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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM                    TO
 COMMISSION FILE NUMBER: 001-15063
 Endocare, Inc.
 (Exact name of Registrant as Specified in Its Charter)
 DELAWARE(State of Incorporation)
    
    33-0618093(I.R.S. Employer I.D. No.)
 201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618  (Address of Principal Executive Office, Including Zip Code)
 (949) 450-5400  (Registrants Telephone Number, Including Area Code)
 þ o þ o
 o o
  Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o(Do not check if a smaller reporting company)
Smaller Reporting Company þ o þ




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##### 



Endocare, Inc. and Subsidiary
 INDEX
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations  Three months ended March 31, 2009 and 2008
    
    
    3Condensed Consolidated Balance Sheets  March 31, 2009 and December 31, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except per share data)
 Three Months Ended March 31,2009
    
    
    2008Total revenues
    
    $
    8,176
    
    
    $
    8,143Costs and expenses:Cost of revenues
    
    
    2,335
    
    
    
    2,505Research and development
    
    
    578
    
    
    
    569Selling and marketing
    
    
    3,678
    
    
    
    3,828General and administrative
    
    
    3,461
    
    
    
    3,040Total costs and expenses
    
    
    10,052
    
    
    
    9,942Loss from operations
    
    
    (1,876
    )
    
    
    (1,799
    )Interest income (expense), net
    
    
    (91
    )
    
    
    109Net loss
    
    $
    (1,967
    )
    
    $
    (1,690
    )Net loss per share  basic and diluted
    
    $
    (0.16
    )
    
    $
    (0.14
    )Weighted average shares of common stock outstanding
    
    
    12,174
    
    
    
    11,785
  3




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ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share and per share data)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,643
    
    
    $
    2,685Accounts receivable less allowances for doubtful
accounts and sales returns of $141 and $146 at March
31, 2009 and December 31, 2008, respectively
    
    
    5,839
    
    
    
    5,076Inventories, net
    
    
    2,343
    
    
    
    2,559Prepaid expenses and other current assets
    
    
    457
    
    
    
    518Total current assets
    
    
    11,282
    
    
    
    10,838Property and equipment, net
    
    
    796
    
    
    
    628Intangibles, net
    
    
    2,451
    
    
    
    2,576Investments and other assets
    
    
    75
    
    
    
    75Total assets
    
    $
    14,604
    
    
    $
    14,117LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,771
    
    
    $
    3,638Accrued compensation
    
    
    2,891
    
    
    
    1,955Other accrued liabilities
    
    
    2,996
    
    
    
    3,007Loan payable
    
    
    2,817
    
    
    
    1,880Obligations under capital lease, current portion
    
    
    27
    
    
    
    26Total current liabilities
    
    
    12,502
    
    
    
    10,506Deferred compensation
    
    
    144
    
    
    
    77Obligations under capital lease  less current portion
    
    
    55
    
    
    
    62Stockholders equity:Preferred stock, $0.001 par value; 1,000,000 shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000,000 shares
authorized; 11,818,617 and 11,811,451 issued and
outstanding at March 31, 2009 and December 31, 2008,
respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    202,030
    
    
    
    201,632Accumulated deficit
    
    
    (200,139
    )
    
    
    (198,172
    )Total stockholders equity
    
    
    1,903
    
    
    
    3,472Total liabilities and stockholders equity
    
    $
    14,604
    
    
    $
    14,117
  4




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ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except per share data)
 Three Months Ended March 31,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (1,967
    )
    
    $
    (1,690
    )Adjustments to reconcile net loss to net cash used in operating activities:Inventory reserve
    
    
    18
    
    
    
    Depreciation and amortization
    
    
    222
    
    
    
    251Stock-based compensation
    
    
    414
    
    
    
    728Changes in operating assets and liabilities:Accounts receivable
    
    
    (763
    )
    
    
    (976
    )Inventories
    
    
    (66
    )
    
    
    (183
    )Prepaid expenses and other assets
    
    
    61
    
    
    
    73Accounts payable
    
    
    133
    
    
    
    179Accrued compensation
    
    
    988
    
    
    
    (1,010
    )Other liabilities
    
    
    (11
    )
    
    
    8Net cash used in operating activities
    
    
    (971
    )
    
    
    (2,620
    )Cash flows from investing activities:Collection of notes receivable
    
    
    
    
    
    
    1,560Purchases of property and equipment
    
    
    (2
    )
    
    
    (7
    )Net cash (used in) provided by investing activities
    
    
    (2
    )
    
    
    1,553Cash flows from financing activities:Payments under capital lease obligation
    
    
    (6
    )
    
    
    (6
    )Borrowings on line of credit
    
    
    1,000
    
    
    
    Payments on line of credit
    
    
    (63
    )Payroll tax on issuance of restricted stock
    
    
    
    
    
    
    (124
    )Net cash provided by (used in) financing activities
    
    
    931
    
    
    
    (130
    )Net decrease in cash and cash equivalents
    
    
    (42
    )
    
    
    (1,197
    )Cash and cash equivalents, beginning of period
    
    
    2,685
    
    
    
    7,712Cash and cash equivalents, end of period
    
    $
    2,643
    
    
    $
    6,515Non-cash activities:Transfer of inventory to property and equipment for placement at customer sites
    
    $
    264
    
    
    $
    115Transfer of Cryocare Surgical Systems from property and equipment to inventory
for sale
    
    $
    
    
    
    $
    54
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular numbers in thousands, except per share data)
(Unaudited)
 1. Organization and Operations
  Proposed Merger and Financing
     6




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Business Combination
  HealthTronics Proposal
  2. Basis of Presentation
   3. Recent Operating Results and Liquidity
  7




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Commitments and
Contingencies
  Business Combinations
   8




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4. Private Placement of Common Stock and Warrants
 March 2005 Private Placement
    9




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Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entitys Own Stock,
 5. Bank Line of Credit
 Recent Operating Results and Liquidity,
    10




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6. Collection of Notes Receivable
  7. Capital Stock and Net Loss Per Share
  8. Stock-Based Compensation
 Share-Based Payment
  11




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9. Inventories
   March 31,
    
    
    December 31,2009
    
    
    2008Raw materials
    
    $
    1,683
    
    
    $
    1,831Work in process
    
    
    286
    
    
    
    119Finished goods
    
    
    879
    
    
    
    1,096Total inventories
    
    
    2,848
    
    
    
    3,046Less: inventory reserve
    
    
    (505
    )
    
    
    (487
    )Inventories, net
    
    $
    2,343
    
    
    $
    2,559
 10. Commitments and Contingencies
 Governmental Investigations and Legal Proceedings
    12




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Other Litigation
  11. Income Taxes
  Accounting for Uncertainty in Income Taxes an interpretation of SFAS No.
109 Accounting for Income Taxes
  12. Fair Value Measurement
 Fair Value Measurements Effective Date of FASB Statement No. 157,
   13




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The Fair Value Option for
Financial Assets and Financial Liabilities
 13. Results of Operations
  Three Months EndedMarch 31,2009
    
    
    2008Revenues:Cryoablation disposable products
    
    $
    5,914
    
    
    $
    5,916Cryocare Surgical Systems
    
    
    393
    
    
    
    4336,307
    
    
    
    6,349Cryoablation procedure fees
    
    
    1,745
    
    
    
    1,690Cardiac royalties
    
    
    130
    
    
    
    113Other
    
    
    (6
    )
    
    
    (9
    )$
    8,176
    
    
    $
    8,143Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,294
    
    
    $
    2,359Cryocare Surgical Systems
    
    
    41
    
    
    
    146$
    2,335
    
    
    $
    2,505
  14. Subsequent Events
   14




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15. Recent Accounting Pronouncements
 Accounting for Collaborative
Arrangements.
 Business Combinations Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements  an
amendment of ARB No. 51.
 15




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Goodwill and Other
Intangible Assets Business Combinations
 Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entitys Own Stock Accounting for Derivative Instruments and Hedging Activities, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part I  Item 1 of this
report, and the audited consolidated financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.
 16




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This discussion contains forward-looking statements based on our current expectations. There
are various factors  many beyond our control  that could cause our actual results or the
occurrence or timing of expected events to differ materially from those anticipated in these
forward-looking statements. Some of these factors are described below and other factors are
described elsewhere in this Quarterly Report on Form 10-Q or under Risk Factors in our Annual
Report on Form 10-K referred to above. In addition, there are factors not described in this
Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K that could cause our actual
results or the occurrence or timing of expected events to differ materially from those anticipated
in these forward-looking statements. All forward-looking statements included in this Quarterly
Report on Form 10-Q are based on information available to us as of the date hereof, and, except as
required by law, we assume no obligation to update any such forward-looking statements.
 Overview
   Recent Events
 The Galil Merger
     Organization
and Operations
 The April 2009 HealthTronics Proposal
  Strategy and Key Metrics
      17




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Three Months EndedMarch 31,2009
    
    2008Estimated domestic cryoablation procedures
    
    
    2,352
    
    
    
    2,568Number of cryoprobes soldStraight probes
    
    
    8,841
    
    
    
    10,283Right-angle probes
    
    
    2,181
    
    
    
    1,920Total
    
    
    11,022
    
    
    
    12,203
  Results of Operations
  Three Months EndedMarch 31,2009
    
    
    2008Revenues:Cryoablation disposable products
    
    $
    5,914
    
    
    $
    5,916Cryocare Surgical Systems
    
    
    393
    
    
    
    4336,307
    
    
    
    6,349Cryoablation procedure fees
    
    
    1,745
    
    
    
    1,690Cardiac royalties
    
    
    130
    
    
    
    113Other
    
    
    (6
    )
    
    
    (9
    )$
    8,176
    
    
    $
    8,143Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,294
    
    
    $
    2,359Cryocare Surgical Systems
    
    
    41
    
    
    
    146$
    2,335
    
    
    $
    2,505
  18




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Share Based Payment
 Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
 Revenues
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeCryoablation disposable products
    
    $
    5,914
    
    
    $
    5,916
    
    
    $
    (2
    )
    
    
    0.0
    %Cryocare Surgical Systems
    
    
    393
    
    
    
    433
    
    
    
    (40
    )
    
    
    (9.2
    )%6,307
    
    
    
    6,349
    
    
    
    (42
    )
    
    
    (0.7
    )%Cryoablation procedure fees
    
    
    1,745
    
    
    
    1,690
    
    
    
    55
    
    
    
    3.3
    %Cardiac royalties
    
    
    130
    
    
    
    113
    
    
    
    17
    
    
    
    15.0
    %Other
    
    
    (6
    )
    
    
    (9
    )
    
    
    3
    
    
    
    33.3
    %$
    8,176
    
    
    $
    8,143
    
    
    $
    33
    
    
    
    0.4
    %
 19




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Cost of Revenues
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    $ ChangeCost of revenues
    
    $
    2,335
    
    
    $
    2,505
    
    
    $
    (170
    )Percent of revenues
    
    
    28.6
    %
    
    
    30.8
    %
  Gross Profit and Gross Margin
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    $ ChangeCryoablation disposable products and procedure fees
    
    $
    5,365
    
    
    $
    5,247
    
    
    $
    118Cryocare surgical systems
    
    
    352
    
    
    
    287
    
    
    
    65Cardiac royalties and other
    
    
    124
    
    
    
    104
    
    
    
    20$
    5,841
    
    
    $
    5,638
    
    
    $
    203
 Three Months EndedMarch 31,
    
    Percentage(percent of revenues)
    
    2009
    
    2008
    
    Point ChangeCryoablation disposable products and procedure fees
    
    
    65.6
    %
    
    
    64.4
    %
    
    
    1.2
    %Cryocare Surgical Systems
    
    
    4.3
    %
    
    
    3.5
    %
    
    
    0.8
    %Cardiac royalties
    
    
    1.5
    %
    
    
    1.3
    %
    
    
    0.2
    %71.4
    %
    
    
    69.2
    %
    
    
    2.2
    %
  20




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Research and Development Expenses
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    
    $ Change
    
    % ChangeResearch and development expenses
    
    $
    578
    
    
    $
    569
    
    
    $
    9
    
    
    
    1.6
    %Percent of total revenues
    
    
    7.1
    %
    
    
    7.0
    %
  Selling and Marketing Expenses
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    
    $ Change
    
    % ChangeSelling and marketing expenses
    
    $
    3,678
    
    
    $
    3,828
    
    
    $
    (150
    )
    
    
    (3.9
    )%Percent of total revenues
    
    
    45.0
    %
    
    
    47.0
    %
  General and Administrative Expenses
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    
    $ Change
    
    % ChangeGeneral and administrative expenses
    
    $
    3,461
    
    
    $
    3,040
    
    
    $
    421
    
    
    
    13.8
    %Percent of total revenues
    
    
    42.3
    %
    
    
    37.3
    %
 Business Combinations.
 Interest Income (expense), Net
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    $ Change
    % ChangeInterest income (expense), net
    
    $
    (91
    )
    
    $
    109
    
    
    $
    (200
    )
    
    
    (183.5
    )%Percent of total revenues
    
    
    (1.1
    )%
    
    
    1.3
    %
 21




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Net Loss
 Three Months EndedMarch 31,(dollars in thousands)
    
    2009
    
    2008
    
    $ Change
    
    % ChangeNet loss
    
    $
    (1,967
    )
    
    $
    (1,690
    )
    
    $
    277
    
    
    
    16.4
    %Percent of total revenues
    
    
    (24.1
    )%
    
    
    (20.8
    )%
  Liquidity and Capital Resources
 Organization and
Operations
    22




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Business Combinations
     23




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
  24




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Changes in Internal Controls.
 25




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 .
 
 Item 1A. Risk Factors
  We have a limited operating history with significant losses and can give no assurances when or
whether we will ever be profitable or have capital sufficient to sustain our operations.
       26




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If Endocare fails to meet all applicable continued listing requirements of the NASDAQ Capital Market
and NASDAQ determines to delist Endocares common stock, the market liquidity and market price of
Endocares common stock could decline.
      
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  27




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Item 6. Exhibits
  28




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SIGNATURES
  ENDOCARE, INC.By:
    /s/ MICHAEL R. RODRIGUEZMichael R. RodriguezSenior Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)  29




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EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1(1)
    
    Stock Purchase Agreement, dated January 13, 2006, by and among the Company, Plethora
Solutions Holdings plc and Timm Medical Technologies, Inc. The schedules and other
attachments to this exhibit were omitted. The Company agrees to furnish a copy of any
omitted schedules or attachments to the Securities and Exchange Commission upon request.2.2(2)
    
    $1,425,000 Secured Convertible Promissory Note, dated February 10, 2006, from Plethora
Solutions Holdings plc to the Company.2.3(13)
    
    Agreement and Plan of Merger, dated as of November 10, 2008, by and among the Company, Orange Acquisitions Ltd. and Galil Medical Ltd.3.1(3)
    
    Restated Certificate of Incorporation.3.2(3)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.3.3(3)
    
    Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on September 25, 2000.3.4(4)
    
    Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on August 17, 2007.3.5(5)
    
    Amended and Restated Bylaws of the Company.3.6(6)
    
    Amendment No. 1 to Amended and Restated Bylaws of the Company.4.1(7)
    
    Form of Stock Certificate.4.2(8)
    
    Form of Series A Warrant.4.3(8)
    
    Form of Series B Warrant.4.4(9)
    
    Rights Agreement, dated March 31, 1999, between the Company and U.S. Stock Transfer
Corporation, which includes the form of Certificate of Designation for the Series A Junior
Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B
and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C.4.5(10)
    
    Amendment No. 1 to Rights Agreement, dated June 24, 2005, between the Company and U.S.
Stock Transfer Corporation.4.6(11)
    
    Amendment No. 2 to Rights Agreement, dated as of March 26, 2009, between Endocare and
Computershare Trust Company, N.A. (as successor-in-interest to U.S. Stock Transfer
Corporation) (including form of rights certificate).10.1(12)
    
    Limited Waiver and Amendment to Loan Documents, dated as of February 26, 2009, by and
between Endocare, Inc. and Silicon Valley Bank.31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Clint B. Davis.31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.
 30




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ExhibitNo.
    
    Description32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Clint B. Davis.32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.
 
 
    
    Management contract or compensatory plan or arrangement.(1)
    
    Previously filed as an exhibit to our Form 8-K filed on January 18, 2006.(2)
    
    Previously filed as an exhibit to our Form 10-K filed on March 16, 2006.(3)
    
    Previously filed as an exhibit to our Registration Statement on Form S-3 filed on September 20, 2001.(4)
    
    Previously filed as an exhibit to our Form 8-K filed on August 21, 2007.(5)
    
    Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.(6)
    
    Previously filed as an exhibit to our Form 8-K filed on March 5, 2008.(7)
    
    Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.(9)
    
    Previously filed as an exhibit to our Form 8-K filed on June 3, 1999.(10)
    
    Previously filed as an exhibit to our Form 8-K filed on June 28, 2005.(11)
    
    Previously filed as an exhibit to our Form S-4/A filed on April 8, 2009.(12)
    
    Previously filed as an exhibit to our Form 8-K filed on February 27, 2009.(13)
    
    Previously filed as an exhibit to our Form 8-K filed on November 12, 2008. 31