1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------- FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1997. [ ] 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 0-28440 CARDIOVASCULAR DYNAMICS, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 68-0328265 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 13700 Alton Parkway, Suite 160, Irvine, California 92618 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (714) 457-9546 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exhange Act of 1934 during the preceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On July 31, 1997, the Registrant had outstanding approximately 9,115,000 shares of Common Stock of $.001 par value, which is the Registrant's only class of Common Stock. 2 CARDIOVASCULAR DYNAMICS, INC. FORM 10-Q JUNE 30, 1997 TABLE OF CONTENTS PAGE ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed consolidated balance sheets at June 30, 1997 and December 31, 1996 3 Condensed consolidated statements of operations for the three and six months ended June 30, 1997 and 1996 4 Condensed consolidated statements of cash flows for the six months ended June 30, 1997 and 1996 5 Notes to condensed consolidated financial statements 6 Item 2. Management's discussion and analysis of financial condition and results of operations 9 Part II. Other Information Items 1 through 6. 15 Signatures 17 Exhibit Index 18 3 CARDIOVASCULAR DYNAMICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share amounts) JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ ASSETS Current assets: Cash and equivalents $11,017 $17,192 Marketable securities available-for-sale 27,753 25,733 Trade accounts receivable, net 4,304 2,268 Other receivables 256 320 Inventories 4,169 2,899 Other current assets 81 162 ------- ------- Total current assets 47,580 48,574 Property and equipment, net 1,348 1,182 Notes receivable from officers 428 325 Other assets 28 3 ------- ------- Total Assets $49,384 $50,084 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,493 $ 750 Accrued payroll and related expenses 906 1,040 Other accrued expenses 241 592 Deferred distributorship fee-current portion 50 50 ------- ------- Total current liabilities 2,690 2,432 Deferred distributorship fee revenue 4 29 STOCKHOLDERS' EQUITY Convertible preferred stock, $.001 par value; 7,560,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 30,000,000 authorized, 9,110,000 shares and 9,004,000 shares outstanding as of June 30, 1997 and December 31, 1996, respectively 9 9 Additional paid-in capital 59,105 58,869 Deferred compensation (314) (376) Accumulated deficit (12,236) (11,049) Unrealized gains on available-for-sale securities 126 170 ------- ------- Total stockholders' equity 46,690 47,623 ------- ------- Total Liabilities and Stockholders' Equity $49,384 $50,084 ======= ======= See accompanying notes 3 4 CARDIOVASCULAR DYNAMICS, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 ------- ------- ------- ------- Revenue: Sales $ 3,355 $ 1,801 $ 6,374 $ 3,584 License fee and other from related party -- -- -- 100 Contract -- -- -- 150 ------- ------- ------- ------- Total revenue 3,355 1,801 6,374 3,834 Cost of sales 1,571 921 2,987 1,863 ------- ------- ------- ------- Gross profit 1,784 880 3,387 1,971 Operating expenses: Research, development and clinical 919 802 1,912 1,429 Marketing and sales 1,686 710 3,036 1,287 General and administrative 358 212 801 503 ------- ------- ------- ------- Total operating expenses 2,963 1,724 5,749 3,219 ------- ------- ------- ------- Loss from operations (1,179) (844) (2,362) (1,248) Other income (expense): Interest income 578 62 1,150 73 Distributorship fees and other income 12 12 25 28 ------- ------- ------- ------- Total other income 590 74 1,175 101 ------- ------- ------- ------- Net loss $ (589) $ (770) $(1,187) $(1,147) ======= ======= ======= ======= Net loss per share $ (0.06) $ (0.13) $ (0.13) $ (0.22) ======= ======= ======= ======= Shares used in the calculation of net loss per share 9,105 5,765 9,093 5,116 ======= ======= ======= ======= See accompanying notes 4 5 CARDIOVASCULAR DYNAMICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) SIX MONTHS ENDED JUNE 30, ---------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net loss $ (1,187) $ (1,147) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 154 90 Amortization of deferred compensation 62 57 Bad debt expense 24 -- Net changes in: -- -- Trade accounts receivable, net (2,060) (828) Inventories (1,270) (421) Other assets 120 (274) Accounts payable and accrued expenses 258 1,081 Deferred distributor fee revenue (25) (25) -------- -------- Net cash used in operating activities (3,924) (1,467) Cash flows from investing activities: Purchases of available-for-sale securities (22,646) -- Sales of available-for-sale securities 20,582 -- Capital expenditures for property and equipment (320) (244) Other assets (103) 35 -------- -------- Net cash used in investing activities (2,487) (209) Cash flows from financing activities: Proceeds from sale of common stock 136 37,123 Proceeds from exercise of common stock options 100 -- Proceeds from sale of preferred stock -- 8,000 Payable to affiliate, net -- 82 -------- -------- Net cash provided by financing activities 236 45,205 -------- -------- Net increase (decrease) in cash and equivalents (6,175) 43,529 Cash and equivalents, beginning of period 17,192 1,568 -------- -------- Cash and equivalents, end of period $ 11,017 $ 45,097 ======== ======== See accompanying notes 5 6 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. Basis of Presentation Cardiovascular Dynamics, Inc. ("CVD" or the "Company") designs, develops, manufactures and markets catheters used to treat certain vascular diseases. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1997 are not necessarily indicative of results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. 2. Net Loss Per Share Pro forma net loss per share is computed using the weighted average number of shares of Common Stock, Preferred Stock (using the as-if-converted method) and Common Stock issuable upon conversion of the Convertible Obligation, outstanding. Common equivalent shares from stock options and warrants are not included as the effect is anti-dilutive, except that in accordance with Securities and Exchange Commission Staff Accounting Bulletins, common equivalent shares issued by the Company at prices substantially below the anticipated initial public offering price during the period beginning one year prior to the offering have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price). For periods subsequent to the Company's initial public offering in June 1996, the Company's net loss per share has been calculated based on the weighted average number of common and dilutive common equivalent shares outstanding. Common stock equivalents that are anti-dilutive are excluded from the calculation. 6 7 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is not expected to result in an change in earnings per share for the quarters ended June 30, 1997 and June 30, 1996 since the effect of stock options is anti-dilutive in the 1997 period and the 1996 period includes the effect of stock options calculated pursuant to requirements of the Securities and Exchange Commission for "cheap stock", which are not changed as a result of the issuance of Statement No. 128. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. 3. Inventories Inventories are stated at the lower of cost, determined on an average cost basis, or market value. Inventories consist of the following: June 30, 1997 December 31, 1996 ------------- ----------------- Raw materials $1,637,000 $1,015,000 Work-in-process 337,000 510,000 Finished goods 2,195,000 1,374,000 ---------- ---------- $4,169,000 $2,899,000 ========== ========== 4. Acquisition of Intraluminal Devices, Inc. On October 16, 1996, the Company acquired all of the outstanding shares of Intraluminal Devices, Inc. (IDI) in a transaction accounted for as a purchase for approximately 93,000 shares of the Company's common stock valued at $1.4 million. The entire purchase price was assigned to products in the development stage and, together with acquisition costs of $0.7 million, were expensed as acquired in-process research and development in the fourth quarter of 1996. Pro forma combined results of the Company and IDI for the three and six month periods ended June 30, 1996, on the basis that the acquisition had taken place at the beginning of 1996, would have reported a pro forma net loss of $841 and $1,304 and pro forma net loss per share of $(0.14) and $(0.25). 7 8 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Other Significant Events In July 1996, the Company and Medtronic, Inc. ("Medtronic") entered into a written OEM agreement ("Agreement") pursuant to which Medtronic was to purchase certain angioplasty balloon catheters and related components from the Company. Medtronic advised the Company of its election to not make minimum purchases of product for the second year of the Agreement. The Company is currently attempting to collect the remaining $1.3 million worth of orders owed under the minimum purchase commitment for the first year of the Agreement. Medtronic has informed the Company that it does not believe it is required to fulfill such commitment. While resolution of the dispute could adversely affect the Company's financial results for the last half of 1997, the Company believes it has a valid legal claim for the entire $1.3 million and intends to aggressively pursue collection. 6. Subsequent Events In July, 1997, the Company acquired its independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec"). In exchange for the assumption of the assets and liabilities of the Clinitec, including bank debt of $0.3 million, the Company acquired all of the common stock of Clinitec. At the time of the acquisition, Clinitec had a deficiency in stockholder's equity of approximately $0.5 million. In August, 1997, SCIMED Life Systems, Inc. exercised 120,000 warrants for an equal amount of the Company's common stock at $3.29 per share. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Some of these factors are discussed below. For a further discussion of factors which might result in different outcomes, see the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996, in particular "Risk Factors." Overview Since inception in 1992, Cardiovascular Dynamics, Inc. has engaged primarily in the research and development of products for the treatment of cardiovascular disease. The Company's financial results will be affected in the future by several factors, including the timing of any FDA approval to market the Company's products, FDA approval of IDE sites and the number of patients permitted to be treated, future changes in government regulations and third party reimbursement policies applicable to the Company's products, the progress of competing technologies and the ability of the Company to develop the manufacturing and marketing capabilities necessary to support commercial sales. As a result of these factors, revenue levels, gross margins and operating results may fluctuate from quarter to quarter. In July 1996, the Company and Medtronic, Inc. ("Medtronic") entered into a written OEM agreement ("Agreement") pursuant to which Medtronic was to purchase certain angioplasty balloon catheters and related components from the Company. Medtronic advised the Company of its election to not make minimum purchases of product for the second year of the Agreement. The Company is currently attempting to collect the remaining $1.3 million worth of orders owed under the minimum purchase commitment for the first year of the Agreement. Medtronic has informed the Company that it does not believe it is required to fulfill such commitment. While resolution of the dispute could adversely affect the Company's financial results for the last half of 1997, the Company believes it has a valid legal claim for the entire $1.3 million and intends to aggressively pursue collection. See Note 5 to the Condensed Consolidated Financial Statements. In July, 1997, the Company acquired its independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec"). In exchange for the assumption of the assets and liabilities of the Clinitec, including bank debt of $0.3 million, the Company acquired all of the common stock of Clinitec. At the time of the 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) acquisition, Clinitec had a deficiency in stockholder's equity of approximately $0.5 million. Management believes that the acquisition will have a negative impact on sales during the third and fourth quarters of 1997 in making the transition from distributor to direct sales in Germany. The Company will also take a one-time charge for costs related to the acquisition--including severance, relocation and other costs--in the third quarter of 1997. Management is presently unable to estimate the amount of such charge. See Note 6 to the Condensed Consolidated Financial Statements. Results of Operations Second quarter of 1997 compared to the same period in 1996 Revenue for the second quarter of 1997 increased 86% to $3.4 million compared to $1.8 million for the second quarter of 1996. The increase resulted primarily from sales volume of the Company's new stent products (60%) and increased sales volume of new and existing Focus catheters (23%). The gross profit percentage for the second quarter of 1997 increased to 53% compared to 49% for the same period of 1996. The increase resulted primary from a decline in the cost of sales due to relatively higher production volumes. Research, development and clinical expenses increased by 15% to $0.9 million in the quarter ended June 30, 1997 from $0.8 million in the quarter ended June 30, 1996. The primary reason for this increase was additional spending on development of the Company's line of coronary stent products and FOCUS technology angioplasty catheters. Marketing and sales expenses rose 137% to $1.7 million, up $1.0 million in the quarter ended June 30, 1997, compared to $0.7 million in the same period of 1996. This increase reflects, primarily, the investment the Company is making to build its sales and marketing infrastructure by adding additional personnel and developing additional distributor relationships and, secondarily, the cost of promotional marketing allowances provided to certain distributors to help develop foreign markets. General and administrative expenses increased by 69% to $0.4 million for the quarter ended June 30, 1997 from $0.2 million for the same quarter in 1996. The increase was due primarily to the addition of administrative staff and the added costs of operating as a public company. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest income rose to $0.6 million in the second quarter of 1997 compared with $0.0 million in the same period of 1996. The increase was due to the investment of funds received from the initial public offering in June 1996. First six months of 1997 compared to the same period of 1996 Revenue for the first six months of 1997 increased 66% to $6.4 million compared to $3.8 million for the same period of 1996. The increase resulted primarily from sales volume of the Company's new stent products (38%) and increased sales volume from new and existing Focus catheters (30%), offset by a reduction in contract and license fee income (6%). In the first six months of 1996, total revenues included approximately $0.3 million of contract revenues and license fee income that had no associated cost of sales. In the first six months of 1997, the Company had no contract revenues or licensing fee income. The gross profit percentage for the first six months of 1997 increased to 53% compared to 48% for the same period of 1996. The increase resulted primary from a decline in the cost of sales primarily due to relatively higher production volumes. Research, development and clinical expenses increased by 34% to $1.9 million in the six month period ended June 30, 1997 from $1.4 million in the six month period ended June 30, 1996. The primary reason for this increase was additional spending on development of the Company's line of coronary stent products and FOCUS technology angioplasty catheters. Marketing and sales expenses rose 136% to $3.0 million, up $1.7 million in the six month period ended June 30, 1997, compared to $1.3 million in the same period of 1996. This increase reflects, primarily, the investment the Company is making to build its sales and marketing infrastructure by adding additional personnel and developing additional distributor relationships and, secondarily, the cost of promotional marketing allowances provided to certain distributors to help develop foreign markets. General and administrative expenses increased by 59% to $0.8 million for the six months ended June 30, 1997 from $0.5 million for the same period in 1996. The increase was due primarily to the addition of administrative staff and the added costs of operating as a public company. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest income rose to $1.1 million in the first six months of 1997 compared with $0.0 million in the same period of 1996. The increase was due to the investment of funds received from the initial public offering in June 1996. The Company has experienced an operating loss for each of the last three years. The Company expects to continue to incur operating losses through at least 1997 and there can be no assurance that the Company will ever be able to achieve or sustain profitability in the future. CVD's results of operations have varied significantly from quarter to quarter. Quarterly operating results will depend upon several factors, including the timing and amount of expenses associated with expanding the Company's operations, the conduct of clinical trials and the timing of regulatory approvals, new product introductions both in the United States and internationally, the mix between pilot production of new products and full-scale manufacturing of existing products, the mix between domestic and export sales, variations in foreign exchange rates, changes in third-party payors' reimbursement policies and healthcare reform. The Company does not operate with a significant backlog of customer orders, and therefore revenues in any quarter are significantly dependent on orders received within that quarter. In addition, the Company cannot predict ordering rates by distributors, some of whom place infrequent stocking orders. The Company's expenses are relatively fixed and difficult to adjust in response to fluctuating revenues. As a result of these and other factors, the Company expects to continue to experience significant fluctuations in quarterly operating results, and there can be no assurance that the Company will be able to achieve or maintain profitability in the future. Liquidity and Capital Resources On June 19, 1996, the Company closed its initial public offering which consisted of 3,400,000 shares of common stock at $12.00 per share. On July 17, 1996, the Company's underwriters exercised their overallotment option to purchase an additional 510,000 shares of common stock at $12.00 per share. CVD received net offering proceeds from the sale of common stock of approximately $42.8 million after deducting underwriting discounts and commissions and other expenses of the offering. From inception through September 30, 1996, the Company raised approximately $11.4 million from the private sales of preferred and common stock and $2.7 million in working capital from Endosonics Corporation (CVD's former parent company). The Company repaid Endosonics Corporation during the third quarter of 1996. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In August, 1997, SCIMED Life Systems, Inc. ("SCIMED") exercised 120,000 warrants for an equal amount of the Company's common stock at $3.29 per share. See Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. On June 30, 1997, the Company had cash, cash equivalents and marketable securities available for sale of $38.8 million. Net cash used in operating activites were $4.0 million for the first six months of 1997 as compared to $1.4 million for the same period of 1996. The Company expects to incur substantial costs related to, among other things, clinical testing, product development, marketing and sales expenses, and increased working capital, prior to achieving positive cash flow from operations. The Company anticipates that its existing capital resources will be sufficient to fund its operations through June 30, 1998. CVD's future capital requirements will depend on many factors, including its research and development programs, the scope and results of clinical trials, the regulatory approval process, the costs involved in intellectual property rights enforcement or litigation, competitive products, the establishment of manufacturing capacity, the establishment of sales and marketing capabilities, and the establishment of collaborative relationships with other parties. The Company may need to raise funds through additional financings, including private or public equity offerings and collaborative arrangements with existing or new corporate partners. There can be no assurance that funds will be raised on favorable terms, or at all. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its development programs or obtain funds through arrangements with collaborative partners or others that may require the Company to grant rights to certain technologies or products that the Company would not otherwise grant. Trade accounts receivable, net, increased 90% to $4.3 million as of June 30, 1997, compared with $2.3 million at December 31, 1996. The increase stemmed from an increase in the sales level compared to the prior six month period. Specifically, sales for the first six months of 1997 were $6.4 million, while sales for the last six months of 1996 were $4.8 million. Inventories rose 44% to $4.2 million as of June 30, 1997, compared with $2.9 million at December 31, 1996, to meet current sales demand and the obligations under the Medtronic contract. Accounts payable and accrued expenses increased 99% to $1.5 million at June 30, 1997, compared with $0.8 million at the end of 1996, due to an increase in expenditures to support higher sales and payment timing differences. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Property and equipment, net, increased 14% from $1.2 million at December 31, 1996 to $1.3 million at June 30, 1997. The Company increased its investment in capital assets during the first six months of 1997 to support rising production and research and development efforts. 14 15 PART II. OTHER INFORMATION Items 1 through 3. Not applicable Item 4. Submission of Matters to a Vote of Security-Holders The Company's Annual Meeting of Stockholders was held on May 16, 1997. The following actions were taken at this meeting: ABSTENTIONS AND BROKER AFFIRMATIVE NEGATIVE VOTES NON-VOTES VOTES VOTES WITHHELD ----------- ----------- -------- -------- a. Amendment to CVD's 1996 Stock Option/Stock Issuance Plan to effect an increase in the number of shares available for issuance by an additional 700,000 shares of Common Stock and to effect certain other changes as set forth in the Proxy Statement. 668,537 1,555,353 1,156,323 2,850 b. Election of Directors Michael R. Henson 3,379,876 3,152 William G. Davis 3,379,876 3,152 Mitchell Dann 3,379,776 3,252 Edward M. Leonard 3,379,876 3,152 Gerard von Hoffmann 3,379,776 3,252 c. Ratification of Ernst & Young LLP as CVD's independent auditors for the fiscal year ending December 31, 1997. -0- 3,381,263 1,600 200 Item 5. Not applicable 15 16 PART II. OTHER INFORMATION (CONTINUED) ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 11 Statement Regarding the Computation of Net Loss Per Share Exhibit 27 Financial Data Schedule - ----------------------------------------- (b) No reports on Form 8-K were filed during the quarter. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereto duly authorized. CARDIOVASCULAR DYNAMICS, INC. Date: August 11, 1997 /s/ Michael R. Henson -------------------------------- President and Chief Executive Officer (Principal Executive Officer) Date: August 11, 1997 /s/ Dana P. Nickell -------------------------------- Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 17 18 EXHIBIT INDEX 11 Statement Regarding the Computation of Net Loss Per Share 27 Financial Data Schedule - ------------------------- 18