##### Table of Contents



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 SEPTEMBER 30, 2007
 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
    
    33-0618093(State of Incorporation)
    
    (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 þ o
 o þ




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##### 



Endocare, Inc.
  
 INDEX
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations  Three and nine months ended September 30,
2007 and 2006
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2007 and December 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30Signatures
    
    
    31EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)(In thousands, except per share data)Total revenues
    
    $
    7,326
    
    
    $
    6,700
    
    
    $
    22,773
    
    
    $
    20,870Costs and expenses:Cost of revenues
    
    
    2,171
    
    
    
    2,677
    
    
    
    7,506
    
    
    
    9,699Research and development
    
    
    699
    
    
    
    581
    
    
    
    1,935
    
    
    
    2,067Selling and marketing
    
    
    3,500
    
    
    
    3,725
    
    
    
    11,362
    
    
    
    11,398General and administrative
    
    
    2,881
    
    
    
    3,196
    
    
    
    9,556
    
    
    
    9,262Litigation settlement, net of related legal
expenses
    
    
    (677
    )
    
    
    
    
    
    
    (677
    )
    
    
    Total costs and expenses
    
    
    8,574
    
    
    
    10,179
    
    
    
    29,682
    
    
    
    32,426Loss from operations
    
    
    (1,248
    )
    
    
    (3,479
    )
    
    
    (6,909
    )
    
    
    (11,556
    )Interest expense related to common stock
warrants
    
    
    
    
    
    
    1,245
    
    
    
    
    
    
    
    2,941Interest income, net
    
    
    264
    
    
    
    85
    
    
    
    402
    
    
    
    434Loss from continuing operations before taxes
    
    
    (984
    )
    
    
    (2,149
    )
    
    
    (6,507
    )
    
    
    (8,181
    )Tax benefit on continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Loss from continuing operations
    
    
    (984
    )
    
    
    (2,149
    )
    
    
    (6,507
    )
    
    
    (8,030
    )Income from discontinued operations
(including gain on disposal of $0.5 million in
2006), net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245Net loss
    
    $
    (984
    )
    
    $
    (2,149
    )
    
    $
    (6,507
    )
    
    $
    (7,785
    )Net income (loss) per share  basic and diluted:Continuing operations
    
    $
    (0.08
    )
    
    $
    (0.21
    )
    
    $
    (0.59
    )
    
    $
    (0.80
    )Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.02Weighted average shares of common stock
outstanding
    
    
    11,595
    
    
    
    10,058
    
    
    
    10,947
    
    
    
    10,054
  3




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ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)(In thousands, exceptper share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,569
    
    
    $
    1,811Accounts receivable, net
    
    
    3,581
    
    
    
    4,161Inventories, net
    
    
    2,702
    
    
    
    2,260Prepaid expenses and other current assets
    
    
    2,083
    
    
    
    1,284Litigation settlement receivable
    
    
    1,100
    
    
    
    Total current assets
    
    
    17,035
    
    
    
    9,516Property and equipment, net
    
    
    769
    
    
    
    1,040Intangibles, net
    
    
    3,203
    
    
    
    3,613Investments and other assets
    
    
    988
    
    
    
    2,077Total assets
    
    $
    21,995
    
    
    $
    16,246LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,173
    
    
    $
    3,393Accrued compensation
    
    
    3,258
    
    
    
    3,000Line of credit
    
    
    880
    
    
    
    Other accrued liabilities
    
    
    3,170
    
    
    
    3,594Total current liabilities
    
    
    10,481
    
    
    
    9,987Other long term liabilities
    
    
    237
    
    
    
    74Common stock warrants
    
    
    
    
    
    
    1,307Stockholders equity:Preferred stock, $0.001 par value; 1,000
shares authorized; none issued and
outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000
shares authorized; 11,595 and 10,226
issued and outstanding as of September
30, 2007 and December 31, 2006,
respectively
    
    
    12
    
    
    
    10Additional paid-in capital
    
    
    198,586
    
    
    
    181,310Accumulated deficit
    
    
    (187,321
    )
    
    
    (176,442
    )Total stockholders equity
    
    
    11,277
    
    
    
    4,878Total liabilities and stockholders equity
    
    $
    21,995
    
    
    $
    16,246
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ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30,2007
    
    
    2006(Unaudited)(In thousands)Cash flows from operating activities:Net loss
    
    $
    (6,507
    )
    
    $
    (7,785
    )Adjustments to reconcile net loss to net cash used in operating activities:Gain on divestiture
    
    
    
    
    
    
    (418
    )Revaluation of Plethora note receivable
    
    
    (442
    )
    
    
    Depreciation and amortization
    
    
    874
    
    
    
    1,227Loss on sale of placement units and other fixed assets
    
    
    52
    
    
    
    5Extinguishment of payroll tax liabilities
    
    
    (121
    )
    
    
    (869
    )Stock-based compensation
    
    
    2,949
    
    
    
    1,986Net interest expense related to common stock warrants
    
    
    
    
    
    
    (2,941
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    581
    
    
    
    826Inventories
    
    
    (612
    )
    
    
    88Prepaid expenses and other assets
    
    
    731
    
    
    
    430Litigation settlement receivable, net of related legal expenses payable
    
    
    (677
    )
    
    
    Accounts payable
    
    
    (640
    )
    
    
    392Accrued compensation
    
    
    427
    
    
    
    (144
    )Other liabilities
    
    
    (261
    )
    
    
    (2,685
    )Net cash used in operating activities
    
    
    (3,646
    )
    
    
    (9,888
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (76
    )
    
    
    (144
    )Proceeds from divestitures
    
    
    
    
    
    
    7,287Net cash provided by (used in) investing activities
    
    
    (76
    )
    
    
    7,143Cash flows from financing activities:Stock options exercised
    
    
    
    
    
    
    108Net borrowings on line of credit
    
    
    880
    
    
    
    Proceeds from sale of common stock
    
    
    8,600
    
    
    
    Net cash provided by financing activities
    
    
    9,480
    
    
    
    108Net increase (decrease) in cash and cash equivalents
    
    
    5,758
    
    
    
    (2,637
    )Cash and cash equivalents, beginning of period
    
    
    1,811
    
    
    
    8,108Cash and cash equivalents, end of period
    
    $
    7,569
    
    
    $
    5,471Non-cash activities:Transfer of inventory to property and equipment for placement at customer sites
    
    $
    273
    
    
    $
    361Transfer of Cryocare Surgical Systems from property and equipment to inventory
for sale
    
    $
    103
    
    
    $
    418Note receivable received in divestiture
    
    $
    
    
    
    $
    1,425Adoption of
FSP 00-19-2:Reduction of retained earnings
    
    $
    4,373
    
    
    $
    Increase in additional paid-in capital
    
    $
    5,680
    
    
    $
    Reduction of common stock warrant liability
    
    $
    1,307
    
    
    $
    
  5




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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
 (Unaudited)
 1. Organization and Operations
  Sale of Timm Medical
 2. Basis of Presentation
    3. Recent Operating Results and Liquidity
  Commitments and Contingencies
 6




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Commitments and
Contingencies.
    Private Placement of
Common Stock and Warrants, Bank Line of Credit.
    7




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4. Sale of Timm Medical
 Accounting for the
Impairment or Disposal of Long-Lived Assets,
   Assets:Cash, inventories and other current assets
    
    $
    1,041Property and equipment, net
    
    
    71Goodwill, net
    
    
    4,552Intangibles, net
    
    
    3,680Other assets
    
    
    65Total assets
    
    
    9,409Liabilities:Accounts payable and other current liabilities
    
    
    502Other accrued liabilities
    
    
    486Total liabilities
    
    
    988Net assets
    
    $
    8,421
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5. Private Placement of Common Stock and Warrants
 May 2007 Private Placement
    Fusion Capital Equity Purchase Agreement
 Recent Operating Results and Liquidity
  9




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March 2005 Private Placement
        10




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Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock Accounting for Registration Payment Arrangements Accounting for
Contingencies.
 6. Bank Line of Credit
 Recent Operating Results and Liquidity
    11




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7. Capital Stock and Net Loss Per Share
  8. Stock-Based Compensation
 Share-Based Payment
   12




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9. Inventories
   September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    1,899
    
    
    $
    1,750Work in process
    
    
    426
    
    
    
    300Finished goods
    
    
    849
    
    
    
    778Total inventories
    
    
    3,174
    
    
    
    2,828Less: inventory reserve
    
    
    (472
    )
    
    
    (568
    )Inventories, net
    
    $
    2,702
    
    
    $
    2,260
 10. Commitments and Contingencies
 Legal Proceedings
 Governmental Investigations and Legal Proceedings
   13




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Lawsuit with KPMG LLP
   Other Litigation
   11. Income Taxes
 Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109 Accounting for
Income Taxes
  Balance as of January 1, 2007
    
    $
    240,000Additions based on tax positions related to the current year
    
    
    Additions for tax positions of prior years
    
    
    Reductions for tax positions of prior years
    
    
    Settlements
    
    
    Balance as of September 30, 2007
    
    $
    240,000
  14




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12. Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Cryoablation disposable products
    
    $
    5,312
    
    
    $
    3,460
    
    
    $
    15,932
    
    
    $
    9,061Cryocare Surgical Systems
    
    
    385
    
    
    
    423
    
    
    
    1,383
    
    
    
    814Other
    
    
    2
    
    
    
    156
    
    
    
    151
    
    
    
    5665,699
    
    
    
    4,039
    
    
    
    17,466
    
    
    
    10,441Cryoablation procedure fees
    
    
    1,541
    
    
    
    2,492
    
    
    
    5,029
    
    
    
    9,963Cardiac royalties (CryoCath)
    
    
    86
    
    
    
    169
    
    
    
    278
    
    
    
    466$
    7,326
    
    
    $
    6,700
    
    
    $
    22,773
    
    
    $
    20,870Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,057
    
    
    $
    2,636
    
    
    $
    6,803
    
    
    $
    9,060Cryocare Surgical Systems
    
    
    114
    
    
    
    41
    
    
    
    703
    
    
    
    639$
    2,171
    
    
    $
    2,677
    
    
    $
    7,506
    
    
    $
    9,699
  13. Recent Accounting Pronouncements
  14. Reclassification
  
 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, 2006.
 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
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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
we assume no obligation to update any such forward-looking statements.
 Overview
    Strategy, Key Metrics and Developments
   16




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17




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Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Cryoablation disposable products
    
    $
    5,312
    
    
    $
    3,460
    
    
    $
    15,932
    
    
    $
    9,061Cryocare Surgical Systems
    
    
    385
    
    
    
    423
    
    
    
    1,383
    
    
    
    814Other
    
    
    2
    
    
    
    156
    
    
    
    151
    
    
    
    5665,699
    
    
    
    4,039
    
    
    
    17,466
    
    
    
    10,441Cryoablation procedure fees
    
    
    1,541
    
    
    
    2,492
    
    
    
    5,029
    
    
    
    9,963Cardiac royalties (CryoCath)
    
    
    86
    
    
    
    169
    
    
    
    278
    
    
    
    466$
    7,326
    
    
    $
    6,700
    
    
    $
    22,773
    
    
    $
    20,870Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,057
    
    
    $
    2,636
    
    
    $
    6,803
    
    
    $
    9,060Cryocare Surgical Systems
    
    
    114
    
    
    
    41
    
    
    
    703
    
    
    
    639$
    2,171
    
    
    $
    2,677
    
    
    $
    7,506
    
    
    $
    9,699
       Share Based Payment
 18




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Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Revenues
 Three Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(dollars in thousands)Cryoablation disposable products
    
    $
    5,312
    
    
    $
    3,460
    
    
    $
    1,852
    
    
    
    53.5
    %Cryocare Surgical Systems
    
    
    385
    
    
    
    423
    
    
    
    (38
    )
    
    
    (9.0
    )%Other
    
    
    2
    
    
    
    156
    
    
    
    (154
    )
    
    
    (98.7
    )%5,699
    
    
    
    4,039
    
    
    
    1,660
    
    
    
    41.1
    %Cryoablation procedure fees
    
    
    1,541
    
    
    
    2,492
    
    
    
    (951
    )
    
    
    (38.2
    )%Cardiac royalties (CryoCath)
    
    
    86
    
    
    
    169
    
    
    
    (83
    )
    
    
    (49.1
    )%$
    7,326
    
    
    $
    6,700
    
    
    $
    626
    
    
    
    9.3
    %
    Cost of Revenues
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change(dollars in thousands)Three months ended
    
    $
    2,171
    
    
    $
    2,677
    
    
    $
    (506
    )Percent of revenues
    
    
    29.6
    %
    
    
    40.0
    %
  19




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Gross Profit and Gross Margin
 Three Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change(dollars in thousands)Cryoablation disposable products and procedure fees
    
    $
    4,796
    
    
    $
    3,316
    
    
    $
    1,480Cryocare surgical systems
    
    
    271
    
    
    
    382
    
    
    
    (111
    )Cardiac royalties (CryoCath) and other
    
    
    88
    
    
    
    325
    
    
    
    (237
    )$
    5,155
    
    
    $
    4,023
    
    
    $
    1,132
 Three Months Ended
    
    PercentageSeptember 30,
    
    Point2007
    
    2006
    
    Change(percent of revenues)Cryoablation disposable products and procedure fees
    
    
    65.5
    %
    
    
    49.5
    %
    
    
    16.0
    %Cryocare Surgical Systems
    
    
    3.7
    %
    
    
    5.7
    %
    
    
    (2.0
    )%Cardiac royalties (CryoCath)
    
    
    1.2
    %
    
    
    4.8
    %
    
    
    (3.6
    )%70.4
    %
    
    
    60.0
    %
    
    
    10.4
    %
  Research and Development Expenses
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Research and development expenses
    
    $
    699
    
    
    $
    581
    
    
    $
    118
    
    
    
    20.3
    %Percent of total revenues
    
    
    9.5
    %
    
    
    8.7
    %
  Selling and Marketing Expenses
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Selling and marketing expenses
    
    $
    3,500
    
    
    $
    3,725
    
    
    $
    (225
    )
    
    
    (6.0
    )%Percent of total revenues
    
    
    47.8
    %
    
    
    55.6
    %
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General and Administrative Expenses
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)General and administrative expenses
    
    $
    2,881
    
    
    $
    3,196
    
    
    $
    (315
    )
    
    
    (9.9
    )%Percent of total revenues
    
    
    39.3
    %
    
    
    47.7
    %
  Litigation Settlement, Net of Related Legal Expenses
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Litigation settlement, net
    
    $
    (677
    )
    
    $
    
    
    
    $
    (677
    )
    
    
    100
    %Percent of total revenues
    
    
    (9.2
    )%
    
    
    
  Interest Expense Related to Common Stock Warrants
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Interest expense related
to common stock warrants
    
    $
    
    
    
    $
    (1,245
    )
    
    $
    1,245
    
    
    
    (100
    )%Percent of total revenues
    
    
    
    
    
    
    (18.6
    )%
  21




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Accounting for Registration Payment Arrangements Private Placement of
Common Stock and Warrants
 Interest Income, Net
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Interest income, net
    
    $
    264
    
    
    $
    85
    
    
    $
    179
    
    
    
    210.6
    %Percent of total revenues
    
    
    3.6
    %
    
    
    1.3
    %
  Net Loss
 Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Net loss
    
    $
    (984
    )
    
    $
    (2,149
    )
    
    $
    (1,165
    )
    
    
    (54.2
    )%Percent of total revenues
    
    
    (13.4
    )%
    
    
    (32.1
    )%
  Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Revenues
 Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(dollars in thousands)Cryoablation disposable products
    
    $
    15,932
    
    
    $
    9,061
    
    
    $
    6,871
    
    
    
    75.8
    %Cryocare Surgical Systems
    
    
    1,383
    
    
    
    814
    
    
    
    569
    
    
    
    69.9
    %Other
    
    
    151
    
    
    
    566
    
    
    
    (415
    )
    
    
    (73.3
    )%17,466
    
    
    
    10,441
    
    
    
    7,025
    
    
    
    67.3
    %Cryoablation procedure fees
    
    
    5,029
    
    
    
    9,963
    
    
    
    (4,934
    )
    
    
    (49.5
    )%Cardiac royalties (CryoCath)
    
    
    278
    
    
    
    466
    
    
    
    (188
    )
    
    
    (40.3
    )%$
    22,773
    
    
    $
    20,870
    
    
    $
    1,903
    
    
    
    9.1
    %
  22




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##### Table of Contents



Cost of Revenues
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change(dollars in thousands)Nine months ended
    
    $
    7,506
    
    
    $
    9,699
    
    
    $
    (2,193
    )Percent of revenues
    
    
    33.0
    %
    
    
    46.5
    %
  Gross Profit and Gross Margin
 Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change(dollars in thousands)Cryoablation disposable products and procedure fees
    
    $
    14,158
    
    
    $
    9,964
    
    
    $
    4,194Cryocare surgical systems
    
    
    680
    
    
    
    175
    
    
    
    505Cardiac royalties (CryoCath) and other
    
    
    429
    
    
    
    1,032
    
    
    
    (603
    )$
    15,267
    
    
    $
    11,171
    
    
    $
    4,096
 Nine Months Ended
    
    PercentageSeptember 30,
    
    Point2007
    
    2006
    
    Change(percent of revenues)Cryoablation disposable products and procedure fees
    
    
    62.2
    %
    
    
    47.7
    %
    
    
    14.5
    %Cryocare surgical systems
    
    
    3.0
    %
    
    
    0.8
    %
    
    
    2.2
    %Cardiac royalties (CryoCath) and other
    
    
    1.9
    %
    
    
    5.0
    %
    
    
    (3.1
    )%67.1
    %
    
    
    53.5
    %
    
    
    13.6
    %
  23




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##### Table of Contents



Research and Development Expenses
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Research and development expenses
    
    $
    1,935
    
    
    $
    2,067
    
    
    $
    (114
    )
    
    
    (5.5
    )%Percent of total revenues
    
    
    8.6
    %
    
    
    9.9
    %
  Selling and Marketing Expenses
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Selling and marketing expenses
    
    $
    11,362
    
    
    $
    11,398
    
    
    $
    (36
    )
    
    
    (0.3
    )%Percent of total revenues
    
    
    49.9
    %
    
    
    54.6
    %
  General and Administrative Expenses
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)General and administrative expenses
    
    $
    9,556
    
    
    $
    9,262
    
    
    $
    294
    
    
    
    3.2
    %Percent of total revenues
    
    
    42.0
    %
    
    
    44.4
    %
 Commitments and Contingencies.
 24




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##### Table of Contents



Litigation Settlement, Net of Related Legal Expenses
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Litigation settlement, net
    
    $
    (677
    )
    
    $
    
    
    
    $
    (677
    )
    
    
    100.0
    %Percent of total revenues
    
    
    (3.0
    )%
    
    
    
  Interest Expense Related to Common Stock Warrants
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Interest expense related to common stock warrants
    
    $
    
    
    
    $
    (2,941
    )
    
    $
    (2,941
    )
    
    
    (100.0
    )%Percent of total revenues
    
    
    
    
    
    
    (14.1
    )%
 Accounting
for Registration Payment Arrangements Private Placement of Common Stock and Warrants
 Interest Income, Net
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Interest income, net
    
    $
    402
    
    
    $
    434
    
    
    $
    (32
    )
    
    
    (7.4
    )%Percent of total revenues
    
    
    1.8
    %
    
    
    2.1
    %
  25




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##### Table of Contents



Net Loss
 Nine Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % Change(dollars in thousands)Net loss
    
    $
    (6,507
    )
    
    $
    (7,785
    )
    
    $
    (1,278
    )
    
    
    (16.4
    )%Percent of total revenues
    
    
    (28.6
    )%
    
    
    (37.3
    )%
  Liquidity and Capital Resources
  Commitments and Contingencies Commitments and Contingencies.
  Private Placement of Common Stock and Warrants,
    26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 27




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##### Table of Contents



Changes in Internal Controls.
 28




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  We could be negatively impacted by future interpretation or implementation of the federal
anti-kickback and Stark laws and other federal and state anti-self-referral and anti-kickback laws.
    29




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##### Table of Contents



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
  
 Item 6. Exhibits
  30




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##### Table of Contents



SIGNATURES
  ENDOCARE,
    
    INC.By:
    
    /s/ CRAIG T. DAVENPORTCraig T. DavenportChief Executive Officer, President andChairman of the Board(Duly Authorized Officer)By:
    
    /s/ MICHAEL R. RODRIGUEZMichael R. RodriguezSenior Vice President, Finance andChief Financial Officer(Principal Financial andAccounting Officer)
  31




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##### Table of Contents



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.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, 2007.3.4(5)
    
    Amended and Restated Bylaws of the Company.4.1(6)
    
    Form of Stock Certificate.4.2(7)
    
    Form of Series A Warrant.4.3(7)
    
    Form of Series B Warrant.4.4(8)
    
    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(9)
    
    Amendment No. 1 to Rights Agreement, dated September 24, 2005, between the Company and
U.S. Stock Transfer Corporation.10.1(10)
    
    First Amendment to Employee Deferred Stock Unit Program, dated August 6, 2007.10.2(10)
    
    First Amendment to Non-Employee Director Deferred Stock Unit Program, dated August 6, 2007.10.3
    
    Memorandum of Understanding, dated September 11, 2007, between the Company and KPMG LLP.31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Craig T. Davenport.31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Craig T. Davenport.32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.
 
 (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. 32




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##### Table of Contents



(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 10-K for the year ended December 31, 1995.(7)
    
    Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on September 3, 1999.(9)
    
    Previously filed as an exhibit to our Form 8-K filed on September 28, 2005.(10)
    
    Previously filed as an exhibit to our Form 8-K filed on August 8, 2007. 33