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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999.
[ ] 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
RADIANCE MEDICAL SYSTEMS, 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 (949) 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 EXCHANGE 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 AUGUST 4, 1999, THE REGISTRANT HAD OUTSTANDING APPROXIMATELY 11,734,000
SHARES OF COMMON STOCK (INCLUDING 686,000 OF TREASURY SHARES) OF $.001 PAR
VALUE, WHICH IS THE REGISTRANT'S ONLY CLASS OF COMMON STOCK.
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RADIANCE MEDICAL SYSTEMS, INC.
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND
DECEMBER 31, 1998 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND 1998 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 6. 21
SIGNATURES 23
EXHIBIT INDEX 24
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
June 30, December 31,
1999 1998
-------- ------------
ASSETS
Current assets:
Cash and equivalents $ 1,201 $ 1,437
Marketable securities available-for-sale 22,872 23,375
Trade accounts receivable, net 1,228 2,413
Inventories 890 1,623
Other current assets 465 593
-------- --------
Total current assets 26,656 29,441
Property and equipment, net 1,275 1,532
Notes receivable from officers 119 116
Goodwill 4,586 2,133
Other assets 40 559
-------- --------
Total Assets $ 32,676 $ 33,781
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,688 $ 4,286
Deferred revenue 1,626 250
-------- --------
Total current liabilities 5,314 4,536
Deferred revenue 500 --
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,
11,690,000 shares and 9,578,000 shares outstanding as of
June 30, 1999 and December 31, 1998, respectively 12 10
Additional paid-in capital 68,436 60,664
Deferred compensation (292) (409)
Accumulated deficit (37,911) (27,807)
Treasury stock at cost, 686,000 common shares as of
June 30, 1999 and December 31, 1998, respectively (3,675) (3,675)
Accumulated other comprehensive income 292 462
-------- --------
Total stockholders' equity 26,862 29,245
-------- --------
Total Liabilities and Stockholders' Equity $ 32,676 $ 33,781
======== ========
See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30 Six Months Ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue:
Sales $ 1,144 $ 2,457 $ 2,337 $ 4,923
License revenue 661 400 1,224 400
-------- -------- -------- --------
Total revenues 1,805 2,857 3,561 5,323
Cost of sales 1,053 1,295 1,900 2,647
-------- -------- -------- --------
Gross profit 752 1,562 1,661 2,676
Operating expenses:
Charge for acquired in-process research
and development -- -- 4,194 --
Research, development and clinical 2,110 1,976 4,157 3,459
Marketing and sales 461 1,199 1,228 2,563
General and administrative 674 601 1,444 1,190
Goodwill impairment charge 1,451 -- 1,451 --
-------- -------- -------- --------
Total operating expenses 4,696 3,776 12,474 7,212
-------- -------- -------- --------
Loss from operations (3,944) (2,214) (10,813) (4,536)
Other income (expense):
Interest income 340 387 655 807
Gain (loss) on disposal of assets (97) -- 131 --
Other expense (55) (23) (77) (95)
-------- -------- -------- --------
Total other income 188 364 709 712
-------- -------- -------- --------
Net loss $ (3,756) $ (1,850) $(10,104) $ (3,824)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.32) $ (0.21) $ (0.88) $ (0.43)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 11,682 8,946 11,474 8,858
======== ======== ======== ========
See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended June 30,
-------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $(10,104) $ (3,824)
Adjustments to reconcile net loss to net cash
used in operating activities:
Goodwill impairment charge 1,451 --
Depreciation and amortization 727 330
Amortization of deferred compensation 68 116
Bad debt expense 37 60
Foreign currency exchange loss 140 --
Charge for acquired in-process research and development 4,194 --
Gain on sale of assets (131) --
Changes, net of effects from purchase of Radiance:
Trade accounts receivable, net 1,148 302
Inventories 29 270
Other assets 147 (58)
Accounts payable and accrued expenses (1,132) (423)
Deferred revenue 1,876 1,600
-------- --------
Net cash used in operating activities (1,550) (1,627)
Cash flows provided by investing activities:
Purchase of available-for-sale securities (15,482) (16,722)
Sales of available-for-sale securities 15,877 17,605
Capital expenditures for property and equipment
and other assets (112) (215)
Sale of Vascular Access business unit, net 1,070 --
Purchase of Radiance, net of cash acquired (259) --
-------- --------
Net cash provided by investing activities 1,094 668
Cash flows provided by (used in) financing activities:
Proceeds from sale of common stock 89 66
Proceeds from exercise of common stock options 67 88
Proceeds from repayment of affiliate debt 64 241
Purchase of treasury stock -- (1,275)
-------- --------
Net cash provided by (used in)
financing activities 220 (880)
-------- --------
Net decrease in cash and equivalents (236) (1,839)
Cash and equivalents, beginning of period 1,437 6,141
-------- --------
Cash and equivalents, end of period $ 1,201 $ 4,302
======== ========
Supplemental disclosure of non-cash
investing activities:
The Company acquired the remaining common stock
of RMS and, in connection with
the transaction, the following liabilities
were assumed:
Fair Value of assets acquired $ 9,308 $ --
Cash paid (692) --
Common stock and options issued (7,569) --
-------- --------
Liabilities assumed $ 1,047 $ --
======== ========
See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, 1999
1. Basis of Presentation
Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc. and
herein after referred to "Radiance" or the "Company") was incorporated in March
1992 in the State of California and reincorporated in Delaware in 1993. The
Company and its subsidiaries design, develop, manufacture and market proprietary
medical devices for the prevention of the recurrence of atherosclerosis,
including the research and development of radiation therapy products.
Accordingly, the Company operates in a single business segment.
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, 1999 are not necessarily indicative of results that may be expected for the
year ending December 31, 1999 or any other period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K as amended for the year ended December
31, 1998.
2. Net Loss Per Share
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's common stock granted under the Company's stock option
plan have been excluded from the calculation of diluted earnings per share as
they are anti-dilutive.
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 437 $ 630
Work-in-process 136 87
Finished goods 317 906
---------- ----------
$ 890 $ 1,623
========== ==========
4. Deferred Revenue
Deferred License Revenue
In June of 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute stent delivery products
using the Company's focus technology. Under the Agreement, the Company is
entitled to receive milestone payments based upon the transfer of the technology
to Guidant, and royalty payments based upon the sale of products using the focus
technology. Two milestone payments for $1,000 were received in the first six
months of 1999. Based upon the completion of certain milestones, the Company
recognized $562 and $1,124 in license revenue in the second quarter and first
six months, respectively, of 1999 and will recognize the remaining $1,126 of
deferred license revenue in future periods.
Deferred Distributor Fees
In June of 1999, the Company granted Cosmotec Co., Ltd. Of Japan distribution
rights to market its vascular radiation therapy products in Japan. Radiance
received $1,000 as an upfront cash payment and will recognize the income over
the next two years.
5. Comprehensive Loss
Statement of Financial Accounting Standards No. 130 requires disclosure of the
total non-stockholder changes in equity resulting from revenue, expense, and
gains and losses, including those that do not affect retained earnings. The
Company's comprehensive loss included the following:
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net loss $ (3,756) $ (1,850) $(10,104) $ (3,824)
Unrealized gain (loss) on
available-for-sale securities (7) (66) (108) 9
Foreign currency translation adjustment 2 43 (62) 10
-------- -------- -------- --------
Comprehensive loss $ (3,761) $ (1,873) $(10,274) $ (3,805)
======== ======== ======== ========
6. Recent Accounting Pronouncements
For the year beginning January 1, 1999, the Company adopted SOP 98-1, Accounting
for the Costs of Computer Software Developed for or Obtained for Internal Use.
The SOP requires the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
The Company currently expenses such costs, and it anticipates that the impact of
the SOP will not be material on its results of operations or financial position
for the foreseeable future as amounts expended to develop or obtain software
have not been and are not expected to be material.
7. Sale of Assets and Acquisition
Sale of Assets of Vascular Access Business Unit
In January 1999, the Company sold substantially all of the properties and assets
used exclusively in its Vascular Access Business Unit to Escalon Medical
Corporation ("Escalon"). The Company received an initial payment of $1,104 for
assets transferred, including inventory ($704) and property and equipment
($146). The Company will also receive an additional $1,000 upon the completion
of the transfer of the assets and technology and also is entitled to receive
royalty payments upon the sale of products for a five-year period. In July, the
Company extended its original commitment to manufacture certain vascular access
products on a "cost plus" basis until December 1999.
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Acquisition of RMS
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of
the capital stock which it did not own of the (former) Radiance Medical Systems,
Inc. ("RMS"). Pursuant to the Merger, the Company paid former stockholders of
RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS
common stock, for a total consideration of approximately $7,033, excluding the
value of Radiance common stock options to be provided to RMS optionholders in
exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $692
in cash to certain RMS stockholders who elected cash. Options for 546,250 shares
of RMS common stock accelerated and vested immediately prior to the completion
of the Merger. Of these, 1,250 were exercised, and holders received the same
consideration for their shares of RMS Common Stock as other holders of RMS
Common Stock. The options not exercised prior to the completion of the Merger
were assumed by the Company and converted into options at the same exercise
price to purchase an aggregate of 317,775 shares of the Company's Common Stock.
In addition, former RMS share and option holders may receive product development
Milestone payments of $2.00 for each share of Preferred Stock and $3.00 for each
share of Common Stock. The milestone payments may be increased up to 30%, or
reduced or eliminated if the milestones are reached earlier or later,
respectively, than the milestone target dates. The milestones represent
important steps in the United States Food and Drug Administration and European
approval process that the Company believes are critical to bringing the
Company's technology to the marketplace.
Proforma combined results of the Company and RMS for the three month and six
month periods ended June 30, 1998, on the basis that the acquisition had taken
place at the beginning of 1998, would have reported the following:
Three Months Six Months
Ended June 30, Ended June 30,
1998 1998
-------------- --------------
Pro forma Revenues $ 2,857 $ 5,323
Pro forma Net Loss (2,427) (4,803)
Pro forma Net Loss
Per Share (0.22) (0.43)
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Not reflected in the above pro forma results is the charge of $4,194 for
acquired in-process research and development. In addition to the aforementioned
charge, the Company capitalized intangible assets of $3,354 and $1,301 for
developed research and development and employment contracts, respectively, as
part of the cost for the remaining common stock of RMS, as described more fully
above.
8. Goodwill Impairment Charge
In the second quarter of 1999, due to continued operating losses, it was
determined that the goodwill associated with the German sales subsidiary would
not be realizable in the future, in spite of operational changes made earlier in
the year. Therefore, the Company recorded an impairment charge for the full
amount of the goodwill related to its German subsidiary in the amount of $1.5
million.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Radiance cautions stockholders that, in addition to the historical financial
information included herein, this Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that are based on
management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this document, including without limitation, certain
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and statements located elsewhere
herein regarding Radiance's financial position and business strategy, may
constitute forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"believes," "may," "will," "expects," "intends," "estimates," "anticipates,"
"plans," "seeks," or "continues," or the negative thereof or variations thereon
or similar terminology. Such forward-looking statements involve known and
unknown risks, including, but not limited to, economic and market conditions,
the regulatory environment in which Radiance operates, competitive activities or
other business conditions. There can be no assurance that Radiance's actual
results, performance or achievements will not differ materially from any future
results, performance or achievements expressed or implied from such
forward-looking statements. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as in the Company's Annual Report on Form 10-K as
amended for the year ended December 31, 1998, including but not limited to those
discussed in "Item 7--Risk Factors." All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by these Cautionary Statements.
Overview
Since its inception in 1992, Radiance Medical Systems, Inc. has engaged
primarily in the research and development, manufacturing and marketing of
proprietary devices for the prevention of the recurrence of atherosclerotic
blockages following the interventional treatment of atherosclerosis. Radiance's
primary product under development is the RDX Catheter, a balloon catheter-based
delivery system designed to deliver radioactive materials to the area of the
artery that has been treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company is the result of an acquisition effected by the merger of the
(former) Radiance Medical Systems, Inc. ("RMS") with and into Cardiovascular
Dynamics, Inc. (now named Radiance Medical Systems, Inc.) in January 1999. RMS
originally was formed by the Company as a separate entity to focus on the
development of radiation therapy technology for the treatment of cardiovascular
disease, and to obtain financing for such development from sources other than
the Company. As a result of the merger, the Company acquired all of the shares
of RMS that it did not own.
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
materially from quarter to quarter.
On July 15, 1996, the Company entered into co-distribution agreements with
Medtronic, providing for the co-distribution of the Company's FACT, CAT and ARC
balloon angioplasty catheters. Under the terms of these agreements, Medtronic
was to purchase a minimum number of angioplasty catheters manufactured by the
Company for distribution worldwide for a period of up to three years. Specific
products to be distributed by Medtronic would differ in individual country
markets. The initial term of the Medtronic agreements was for a period of three
years from the date of first delivery of a product. In May of 1997, Medtronic
advised the Company of its election to not make minimum purchases of product for
the second year of the agreement.
In June 1997, Medtronic informed CVD that it would not fulfill its commitment
for the first year of the agreement and that it did not believe it was required
to fulfill such commitment. This dispute adversely affected the Company's
financial results for the second quarter 1998.
In June 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute products using the
Company's focus technology. Under the terms of the Agreement, the Company is
entitled to receive certain milestone payments based upon the transfer of the
technological knowledge
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
to Guidant, and royalty payments based upon the sale of products using focus
technology by Guidant. See Note 4 to the Condensed Consolidated Financial
Statements.
In January 1999, the Company sold substantially all of the properties and assets
used exclusively in its Vascular Access Business Unit to Escalon Medical
Corporation ("Escalon"). The Company received an initial payment of $1.1 million
for actual inventory and equipment transferred, will receive an additional $1.0
million upon the completion of the transfer of the assets and technology, and
also is entitled to receive royalty payments upon the sale of products for a
five-year period. In July of 1999, the Company agreed to extend its commitment
to Escalon to manufacture certain vascular access products until December of
1999.
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of
the capital stock which it did not own of the (former) Radiance Medical Systems,
Inc. ("RMS"). Pursuant to the Merger, The Company paid former stockholders of
RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS
common stock, for a total consideration of approximately $7.0 million, excluding
the value of Radiance common stock options to be provided to RMS optionholders
in exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $0.7
million in cash to certain RMS stockholders who elected cash. Options for
546,250 shares of RMS common stock accelerated and vested immediately prior to
the completion of the Merger. Of these, 1,250 were exercised, and holders
received the same consideration for their shares of RMS Common Stock as other
holders of RMS Common Stock. The options not exercised prior to the completion
of the Merger were assumed by the Company and converted into options at the same
exercise price to purchase an aggregate of 317,775 shares of the Company's
Common Stock. In addition, Radiance share and option holders may receive product
development milestone payments of $2.00 for each share of Preferred Stock and
$3.00 for each share of Common Stock. The milestone payments may be increased up
to 30%, or reduced or eliminated if the milestones are reached earlier or later,
respectively, than the milestone target dates. The milestones represent
important steps in the United States Food and Drug Administration and European
approval process that the Company believes are critical to bringing the
Company's technology to the marketplace. See Note 7 to the Condensed
Consolidated Financial Statements.
In June 1999, the Company granted Cosmotec Co., Ltd. ("Cosmotec") of Japan
distribution rights to market its vascular radiation therapy products in Japan.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Radiance received $1.0 million as an upfront cash payment and will recognize the
income over the next two years. Radiance will also receive $1.0 million from
Cosmotec for a debenture issuable in June 2000 and convertible into Radiance
common stock over the subsequent three-year period at a conversion price of $7
per share.
Results of Operations
Second quarter of 1999 compared to the same period in 1998
Sales Revenue. Sales Revenue for the second quarter of 1999 decreased
53% to $1.1 million compared to $2.5 million for the second quarter of 1998. The
decrease resulted primarily from the sale of the Vascular Access business unit
in January 1999 and from lower sales in Asia in the second quarter of 1999
compared with the same period of 1998. Management anticipates that product sales
revenue will continue to be materially lower in subsequent periods of 1999
compared with the same periods of 1998 due to the sale of the Vascular Access
business unit and the license of technology to Guidant.
License Revenue. $0.7 million and $0.4 million in license revenue was
recognized in the second quarter of 1999 and 1998, respectively. The revenue
primarily resulted from the technology license agreement with Guidant and was
recognized on the basis of the completion of certain milestones.
Cost of Sales. The cost of sales for the second quarter of 1999
increased to 58% compared to 45% of revenues for the same period of 1998. The
increase is attributable primarily due to the sale of Vascular Access products
on a "cost plus" basis to the purchaser of the business unit, Escalon, and a
switch from direct to distributor sales in Germany. Management anticipates that
margins will continue to be negatively impacted by the aforementioned factors in
the subsequent periods of 1999.
Research and Development. Research and development expenses were $2.1
million and $2.0 million in the quarters ended June 30, 1999 and 1998,
respectively. During the quarter, the Company primarily directed its development
efforts on the development of the RDX catheter and expects the overall
expenditures to increase in the third quarter and in the remainder of 1999 if
the technology proves to be suitable for clinical trials. However, at any time
during the development process,
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
work on the technology could be halted or restarted under a different design,
for example, unless the efficacy of the design and technology is proven at each
stage of its development. There is no certainty that the technology will ever
reach the market or produce material sales due to many risks, including
competitor development of superior technologies or products, an unrecoverable
product cost, lack of product reimbursement, the uncertainty of regulatory
approval and other factors mentioned below concerning the risks associated with
Radiance's operations within this market.
Marketing and Sales. Marketing and sales expenses decreased 62% to $0.5
million, down $0.7 million in the quarter ended June 30, 1999, compared to $1.2
million in the same period of 1998. This decrease primarily reflects reductions
in the Company's domestic and foreign sales force and related expenses.
General and Administrative. General and administrative expenses
increased by 12% to $0.7 million for the quarter ended June 30, 1999, from $0.6
million for the same quarter in 1998. The increase was due primarily to legal
expenses associated with a technology license agreement.
Goodwill Impairment Charge. In the second quarter of 1999, due to
continued operating losses, it was determined that the goodwill associated with
the German sales subsidiary would not be realizable in the future, in spite of
operational changes made earlier in the year. Therefore, the Company recorded an
impairment charge for the full amount of the goodwill of $1.5 million.
Other income (expense). Other income (expense) decreased 48% to $0.2
million in the second quarter of 1999 from $0.4 million for the same period of
1998. The decrease was primarily due to a $0.1 million loss on the disposal of
assets of the Vascular Access business unit in the second quarter of 1999.
First six months of 1999 compared to the same period of 1998
Sales Revenue. Revenue for the first six months of 1999 decreased 53% to
$2.3 million compared to $4.9 million for the same period of 1998. The decrease
resulted primarily from lower sales in Asia in the first six months of 1999
compared with the same period of 1998 and the sale of the Vascular Access
business unit in January 1999.
License Revenue. $1.2 million and $0.4 million in license revenue was
recognized in the first six months of 1999 and 1998, respectively. The revenue
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
primarily resulted from the technology license agreement with Guidant and was
recognized on the basis of the completion of certain milestones.
Cost of Sales. The cost of sales for the first six months of 1999
increased to 53% compared to 50% of revenues for the same period of 1998. The
increase is attributable primarily to the sale of Vascular Access products on a
"cost plus" basis to the purchaser of the business unit, Escalon, and a switch
from direct to distributor sales in Germany, offset somewhat by an increase in
license revenue that had no associated cost of sales.
Charge for Acquired In Process Research and Development. The Company
incurred a charge of $4.2 million in the first quarter of 1999 in connection
with the purchase of the Common Stock of RMS not previously owned. The excess of
the purchase price of RMS over the fair market value of net assets was allocated
to acquired in-process research and development, developed research and
development and other intangibles in accordance with an independent appraisal.
Research and Development. Research, development and clinical expenses
increased by 20% to $4.2 million in the six-month period ended June 30, 1999
from $3.5 million in the six-month period ended June 30, 1998. The primary
reason for this increase was additional spending on development of the Company's
RDX catheter and continued spending on its SEAL technology stent products.
Marketing and Sales. Marketing and sales expenses declined 52% to $1.2
million in the six-month period ended June 30, 1999, from $2.6 million in the
six-month period ended June 30, 1998. This decrease primarily reflects
reductions in the Company's domestic and foreign sales force and related
expenses.
General and Administrative. General and administrative expenses
increased by 21% to $1.4 million for the six months ended June 30, 1999 from
$1.2 million for the same period in 1998. The increase was primarily due to
legal and other expenses associated with a technology license agreement and
Japanese distributor agreement in the first six months of 1999.
Goodwill Impairment Charge. In the second quarter of 1999, the Company
recorded an impairment charge for the full amount of the goodwill, related to
its German subsidiary, of $1.5 million. See additional comments, above, for the
second quarter results comparison for further information.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Other income (expense). Other income, in total, remained at $0.7 million
in the first six months of 1999 compared with that for the same period of 1998.
A $0.2 million reduction in interest income in the first six months of 1999,
compared with the same period of 1998, was offset by a $0.1 million gain on the
disposal of assets of the Vascular Access business unit.
Radiance has experienced an operating loss for each of the last three years and
expects to continue to incur operating losses through at least 2000. Radiance's
results of operation have varied significantly from quarter to quarter.
Quarterly operating results depend upon several factors, including the timing
and amount of expenses associated with development of the RDX catheter, the
conduct of clinical trials and the timing of regulatory approvals, new product
introductions both in the United States and internationally, 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
Since its inception, the Company has financed its operations primarily through
the sale of its equity securities, advances from Endosonics (Radiance's former
parent company), licensing its technologies and through international product
distribution agreements. Prior to the Company's initial public offering, the
Company had raised an aggregate of approximately $11.4 million from the private
sales of preferred and common stock and $2.7 million in working capital advances
from Endosonics Corporation, which was repaid to Endosonics during the third
quarter of 1996.
In the third quarter of 1996, the Company closed its initial public offering of
common stock, resulting in net proceeds of approximately $42.8 million after
deducting underwriting discounts and commissions and other expenses of the
offering. For the quarters ended June 30, 1999 and 1998, the Company's net cash
used in operating activities was $1.6 million.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
On June 30, 1999, the Company had cash, cash equivalents and marketable
securities available for sale of $24.1 million. The Company expects to incur
substantial costs related to, among other things, clinical testing, product
development, marketing and sales expenses, and to utilize increased levels of
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 September 30, 2000. Radiance'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, decreased 49% to $1.2 million as of June 30,
1999, compared with $2.4 million at December 31, 1998. The decrease was
primarily due to lower sales in Asia and the sale of the Vascular Access
business unit in the first quarter of 1999.
Inventories decreased 45% to $0.9 million as of June 30, 1999, compared with
$1.6 million at December 31, 1998. This decrease primarily resulted from the
sale of the inventory of the Vascular Access business unit totaling $0.7 million
in the first quarter of 1999.
Goodwill and other intangibles increased 115% to $4.6 million at June 30, 1999,
compared with $2.1 million at the end of 1998 due to the recognition of $4.7
million in completed research and development and employment contracts obtained
in the acquisition of RMS in the first quarter of 1999, offset by a $1.5 million
goodwill impairment charge relating to the Company's German subsidiary.
Accounts payable and accrued expenses decreased 14% to $3.7 million at March 31,
1999, compared with $4.3 million at the end of 1998 primarily due to the payment
of annual incentive compensation and reorganization costs.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Deferred revenue increased 750% to $2.1 million, including both the current and
non-current amounts, at June 30, 1999 from $0.3 million at the end of 1998. The
increase was due to the receipt of milestone payments of $2.0 million under the
Guidant technology license agreement, offset by the recognition of $1.1 million
in license revenue during the first six months of 1999, and the receipt of
deferred distributor fees of $1.0 million from Cosmotec, as described above. See
Note 4 to the Condensed Consolidated Financial Statements.
Additional paid-in capital increased 13% to $68.4 million at June 30, 1999 from
$60.7 million at the end of 1998. This increase was due to the Company's
acquisition of all of the capital stock that it did not own of RMS through the
issuance of the Company's common stock and options with a value of approximately
$7.6 million and the payment of cash of approximately $0.7 million. See Note 7
to the Condensed Consolidated Financial Statements.
Year 2000 Issue
The Company has completed an assessment and upgrade of its hardware and software
so that its computer systems will function properly on and after the Year 2000.
Approximately $20,000 for the Year 2000 upgrade has been spent.
We are contacting our vendors and customers to assess the impact the Year 2000
issue will have on the supply and service relationships we have with our vendors
and customers. Though we cannot be assured of the results of the enhancements
and upgrades, based upon our assessment of our systems and software, we believe
that the system enhancements and upgrades should prevent related problems that
could affect our ability to supply or service our customers. We anticipate
completing our assessment of significant vendor and customer Year 2000 issues by
the end of the third quarter of 1999 and will formulate a contingency plan based
upon what we believe are the "worst-case" scenarios. However, depending upon the
response level by customers and vendors and the information received from them,
this assessment may not be completed as anticipated or may be inadequate to
assess or address the related risks. We cannot be certain that all of our
systems or software will be Year 2000 ready nor have any assurance that our
vendors' or customers' systems and software will be Year 2000 ready. To prepare
for any vendor problems, we will try to identify alternative supply sources, but
there is no guaranty that the alternative sources will be Year 2000 ready or
will be able to provide the same level of service and supply as our current
vendors. If our customers' systems and software are not Year 2000 ready, any
operational problems that may result could cause slowed or
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
lower demand of our products. Even if our goal is to be Year 2000 ready, there
can be no assurance that our plans will be sufficient to address any third party
failures, and any unresolved or undetected internal or external Year 2000 issues
could materially adversely affect our business, financial condition or results
of operations.
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PART II.
OTHER INFORMATION
Items 1, 3 and 5. Not applicable
Item 2. Changes in Securities and Use of Proceeds
c) Recent Sales of Unregistered Securities
Although the Company did not issue any unregistered securities during the
quarter ended June 30, 1999, the Company entered into joint venture and
distribution agreements by and among the Company and Globe Co., Ltd. And
Cosmotec Co., Ltd., dated June 15, 1999. Pursuant to the agreements, Cosmotec
agreed to purchase $1 million convertible debenture from the Company to be
issued June 15, 2000. The debenture is convertible into shares of the Company's
common stock for the face amount of the debenture plus accrued interest, at an
initial conversion price of $7.00 per share. The securities to be issued by the
Company pursuant to this transaction will be issued without registration under
the Securities Act of 1933, as amended, in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder by the Securities and Exchange Commission.
d) Use of Proceeds
The Company has used approximately $2.7 million of the net proceeds from its
initial public offering on June 19, 1996, SEC file number 333-04560, the IPO for
repayment of certain outstanding indebtedness to Endosonics, Inc., a holder of
in excess of ten percent of the Common Stock of the Company. From the date of
the IPO until March 31, 1999, in the normal course of business, the Company has
paid salaries and bonuses in excess of $0.1 million each to nine present and
former officers of the Company and used $11.9 million for working capital. The
Company has also used approximately $1.9 million of the net proceeds for
machinery and equipment and leasehold improvement purchases. Through the end of
the second quarter of 1999, the Company used approximately $3.7 million to
purchase 686,000 shares of the Company's Common Stock on the open market. In
September of 1998, the Company exercised a Warrant to acquire 1,500,000 Series B
Preferred Stock of Radiance Medical Systems, Inc. for $1.5 million. In January
1999, the Company paid $0.7 million to stockholders of RMS who elected to
receive cash for their RMS common stock and $0.6 million in costs relating to
the acquisition of the remaining common stock of RMS not held by the Company. At
June 30, 1999, approximately $23.7 million was held in temporary investments, of
which approximately $8.2 million was invested in U.S. Agency debt securities,
and $15.5 million was invested in corporate debt securities.
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Item 4. Submission of Matters to a Vote of Security-Holders
The Company's Annual Meeting of Stockholders was held on June 9, 1999. The
following action was taken at this meeting:
Abstentions
and
Broker Non- Affirmative Negative Votes
Votes Votes Votes Withheld
----------- ----------- --------- -------
Election of Directors:
Maurice Buchbinder 7,880,147 48,758
Jeffrey F. O'Donnell 7,825,133 103,772
Gerard Von Hoffmann 7,885,883 43,022
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 4.2 Form of $1,000,000 5% Convertible Debenture to be
issued by the Company to Cosmotec Co., Ltd. On
June 15, 2000.
Exhibit 10.31 Joint Venture Agreement dated June 15, 1999
between the Company and Globe Co., Ltd. The
following exhibits to the Joint Venture Agreement
have not been filed: Supply Agreement dated June
15, 1999 between the Company and Radiatec, Inc.;
and, International Distributor Agreement dated
June 15, 1999 between Radiatec, Inc. and Globe
Co., Ltd.. The Registrant agrees to furnish
supplementally a copy of such omitted exhibits to
the Commission upon request.
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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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.
RADIANCE MEDICAL SYSTEMS, INC.
Date: August 12, 1999 /s/ Michael R. Henson
---------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 /s/ Stephen R. Kroll
----------------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
4.2 Form of $1,000,000 5% Convertible Debenture to be issued by the Company
to Cosmotec Co., Ltd. On June 15, 2000.
10.31 Joint Venture Agreement dated June 15, 1999 between the Company and
Globe Co., Ltd. The following exhibits to the Joint Venture Agreement
have not been filed: Supply Agreement dated June 15, 1999 between the
Company and Radiatec, Inc.; and, International Distributor Agreement
dated June 15, 1999 between Radiatec, Inc. and Globe Co., Ltd.. The
Registrant agrees to furnish supplementally a copy of such omitted
exhibits to the Commission upon request.
27 Financial Data Schedule
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