Gross margin in this year’s first quarter improved to 71.4%, against 69.2% in the prior year period and 64.4% in the 2008 fourth quarter. Gross margin in the 2008 fourth quarter was affected by about $315,000 in costs associated with reworking certain of the company’s finished goods inventory to incorporate recent product enhancements and certain adjustments to inventory reserves. Operating expenses in the 2009 first quarter were $7.7 million, against $7.4 million in the 2008 first quarter, and included more than $1.3 million in expenses related to the proposed merger with Galil Medical Ltd. Operating expenses in the 2008 fourth quarter were $8.8 million, and included more than $1.5 million in merger related expenses and a $0.9 million loss from the impairment of an investment in Sanarus Medical, a privately-held minority investee, in connection with a strategic alliance formed in 2001.
Adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) was a loss of $1.2 million for the first quarter of 2009, against a loss of $0.7 million for the first quarter of 2008. Adjusted EBITDA was a loss of $3.1 million for the fourth quarter of 2008, including $1.5 million in merger related expenses and the $0.9 million impairment loss as noted above.
In November 2008, Endocare announced the execution of a definitive merger deal with Galil to together create a larger combined company focused on the promotion and development of cryoablation, a minimally invasive method to freeze and destroy cancerous tumors.
Regarding the proposed merger with Galil, Endocare chief financial officer Michael R. Rodriguez stated, “Now that our registration statement relating to the merger has been declared effective by the Securities and Exchange Commission, we are moving forward with our stockholders’ meeting on June 5, 2009. As expected, Galil’s shareholders approved the merger and related matters at meetings held May 14. The Federal Trade Commission (FTC) investigation relating to the merger remains ongoing. We hope to have clear guidance from the FTC, if not a complete resolution of the investigation, in advance of the June 5 stockholders’ meeting.”
As earlier announced, on April 9, 2009, Endocare received a written proposal from HealthTronics, Inc. offering to purchase all of Endocare’s outstanding common stock for $1.25 per share, with Endocare’s stockholders having the ability to elect to receive either cash or HealthTronics’ common stock as consideration. The proposal is subject to negotiation of a definitive written agreement and due diligence. As previously reported, the Endocare board of directors has determined that HealthTronics’ proposal could reasonably be expected to lead to a “Superior Proposal” under Endocare’s merger agreement with Galil. The Endocare board is in the process of further evaluating the HealthTronics proposal.
As of March 31, 2009, the balance sheet showed cash and cash equivalents of $2.6 million, total assets of $14.6 million and total stockholders’ equity of $1.9 million. The company had access to an additional $1.2 million under its line of credit with Silicon Valley Bank as of March 31, 2009. As disclosed in the company’s Form 8-K filing on February 27, 2009, the company and Silicon Valley Bank entered into an amendment to the credit facility which, among other matters, extended the line of credit through May 27, 2009. The company is currently in negotiations with Silicon Valley Bank regarding entry into an additional amendment to the credit facility to further extend the line of credit to ensure that the company has uninterrupted access to credit through the closing of the pending merger with Galil.
