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 September 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 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 November 3, 1999, the Registrant had outstanding approximately 11,857,000
shares of Common Stock (including 686,000 of treasury shares) of $.001 par
value, which is the Registrant's only class of Common Stock.
2
RADIANCE MEDICAL SYSTEMS, INC.
Form 10-Q
September 30, 1999
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at September 30, 1999
and December 31, 1998 3
Condensed consolidated statements of operations for the three
and nine months ended September 30, 1999 and 1998 4
Condensed consolidated statements of cash flows for the nine
months ended September 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 12
Part II. Other Information
Items 1 through 6. 22
Signatures 23
Exhibit Index
2
3
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
September 30, December 31,
1999 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,599 $ 1,437
Marketable securities available-for-sale 19,700 23,375
Trade accounts receivable, net 748 2,413
Inventories 721 1,623
Other current assets 801 593
-------- --------
Total current assets 25,569 29,441
Property and equipment, net 1,381 1,532
Notes receivable from officers 121 116
Intangible assets, net 4,213 2,133
Other assets 32 559
-------- --------
Total Assets $ 31,316 $ 33,781
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,267 $ 4,286
Deferred revenue 1,576 250
-------- --------
Total current liabilities 3,843 4,536
Deferred revenue 1,075 --
Minority interest 230 --
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,
11,765,000 shares and 9,578,000 shares outstanding as of
September 30, 1999 and December 31, 1998, respectively 12 10
Additional paid-in capital 68,573 60,664
Deferred compensation (234) (409)
Accumulated deficit (38,678) (27,807)
Treasury stock at cost, 686,000 common shares as of
September 30, 1999 and December 31, 1998, respectively (3,675) (3,675)
Accumulated other comprehensive income 170 462
-------- --------
Total stockholders' equity 26,168 29,245
-------- --------
Total Liabilities and Stockholders' Equity $ 31,316 $ 33,781
======== ========
See accompanying notes
3
4
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue:
Sales $ 648 $ 2,108 $ 2,985 $ 7,031
License and other revenue 826 1,205 2,050 1,605
-------- -------- -------- --------
Total revenues 1,474 3,313 5,035 8,636
Cost of sales 412 1,692 2,312 4,339
-------- -------- -------- --------
Gross profit 1,062 1,621 2,723 4,297
Operating expenses:
Charge for acquired in-process research
and development -- -- 4,194 --
Research, development and clinical 1,561 1,579 5,718 5,038
Marketing and sales 297 1,238 1,525 3,801
General and administrative 426 665 1,870 1,855
Goodwill impairment charge -- -- 1,451 --
Minority interest -- (68) -- (68)
-------- -------- -------- --------
Total operating expenses 2,284 3,414 14,758 10,626
-------- -------- -------- --------
Loss from operations (1,222) (1,793) (12,035) (6,329)
Other income (expense):
Interest income 280 395 935 1,202
Gain on disposal of assets 93 -- 224 --
Other income (expense) 82 29 5 (66)
-------- -------- -------- --------
Total other income 455 424 1,164 1,136
-------- -------- -------- --------
Net loss $ (767) $ (1,369) $(10,871) $ (5,193)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.07) $ (0.16) $ (1.00) $ (0.59)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 11,044 8,854 10,874 8,857
======== ======== ======== ========
See accompanying notes
4
5
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended
September 30,
-------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $(10,871) $ (5,193)
Adjustments to reconcile net loss to net cash
used in operating activities:
Goodwill impairment charge 1,451 --
Depreciation and amortization 1,299 359
Amortization of deferred compensation 126 190
Bad debt expense 113 190
Foreign currency exchange loss 97 --
Minority interest in losses of (former) Radiance -- (68)
Charge for acquired in-process research
and development 4,194 --
Gain on sale of assets (224) --
Changes, net of effects from purchase of (former) Radiance:
Trade accounts receivable, net 1,553 359
Inventories 198 871
Other assets (182) (81)
Accounts payable and accrued expenses (2,553) (322)
Deferred revenue 1,277 400
-------- --------
Net cash used in operating activities (3,522) (3,295)
Cash flows provided by investing activities:
Purchase of available-for-sale securities (22,891) (32,444)
Sales of available-for-sale securities 26,364 33,904
Capital expenditures for property and equipment and other assets (422) (311)
Sale of Vascular Access business unit, net 1,070 --
Proceeds from sale of option on investment securities 1,232 --
Purchase of majority interest in Radiatec 233 --
Purchase of interest in (former) Radiance, net of cash acquired (259) 577
-------- --------
Net cash provided by investing activities 5,327 1,726
Cash flows provided by (used in) financing activities:
Proceeds from sale of common stock 168 180
Proceeds from exercise of common stock options 125 112
Proceeds from repayment of affiliate debt 64 233
Purchase of treasury stock -- (1,470)
-------- --------
Net cash provided by (used in) financing activities 357 (945)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,162 (2,514)
Cash and cash equivalents, beginning of period 1,437 6,141
-------- --------
Cash and cash equivalents, end of period $ 3,599 $ 3,627
======== ========
Supplemental disclosure of non-cash investing and financing activities:
In September 1998, the Company exercised preferred stock warrants
bringing its ownership of (former) Radiance to 50%. In January 1999,
the Company acquired the remaining common stock of (former) Radiance
In conjunction with the transactions, the following liabilities were
assumed:
Fair value of assets acquired $ 9,308 $ 1,535
Cash paid (692) (1,462)
Common stock and options issued (7,569) --
-------- --------
Liabilities assumed $ 1,047 $ 73
======== ========
See accompanying notes
5
6
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 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.
In August 1999, the Company purchased for cash of $233 a 51% interest in
Radiatec, a joint venture formed to distribute the Company's RDX catheter
products in Japan. The consolidated financial statements for September 30, 1999
include the accounts of the Company and its wholly and majority-owned
subsidiaries. Intercompany transactions have been eliminated and any minority
interest recognized.
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 nine month periods ended
September 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.
6
7
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $438 $ 630
Work-in-process 27 87
Finished goods 256 906
---- ------
$721 $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 $563 and $1,687 in license revenue in the third quarter and first
nine months, respectively, of 1999 and will recognize the remaining $563 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 revenue over
the next seven years. The Company recognized $36 of the aforementioned revenue
for the three and nine-month periods ended September 30, 1999.
7
8
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Deferred Gain on Sale of Assets
In August of 1999, the Company sold an option to purchase an investment held by
the Company. Under the option agreement, the purchaser made a non-refundable
cash payment to the Company of $1,232 for the option and has until December of
2000 to exercise the option. A gain of $109 was recognized in other income in
the third quarter of 1999 and the remainder will be recognized over the
remaining term of the option.
Although the likelihood of exercise is uncertain, if the option is exercised,
the Company will receive an additional payment of approximately $2,000 in 2000.
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:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1999 1998 1999 1998
------ -------- --------- --------
Net loss $(767) $(1,369) $(10,871) $(5,193)
Unrealized gain (loss) on
available-for-sale securities (82) (21) (190) (12)
Foreign currency translation
adjustment (40) 168 (102) 178
----- ------- -------- -------
Comprehensive loss $(889) $(1,222) $(11,163) $(5,027)
===== ======= ======== =======
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.
8
9
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
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). In October 1999, the Company received 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
following the sale. In July 1999, the Company extended its original commitment
to manufacture certain vascular access products on a "cost plus" basis until
December 1999.
Acquisition of RMS
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger (the
"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, under the Merger agreement, former RMS share and option holders
could have received product development milestone payments of $2.00 for each
share of Preferred Stock and $3.00 for each share of Common Stock. One of the
milestones, which was scheduled during the second quarter and extended into the
9
10
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
third quarter, was not met. As a result, the total of potential milestone
payments, before adjustment for early or late achievement of the milestones, is
reduced to $1.69 for each share of Preferred Stock and $2.54 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 nine
month periods ended September 30, 1998, on the basis that the acquisition had
taken place at the beginning of 1998, would have reported the following:
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
Pro forma Revenues $ 3,314 $ 8,636
Pro forma Net Loss (2,040) (6,843)
Pro forma Net Loss
Per Share (0.18) (0.62)
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 in spite of
operational changes made earlier in the year, it was determined that the
goodwill associated with the German sales subsidiary would not be realizable in
the future. 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.
9. Legal Matters
On September 15, 1999, EndoSonics Corporation filed a complaint for declaratory
relief in the Superior Court in Orange County, California, relating to a License
10
11
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Agreement dated May 16, 1997, between EndoSonics and the Company. Under that
License Agreement, EndoSonics was granted certain rights to the Company's Focus
technology for use on catheters with EndoSonics' ultrasound transducers.
EndoSonics is seeking a declaratory judgment that the License Agreement entitles
EndoSonics to also place a stent on such catheters. The Company believes that
EndoSonics is authorized only to use the Focus technology with the EndoSonics
ultrasound transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position or operating results.
11
12
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.
12
13
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 a wholly-owned
subsidiary of 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 quarter and nine month period ended September 30,
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
13
14
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 and is entitled to receive
royalty payments upon the sale of products for a five-year period. In July 1999,
the Company agreed to extend its commitment to Escalon to manufacture certain
vascular access products until December 1999. In October 1999, the Company
received an additional $1.0 million upon the completion of the transfer of the
assets and technology.
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger (the
"Merger") all of the capital stock that 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, under the Merger agreement, former RMS share and option holders
could have received product development milestone payments of $2.00 for each
share of Preferred Stock and $3.00 for each share of Common Stock. One of the
milestones, which was scheduled during the second quarter and extended into the
third quarter, was not met, however. As a result, the total of potential
milestone payments, before adjustment for early or late achievement of the
milestones, is reduced to $1.69 for each share of Preferred Stock and $2.54 for
each share of Common Stock. The milestone payments may be increased up to 30%,
or reduced
14
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
Radiance received $1.0 million as an upfront cash payment and began recognizing
income over a seven year period in the third quarter of 1999. Radiance will also
receive $1.0 million from Cosmotec for a debenture issuable in June 2000, which
will be convertible into Radiance common stock over the subsequent three-year
period at a conversion price of $7 per share.
In August 1999, the Company purchased for $233 a 51% interest in Radiatec, a new
joint venture formed to distribute the Company's RDX catheter products in Japan.
In August of 1999, the Company sold an option to purchase an investment held by
the Company. Under the option agreement, the purchaser made a non-refundable
cash payment to the Company of $1.2 million for the option and has until
December of 2000 to exercise the option. A gain of $0.1 million was recognized
in other income in the third quarter and the remainder will be recognized over
the remaining term of the option. Although the likelihood of exercise is
uncertain, if the aforementioned option is exercised, the Company will receive
an additional payment of approximately $2.0 million in 2000.
Results of Operations
Third quarter of 1999 compared to the same period in 1998
Sales Revenue. Sales revenue for the third quarter of 1999 decreased
69% to $0.6 million compared to $2.1 million for the third quarter of 1998. The
decrease resulted primarily from the sale of the Vascular Access business unit
in January 1999 and from lower sales of focus technology products in Europe in
the third 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, the license of focus technology to
Guidant, and the increasing emphasis by the Company on the development of RDX
technology.
15
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
License and Other Revenue. $0.8 million and $1.2 million in license and
other revenue was recognized in the third quarter of 1999 and 1998,
respectively. The decrease in license and other revenue in the third quarter of
1999 primarily resulted from decreasing payments under the technology license
agreement with Guidant that were recognized on the basis of the completion of
certain milestones. The remaining $0.6 million of deferred license revenue from
the completion of milestones under the aforementioned agreement is expected to
be recognized in the fourth quarter of 1999.
Cost of Sales. The cost of sales for the third quarter of 1999
decreased to 64% compared to 80% of sales revenue for the same period of 1998.
The decrease is primarily attributable to $0.5 million in inventory obsolescence
reserves recorded in the third quarter of 1998 and is somewhat offset by
relatively higher cost of sales in 1999 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, Development and Clinical. Research, development and clinical
expenses were $1.6 million in the quarters ended September 30, 1999 and 1998,
respectively. Although management anticipated that expenditures would be more
significant in the third quarter of 1999, short-term delays in starting clinical
trials and opening trial sites resulted in lower expenditures. The Company
continued to primarily direct its development efforts on the RDX catheter
technology in the third quarter and expects the overall expenditures to increase
in the fourth quarter of 1999 as clinical trials proceed. However, at any time
during the development process and clinical trials, 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 76% to $0.3
million, down $0.9 million in the quarter ended September 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.
16
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General and Administrative. General and administrative expenses
decreased by 36% to $0.4 million for the quarter ended September 30, 1999, from
$0.7 million for the same quarter in 1998. The decrease was due primarily to
lower personnel costs in 1999 and a bad debt charge taken in the third quarter
of 1998.
Other income (expense). Other income (expense) increased 7% to $0.5
million in the third quarter of 1999 from $0.4 million for the same period of
1998. The increase was primarily due to a $0.1 million gain recognized on the
sale of an option to purchase an investment held by the Company in the third
quarter of 1999.
First nine months of 1999 compared to the same period of 1998
Sales Revenue. Sales revenue for the first nine months of 1999
decreased 58% to $3.0 million compared to $7.0 million for the same period of
1998. The decrease resulted primarily from the sale of the Vascular Access
business unit in January 1999 and lower sales in Asia in the first nine months
of 1999 compared with the same period of 1998.
License and Other Revenue. $2.1 million and $1.6 million in license
revenue was recognized in the first nine months 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 first nine months of 1999
increased to 77% compared to 62% of sales revenue 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.
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, Development and Clinical. Research, development and clinical
expenses increased by 13% to $5.7 million in the nine-month period ended
September 30, 1999 from $5.0 million in the nine-month period ended September
30, 1998. The primary reason for this increase was additional spending on
development of the Company's RDX catheter.
17
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Marketing and Sales. Marketing and sales expenses declined 60% to $1.5
million in the nine-month period ended September 30, 1999, from $3.8 million in
the nine-month period ended September 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 totaled
$1.9 million for the nine months ended September 30, 1999 and September 30,
1998. Lower bad debts charges and personnel expenses for the first nine months
of 1999 compared with 1998 were offset by relatively higher travel and audit and
tax services expenses.
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 totaled $1.2 million in the first
nine months of 1999 compared with $1.1 million for the same period of 1998. A
$0.3 million reduction in interest income in the first nine months of 1999,
compared with the same period of 1998, was offset primarily by a $0.1 million
gain on the disposal of assets of the Vascular Access business unit and a $0.1
million gain recognized on the sale of an option to purchase an investment held
by the Company.
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 operations 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
18
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 nine months ended September 30, 1999 and 1998, the Company's
net cash used in operating activities was $3.5 million and $3.3 million.
On September 30, 1999, the Company had cash, cash equivalents and marketable
securities available for sale of $23.3 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 December 31, 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
19
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 69% to $0.7 million as of September
30, 1999, compared with $2.4 million at December 31, 1998. The decrease was
primarily due to the sale of the Vascular Access business unit in the first
quarter of 1999 and to the licensing of the Company's focus technology.
Inventories decreased 56% to $0.7 million as of September 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.
Intangible assets increased 98% to $4.2 million at September 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 47% to $2.3 million at September
30, 1999, compared with $4.3 million at the end of 1998 primarily due to the
payment of clinical trials costs and accrual adjustments for cancelled trials,
and the payment of reorganization costs and annual incentive compensation.
Deferred revenue increased 960% to $2.7 million, including both the current and
non-current amounts, at September 30, 1999 from $0.3 million at the end of 1998.
The increase was primarily due to the receipt of deferred distributor fees from
Cosmotec of $1.0 million and $1.2 million for an option to purchase an
investment held by the Company that expires in December of 2000, as described
above. See Note 4 to the Condensed Consolidated Financial Statements.
Additional paid-in capital increased 13% to $68.6 million at September 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.
20
21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 was spent for the Year 2000 upgrade and testing.
We have contacted 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 have
substantially completed our assessment of significant vendor and customer Year
2000 issues. We have identified our "critical" vendors and have formulated a
contingency plan based upon what we believe are the "worst-case" scenarios. We
have not been able to gather sufficient evidence from our customers to ascertain
whether they will experience computer systems problems as a result of the Year
2000 issue. We have asked that they review and mitigate any problems they
foresee, but believe that most of our customers utilize inventory management
systems that are not critically dependent upon their computer systems. However,
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 for our critical vendors,
we have tried 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 lower demand of our products. Even though 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.
21
22
Part II.
OTHER INFORMATION
Items 1, 3, 4 and 5. Not applicable
Item 2. Changes in Securities and Use of Proceeds
(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 September 30, 1999, in the normal course of business, the Company
has paid salaries and bonuses in excess of $0.1 million each to ten present and
former officers of the Company and used $14.9 million for working capital. The
Company has also used approximately $2.2 million of the net proceeds for
machinery and equipment and leasehold improvement purchases. Through the end of
the third 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
September 30, 1999, approximately $22.3 million was held in temporary
investments, of which approximately $10.3 million was invested in U.S. Federal
and State Agency debt securities, and $12.0 million was invested in corporate
debt securities.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K.
o The Company filed a Report on Form 8-K as of August 10, 1999 reporting
the dismissal of Ernst & Young LLP as its auditors.
o The Company filed a Report on Form 8-K as of August 27, 1999 reporting
the appointment of PricewaterhouseCoopers LLP as its independent
accountants.
22
23
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: November 11, 1999 /s/ Michael R. Henson
------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1999 /s/ Stephen R. Kroll
------------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
23
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule