<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 2000.
[ ] 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 August 7, 2000, the Registrant had outstanding approximately 12,069,000
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, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 2000 and
December 31, 1999 3
Condensed consolidated statements of operations for the three
and six months ended June 30, 2000 and 1999 4
Condensed consolidated statements of cash flows for the six
months ended June 30, 2000 and 1999 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 14
Part II. Other Information
Items 1 through 6. 24
Signatures 26
Exhibit Index 27
</TABLE>
2
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 3,585 $ 2,051
Marketable securities available-for-sale 16,712 20,004
Trade accounts receivable, net 590 1,070
Other receivables 2,188 742
Inventories 1,060 822
Other current assets 91 259
-------- --------
Total current assets 24,226 24,948
Property and equipment, net 875 1,109
Notes receivable from officers 123 118
Intangibles, net 3,237 3,667
Other assets 32 31
-------- --------
Total assets $ 28,493 $ 29,873
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,965 $ 2,714
Deferred revenue 504 1,028
-------- --------
Total current liabilities 3,469 3,742
Deferred revenue 400 786
Convertible debenture 1,402 --
Minority interest 216 234
-------- --------
Total liabilities 5,487 4,762
-------- --------
Commitments and contingencies (Note 8)
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,
12,043,000 shares and 11,896,000 shares outstanding as of
June 30, 2000 and December 31, 1999, respectively 12 12
Additional paid-in capital 69,924 69,483
Deferred compensation (432) (524)
Accumulated deficit (42,951) (40,333)
Treasury stock at cost, 686,000 common shares as of
June 30, 2000 and December 31, 1999 (3,675) (3,675)
Accumulated other comprehensive income 128 148
-------- --------
Total stockholders' equity 23,006 25,111
-------- --------
Total Liabilities and Stockholders' Equity $ 28,493 $ 29,873
======== ========
</TABLE>
See accompanying notes
3
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Sales $ 623 $ 1,144 $ 1,193 $ 2,337
License revenue 1,919 661 3,711 1,224
-------- -------- -------- --------
Total revenues 2,542 1,805 4,904 3,561
Cost of sales 366 1,053 859 1,900
-------- -------- -------- --------
Gross profit 2,176 752 4,045 1,661
Operating expenses:
Charge for acquired in-process research
and development -- -- -- 4,194
Research, development and clinical 2,814 2,110 5,559 4,157
Marketing and sales 319 166 642 933
General and administrative 750 674 1,477 1,444
Minority interest (8) -- (9) --
-------- -------- -------- --------
Total operating expenses 3,875 2,950 7,669 10,728
-------- -------- -------- --------
Loss from operations (1,699) (2,198) (3,624) (9,067)
Other income (expense):
Interest income 294 340 587 655
Gain (loss) on disposal of assets 234 (97) 467 131
Other expense 0 (55) (48) (77)
-------- -------- -------- --------
Total other income 528 188 1,006 709
-------- -------- -------- --------
Net loss $ (1,171) $ (2,010) $ (2,618) $ (8,358)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.10) $ (0.18) $ (0.23) $ (0.77)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 11,352 10,995 11,316 10,788
======== ======== ======== ========
</TABLE>
See accompanying notes
4
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,618) $ (8,358)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 660 633
Amortization of deferred stock compensation 92 68
Bad debt expense 38 37
Foreign currency exchange loss (gain) 23 (61)
Charge for acquired in-process research and development -- 4,194
Loss (gain) on sale of assets 28 (131)
Minority interest in losses of Radiatec (9) 0
Changes, net of effects from 1999 purchase
of (former) Radiance:
Trade accounts receivable, net 442 1,148
Inventories (238) 29
Other assets (1,283) 147
Accounts payable and accrued expenses 251 (1,132)
Deferred revenue (507) 1,876
-------- --------
Net cash used in operating activities (3,121) (1,550)
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (7,283) (15,482)
Sales of available-for-sale securities 10,523 15,877
Capital expenditures for property and equipment
and other assets (26) (112)
Sale of Vascular Access product line, net -- 1,070
Purchase of Radiance, net of cash acquired -- (259)
-------- --------
Net cash provided by investing activities 3,214 1,094
-------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible debenture 1,000 --
Proceeds from sale of common stock 107 89
Proceeds from exercise of common stock options 334 67
Proceeds from repayment of affiliate debt -- 64
-------- --------
Net cash provided by financing activities 1,441 220
-------- --------
Net increase (decrease) in cash and cash equivalents 1,534 (236)
Cash and cash equivalents, beginning of period 2,051 1,437
-------- --------
Cash and cash equivalents, end of period $ 3,585 $ 1,201
======== ========
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 $ 8,962
Cash paid (692)
Common stock and options issued (8,035)
--------
Liabilities assumed $ 235
========
</TABLE>
See accompanying notes
5
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, 2000
1. Basis of Presentation
Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc. and
herein after referred to as "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, 2000 are not necessarily indicative of results that may be expected for the
year ending December 31, 2000 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 for the year ended December 31, 1999.
As a result of the 1999 closing of Radiance Medical Systems GmbH (formerly known
as Clinitec GmbH), the Company's German distribution subsidiary, the Company
reconsidered the initial accounting for the acquisition of this subsidiary in
1997. As more fully described in the Annual Report on Form 10-K for the year
ended December 31, 1999, the Company restated operating results primarily to
eliminate 1997 sales to Clinitec not paid for by the date of the acquisition,
the associated goodwill capitalized in 1997 and the goodwill-related charges
recorded in 1999. The impact of the restatement on goodwill amortization of $295
has been reflected in three and six month periods ended June 30, 1999. The
restatement has no effect on cash flows from operations or other sources or uses
of cash.
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
6
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
shares of the Company's common stock granted under the Company's stock option
plan and shares issuable upon the conversion of the convertible debenture have
been excluded from the calculation of diluted earnings per share as they are
anti-dilutive. See Note 5.
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
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<S> <C> <C>
Raw materials $ 403 $398
Work-in-process 220 94
Finished goods 437 330
------ ----
$1,060 $822
====== ====
</TABLE>
4. Deferred Revenue
Deferred Distributor Fees
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 $1,000 as an up-front cash payment and will recognize the
revenue ratably over the seven-year term of the distribution agreement. During
the second quarter and first six months of 2000, the Company recognized $5 and
$41, respectively, of the aforementioned revenue. In addition, the Company has
issued a $1,000 convertible debenture to Cosmotec. As a result of the valuation
of the convertible debenture, the revenue to be recognized as a deferred
distributor fee was reduced by $377 in June 2000. See Note 5.
Deferred Gain on Sale of Assets
In August 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 2000 to
exercise the option. The option premium is being recognized on a straight-line
basis over the option term, resulting in a gain of $231 and $462 being
recognized as other income for the second quarter and first six months of 2000,
respectively. The
7
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
remainder of $424 will be recognized ratably over the next two quarters.
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.
Deferred License and License Revenue
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 stent delivery products
using the Company's Focus technology. Under the Agreement, the Company was
entitled to receive certain milestone payments based upon the transfer of the
technology to Guidant, and royalty payments based upon the sale of products
using the Focus technology. The last two milestone payments of $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. During the second
quarter and first six months of 2000, the Company recorded $1,840 and $3,520,
respectively, in license revenue due on licensed product sales by Guidant.
5. Convertible Debenture
In June 1999, in conjunction with an agreement to grant Cosmotec distribution
rights to market the Company's vascular radiation therapy products in Japan, a
convertible debenture agreement was executed between the Company and Cosmotec
whereby the Company was committed to sell Cosmotec a 5%, $1,000 face amount
convertible debenture in June 2000. The borrowing under the agreement took place
in June 2000 and will mature in June 2003. At any time prior to the repayment of
the debt, Cosmotec may convert the debenture into shares of common stock of the
Company at an initial conversion price of $7.00 per share. The conversion price
may be adjusted due to equity transactions including, but not limited to, stock
issuances, convertible security issuances, stock splits, dividends, and warrant
issuances. On August 10, 2000, Cosmotec notified us that they will convert the
debenture into 142,857 shares of our common stock.
The Company recorded the convertible debenture at its fair value of $1,407, and
the difference between the fair value and the cash proceeds received from this
debenture has been recorded as a reduction in the deferred revenue associated
with the distribution agreement. The excess of the debenture value over its
maturity value
8
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
of $1,000 will be amortized to interest expense over the debenture's three-year
term. During June 2000, $5 was amortized to interest expense. See Note 4.
6. 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(1,171) $(2,010) $(2,618) $(8,358)
Unrealized loss on
available-for-sale securities (29) (7) (51) (108)
Foreign currency translation
adjustment (16) 2 31 (62)
------- ------- ------- -------
Comprehensive loss $(1,216) $(2,015) $(2,638) $(8,528)
======= ======= ======= =======
</TABLE>
7. Sale of Assets and Acquisition
Sale of Assets of Vascular Access Assets
In January 1999, the Company sold substantially all of the properties and assets
used exclusively in its Vascular Access assets 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). It
received an additional $1,000 upon the completion of the transfer of the assets
and technology in October 1999 and also is entitled to receive royalty payments
upon the sale of products for a five-year period following the sale. In 1999,
the Company continued to manufacture certain vascular access products for ten
months following the completion of the sale on a "cost plus" basis. During the
second quarter and first six months of 1999, the Company recognized royalties of
$99. In the second quarter and first six months of 2000, the Company recognized
the pro rata minimum royalty due of $75 and $150, respectively.
9
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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 previously 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
$7,432, 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
to receive 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 317,776
shares of the Company's common stock for total consideration of $1,150.
In addition, under the merger agreement, Radiance 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. The first of the
milestones was not achieved and completion of the second milestone is behind
schedule. Because the first milestone was not met, 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. Any milestone payments will be
capitalized as additions to the purchase price.
The RMS merger consideration was allocated to tangible assets (aggregating
approximately $459), acquired and assumed liabilities (aggregating approximately
$235), with the remaining merger consideration being allocated to acquired in-
10
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
process research and development ("IPR&D"), developed technology and employment
contracts, according to an independent valuation.
Significant portions of the RMS merger consideration were identified as
intangible assets. Valuation techniques were employed that reflect recent
guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to IPR&D. At the date of the
merger, technological feasibility of IPR&D projects had not been reached and the
technology had no alternative future uses. Accordingly, the Company expensed the
portion of the purchase price allocated to IPR&D of $4,194, in accordance with
generally accepted accounting principles, in the first quarter of 1999. The fair
values of the developed technology and employment contracts (i.e., the
identified intangibles) at the date of the acquisition of the remainder of the
capital stock of RMS were $3,079 and $1,229, respectively.
8. Commitments and Contingencies
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
Agreement dated May 16, 1997, between EndoSonics and the Company.
Under that License Agreement, EndoSonics was granted certain royalty-free rights
to the Company's Focus technology for use on catheters with EndoSonics'
ultrasound transducers. EndoSonics is seeking a declaratory judgement 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, operating results, or cash flows. However, if EndoSonics
prevails in their suit, the Company may have to pay damages and/or renegotiate
its license agreement with Guidant. See Note 4.
11
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
Radiance is a party to ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on the Company's consolidated financial
position.
Contract Manufacturing and License Agreement with Bebig GmbH
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to perform final assembly of its radiation
therapy catheter in Europe. Pursuant to the agreement, which was amended in July
2000, Radiance paid $100 during 1999 and, in 2000, will pay approximately $1,247
of certain facility set-up fees. Radiance will prepare the manufacturing
equipment used to perform the final assembly of the RDX catheter, estimated to
cost approximately $700, and Bebig will purchase the equipment from Radiance for
$500. The cost of the facility set up fees, equipment costs and other costs
could increase materially from the aforementioned amounts as the design of the
production processes and facilities evolves over the next three quarters. The
Company will pay all material and third party costs associated with production
validation. Radiance will also pay Bebig an agreed amount for each unit
produced. For a nominal charge, the Company can renew the agreement for three
successive, two-year terms.
In conjunction with the contract manufacturing agreement, the Company entered
into a three year sub-license agreement for certain radiation technology that it
believes may be useful in the development of its radiation therapy products.
There is a minimum annual license fee of $200, subject to offset by certain
amounts paid under the aforementioned manufacturing agreement, beginning in July
2000 and royalty fees for any products sold worldwide that incorporate the
licensed technology. The sub-license is subject to renewal, without cost, until
the underlying patents' expiration dates. All costs associated with the contract
manufacturing and license agreements with Bebig have been expensed as research
and development costs.
9. Recent Accounting Pronouncements
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
the presentation of revenue and for disclosure related to revenue recognition
policies in
12
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
financial statements filed with the SEC. We believe that adopting SAB 101 will
not have a material impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation," which is an interpretation
of Accounting Principles Board No. 25 ("APB 25"). This interpretation clarifies:
1. The definition of an employee for purposes of applying APB 25; 2. The
criteria for determining whether a plan qualifies as a noncompensatory plan; 3.
The accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and 4. The accounting for an exchange of
stock compensation awards in a business combination.
This interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe that the adoption of FIN 44 will not have a material impact on our
financial statements.
13
<PAGE> 14
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 Report on Form 10-Q, 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, you generally
can identify forward-looking statements 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. We cannot assure
you that our 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 Radiance's expectations ("Cautionary
Statements") are disclosed in the Annual Report on Form 10-K, including, but not
limited to, those discussed in "Item 7--Risk Factors." All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these Cautionary Statements.
We disclaim any obligation to update information contained in any
forward-looking statement.
Overview
Our Business
We are developing proprietary devices to deliver low level radiation to prevent
the recurrence of blockages in arteries following balloon angioplasty, vascular
stenting, arterial bypass surgery and other interventional treatments of
blockages in coronary and peripheral arteries. We incorporate our proprietary
RDX technology into catheter-based systems that delivers beta radiation to the
site of a treated blockage in an artery in order to decrease the likelihood of
restenosis. Restenosis is the recurrence of a blockage following interventional
therapy. The application of beta radiation inside the artery at the site of a
blockage has proven clinically effective in inhibiting cell proliferation, a
cause of restenosis.
14
<PAGE> 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Prior to June 1998, we focused on manufacturing and selling a broad range of
angioplasty catheters and stent products, including our Focus technology product
line. As catheter and stent products became commodity items subject to
increasing price pressure, we shifted our focus to the research and development
of radiation therapy devices to treat restenosis. Since June 1998, we have:
o acquired the portion of our former Radiance Medical Systems subsidiary that
we did not already own, which was researching and developing radiation
therapy treatment devices to prevent blockages in arteries following
interventional treatments;
o sold our vascular access product line and related assets;
o licensed our proprietary Focus technology for balloon angioplasty to
Guidant Corporation for use in Guidant's stent delivery systems; and
o reduced our direct sales force.
We continue to sell our Focus technology products on a limited basis through
medical device distributors.
Development and Operations
We plan to continue spending substantial amounts to:
o fund clinical trials for the RDX system;
o obtain regulatory approvals for the RDX system; and
o continue research and development activities related to devices for the
delivery of radiation to treat restenosis.
We currently sell our existing products primarily through medical device
distributors. Over the past few years, our source of revenues has shifted
gradually from direct sales to royalties from licenses involving our products.
We are a party to several agreements for the distribution of products
incorporating our Focus technology and other existing products in the United
States and 23 other countries, the most significant of which is our license
agreement with Guidant Corporation.
In June 1998, we entered into a technology license agreement with Guidant
Corporation, granting Guidant rights to manufacture and distribute products
using our Focus technology for the delivery of stents, including exclusive
rights in the United States. In exchange for those rights we received milestone
payments based upon the transfer of the technological knowledge to Guidant, and
and continue to
15
<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
receive royalty payments based upon the sale of products by Guidant using the
Focus technology. The payments under the Guidant license are the primary source
of our existing revenues. Until we successfully develop and commercialize the
RDX system, we anticipate that our revenues will continue to decline as sales of
products incorporating our licensed technology decline and as our technology
becomes obsolete. See Note 4 to the Condensed Consolidated Financial Statements.
We believe that research and development expenses relating to the RDX system
will increase, as will costs associated with commercialization of the RDX system
if we successfully obtain regulatory approvals. We expect to begin sales of the
RDX system in Europe once we receive CE Mark approval. Bebig GmbH, our
manufacturing partner in Europe, also owns the Hehrlein patent technology that
we expect to incorporate into our RDX system. As a result of our use of Bebig's
technology, we entered into a license agreement with Bebig pursuant to which we
will pay Bebig a royalty for worldwide sales of our RDX system.
We have experienced an operating loss for each of the last three years and
expect to continue to incur operating losses through at least the end of 2001.
Our results of operations have varied significantly from quarter to quarter, and
we expect that our results of operations will continue to vary significantly in
the future. Our quarterly operating results depend upon several factors,
including:
o the timing and amount of expenses associated with development of the RDX
system;
o the progress of clinical trials and the timing of regulatory approvals;
o new product introductions both in the United States and internationally;
o varying product sales by our licensee;
o variations in foreign exchange rates;
o changes in third-party payors' reimbursement policies; and
o levels of reimbursement by third-party payors.
We do not operate with a significant backlog of customer orders, and therefore
revenues in any quarter are significantly dependent on orders received during
that quarter. In addition, we cannot predict ordering rates by distributors,
some of whom place infrequent stocking orders. Our expenses are relatively fixed
and difficult to adjust in response to fluctuating revenues.
16
<PAGE> 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Organizational History
We were formed in 1992, and our common stock began trading publicly in 1996. The
current Radiance Medical Systems, Inc. resulted from the 1999 acquisition by us
of the portion of our former Radiance Medical Systems subsidiary that we did not
already own. We originally incorporated the former Radiance as a separate entity
to focus on the research and development of radiation therapy for the treatment
of cardiovascular disease, and to obtain outside sources of financing for such
research and development. In January 1999, we paid approximately $6.3 million in
stock and $692,000 in cash, plus $1.1 million of options to purchase our common
stock in exchange for the portion of the common stock and options to acquire the
common stock of former Radiance that we did not already own. In addition, the
stockholders and optionholders of the former Radiance may still receive product
development milestones of up to $1.69 for each share of preferred stock and
$2.54 for each share of common stock. These 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 first milestone was
not achieved, and the second milestone is behind schedule. See Note 7 to the
Condensed Consolidated Financial Statements.
In January 1999, we also sold substantially all of our vascular access product
line and related assets to Escalon Medical Corporation for approximately $2.1
million. We also may receive royalty payments upon the sale of vascular access
products for a five year period. See Note 7 to the Condensed Consolidated
Financial Statements.
Results of Operations
Three months ended June 30, 2000 compared to the three months ended June 30,
1999
Sales Revenue. Sales revenue for the second quarter of 2000 decreased
46% to $623,000 compared to $1.1 million for the same period of 1999. The
decrease resulted primarily from increasing competition and the sale of
competing products by Guidant using Focus Technology. Management anticipates
that product sales revenue will continue to be materially lower in subsequent
periods of 2000 compared with the same periods of 1999 for the above-mentioned
reasons.
License Revenue. License revenue increased 190% to $1.9 million in the
second quarter of 2000 compared to $661,000 in the same period of 1999. $1.8
million and $563,000 in license revenue were recognized in the second quarter of
2000 and 1999, respectively, for royalties on product sales under the technology
17
<PAGE> 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
license agreement with Guidant. Management anticipates that license revenues
will continue to be materially higher in subsequent periods of 2000 compared
with the same periods of 1999 as Guidant began marketing the licensed products
late in the third quarter of 1999.
Cost of Sales. The cost of sales for the second quarter of 2000
decreased to $366,000 or 59% of sales revenues, compared to $1.1 million, or 92%
of sales revenues, for the same period of 1999. The decrease is attributable
primarily to the allocation of a larger portion of manufacturing costs to units
produced for research and development programs and clinical trials.
Research and Development. Research and development expenses, which
include clinical expenses, increased 33% to $2.8 million for the second quarter
of 2000 compared with $2.1 million for the same period of 1999. The relative
increase in expenses during the quarter ended June 30, 2000 resulted primarily
from expenditures for clinical trials. The Company expects the overall
expenditures to increase in the remainder of 2000, compared to the expenditures
for the same periods of 1999 due to higher expenditures anticipated for clinical
trials and for programs to develop the RDX system for saphaneous vein graft and
peripheral vascular interventions.
Marketing and Sales. Marketing and sales expenses increased 92% to
$319,000 in the second quarter of 2000, compared to $166,000 in the same period
of 1999. The relative increase in expenses resulted because of increases in
various expenses.
General and Administrative. General and administrative expenses
increased 11% to $750,000 for the second quarter ended June 30, 2000, from
$674,000 for the same period in 1999 due to increases in various expenses.
Minority Interest. The minority interest relates to a 49% ownership of
the Japan distribution joint venture, Radiatec, described more fully in
"Liquidity and Capital Resources." The venture began limited operations in the
third quarter of 1999 to obtain Japanese regulatory approval and, thereafter,
will begin marketing the Company's RDX catheter products.
Other Income (Expense). Other income increased 181% to $528,000 for the
second quarter of 2000, as compared to $188,000 for the same period of 1999,
primarily due to the recognition of a portion of the income from the sale of an
18
<PAGE> 19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
option to purchase an investment held by the Company in August 1999. 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 2000 to exercise
the option. A gain of $231,000 was recognized in other income in the second
quarter of 2000. 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. See Note 4 to the Condensed
Consolidated Financial Statements.
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
Sales Revenue. Sales revenue for the first six months of 2000 decreased
49% to $1.2 million compared to $2.3 million for the first six months of 1999.
The decrease resulted primarily from the sale of competing products by Guidant
based upon the license of Focus Technology to them and the divestiture of the
Vascular Access product line in January 1999.
License Revenue. License revenue increased 203% to $3.7 million in the
first six months of 2000 compared to $1.2 million in the same period of 1999.
$3.5 million and $1.1 million in license revenue were recognized in the first
six months of 2000 and 1999, respectively, for royalties on product sales under
the technology license agreement with Guidant.
Cost of Sales. The cost of sales for the first six months of 2000
decreased to $859,000, or 72% of sales revenues, compared to $1.9 million, or
81% of sales revenues, for the same period of 1999. The decrease is attributable
primarily to the allocation of a larger portion of manufacturing costs to units
for research and development programs and clinical trials.
Charge for Acquired In-Process Research and Development. Due to the
acquisition of the remaining shares of RMS not owned by the Company in January
1999, the Company recognized a charge of $4.2 million for acquired in-process
research and development in the first six months of 1999. See Note 7 to the
Condensed Consolidated Financial Statements.
Research and Development. Research and development expenses, which
include clinical expenses, increased 34% to $5.6 million compared with $4.2
million for the first six months of 2000 and 1999, respectively. The relative
increase in expenses during the quarter ended June 30, 2000 resulted primarily
from expenditures for clinical trials.
19
<PAGE> 20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Marketing and Sales. Marketing and sales expenses decreased 31% to
$642,000 in the first six months of 2000, compared to $933,000 in the same
period of 1999. This decrease is primarily due to reductions in the Company's
international sales force and related expenses.
General and Administrative. General and administrative expenses
increased 2% to $1.5 million for the six months ended June 30, 2000, from $1.4
million for the same period in 1999 due primarily to an increase in payroll and
related benefit expenses and expenditures to encourage investment in the
Company's common stock by the investment community.
Minority Interest. See above discussion under "Results of Operations,
Three months ended June 30, 2000 compared to the three months ended June 30,
1999."
Other Income (Expense). Other income increased 42% to $1.0 million for
the first six months of 2000, as compared to $709,000 for the same period of
1999, primarily due to the recognition of a portion of the income from the sale
of an option to purchase an investment held by the Company in August 1999. A
gain of $462,000 was recognized in other income in the first six months of 2000.
See above discussion under "Results of Operations, Three months ended June 30,
2000 compared to the three months ended June 30, 1999."
Liquidity and Capital Resources
Since inception, we have financed our operations primarily by:
o selling our equity securities;
o obtaining advances from EndoSonics Corporation, our former parent company;
o licensing our technologies; and
o entering into international product distribution agreements.
Prior to our initial public offering in 1996, we 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, which we repaid
during the third quarter of 1996.
In the second quarter of 1996, we closed our initial public offering of common
stock, which resulted in net proceeds of approximately $42.8 million after
deducting underwriting discounts and commissions and other expenses of the
offering.
20
<PAGE> 21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In the third quarter of 1997, SCIMED Life Systems, Inc. exercised 120,000 common
stock warrants, obtained from us through a 1995 stock purchase and technology
license agreement, for $377,000. We also received $200,000 from the sale of our
common stock to Cathex, Ltd. under a May 1997 agreement that gave Cathex
exclusive product distribution rights of our existing products through May 1999.
The current Radiance Medical Systems, Inc. resulted from the 1999 acquisition by
us of the portion of our former Radiance Medical Systems subsidiary that we did
not already own. We originally incorporated the former Radiance as a separate
entity to focus on the research and development of radiation therapy for the
treatment of cardiovascular disease, and to obtain outside sources of financing
for such research and development. In January 1999, we paid approximately $6.3
million in stock and $692,000 in cash, plus $1.1 million of options to purchase
our common stock in exchange for the portion of the common stock and options to
acquire the common stock of former Radiance we did not already own. In addition,
the stockholders and optionholders of the former Radiance may still receive
product development milestones of up to $1.69 for each share of preferred stock
and $2.54 for each share of common stock. These 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 first
milestone was not achieved, and the second milestone is behind schedule. See
Note 7 to the Condensed Consolidated Financial Statements.
In June 1999, we granted Cosmotec Co., Ltd. of Japan the exclusive distribution
rights to market our vascular radiation therapy products in Japan. We received
$1.0 million from Cosmotec as an upfront cash payment and began recognizing
income ratably over the seven-year term of the agreement. As part of the
transaction with Cosmotec, in August 1999 we acquired a 51% interest, for
$233,000, in a joint venture, named Radiatec, with an affiliate of Cosmotec to
gain regulatory approval of and provide distribution for the RDX system in
Japan.
Convertible debenture debt rose to $1.4 million in June 2000 to reflect the fair
value of a 5% convertible debenture that we sold to Cosmotec. The debenture is
convertible into Radiance common stock over the subsequent three-year period at
an initial conversion price of $7 per share. On August 10, 2000, Cosmotec
notified us that they will convert the debenture into 142,857 shares of our
common stock. See Note 5 to the Condensed Consolidated Financial Statements.
21
<PAGE> 22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In July 1999, we entered into a two-year contract manufacturing agreement with
Bebig GmbH to activate the radioactive sources and complete final assembly of
the RDX system. Pursuant to the agreement, Bebig performs final assembly of our
proprietary equipment and proprietary processes. Pursuant to the agreement,
which was amended in July 2000, Bebig will build a facility for the production
of the RDX system. We paid $100,000 during 1999, and, in the last six months of
2000, we will pay approximately $1.2 million of facility set-up fees. We will
also pay all material and third party costs associated with production
validation. We will prepare the manufacturing equipment to be used by Bebig to
perform the final assembly of the RDX system, estimated to cost approximately
$700,000, and Bebig will purchase the equipment from us for $500,000. We will
also pay Bebig an agreed amount for each unit produced. The cost of the facility
set-up fees, equipment costs and other costs could increase materially from the
aforementioned amounts as the design of the production processes and facilities
evolves over the coming year. We have expensed all costs incurred under the
aforementioned agreements as research and development expenses.
In conjunction with the contract manufacturing agreement, in July 1999, we
entered into a three-year sub-license agreement to use Bebig's Hehrlein patent
for radiation technology that may be useful in the development of the RDX
system. The sub-license is subject to renewal, without cost, through the
expiration dates of Bebig's patents.
Net cash used in operating activities increased 101% to $3.1 million for the six
months ended June 30, 2000 from $1.6 million for the six months ended June 30,
1999. The increase in net cash used, comparing the first six months of 2000 and
1999, resulted primarily from royalty payments, which Guidant makes in the
quarter after it recognizes revenue related to the license of our Focus
technology, and from higher research and development and clinical expenditures.
At June 30, 2000, we had cash, cash equivalents and marketable securities
available for sale of $20.3 million. We expect to incur substantial costs
related to, among other things, clinical testing, product development, marketing
and sales expenses, and expect to utilize increased levels of working capital
prior to achieving positive cash flow from operations. We anticipate that our
existing capital resources will be sufficient to fund our operations through
June 30, 2001. Our future capital requirements will depend on many factors,
including:
22
<PAGE> 23
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
o our research and development programs;
o the scope and results of clinical trials;
o the regulatory approval process;
o the costs involved in intellectual property rights enforcement or
litigation;
o competitive products;
o the establishment of manufacturing capacity;
o the establishment of sales and marketing capabilities; and
o the establishment of collaborative relationships with other parties.
We may need to raise funds through additional financings, including private or
public equity offerings and collaborative arrangements with existing or new
corporate partners. We cannot assure you that we will be able to raise funds on
favorable terms, or at all. If adequate funds are not available, we may need to
delay, scale back or eliminate one or more of our development programs or obtain
funds through arrangements with collaborative partners or others that may
require us to grant rights to certain technologies or products that we would not
otherwise grant.
Trade accounts receivable, net, decreased 45% to $590,000 at June 30, 2000 from
$1.1 million at December 31, 1999. The decrease resulted primarily from lower
product sales caused by increasing competition with our existing products, which
are based on Focus technology.
Other receivables increased 195% to $2.2 million at June 30, 2000 from $742,000
at December 31, 1999. The increase is attributable primarily to an increase in
the license revenue receivable from Guidant of $1.6 million for licensed product
sales during the second quarter of 2000.
Accounts payable and accrued expenses increased 9% to $3.0 million at June 30,
2000 from $2.7 million at December 31, 1999, due primarily to higher accruals
for research and development and clinical expenditures.
Deferred revenue decreased 50% to $904,000 at June 30, 2000 from $1.8 million at
December 31, 1999. The decrease was due to the recognition of deferred revenue
on the sale of an option and deferred license revenue during the first six
months of 2000, as well as a reallocation of $407,000 to the convertible
debenture to recognize the fair value of the Cosmotec debenture issued in June
2000. See Notes 4 and 5 to the Condensed Consolidated Financial Statements.
23
<PAGE> 24
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
Pursuant to a joint venture and distribution agreement, the Company received $1
million and issued a convertible debenture, dated June 15, 2000, to Cosmotec
Co., Ltd.. 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. On August 10, 2000, Cosmotec notified us
that they will convert the debenture into 142,857 shares of our common stock.
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/or Regulation D promulgated thereunder by the Securities
and Exchange Commission.
(d) Use of Proceeds
In the second quarter of 1996, the Company closed its initial public offering of
common stock ("IPO"), SEC file number 333-04560, resulting in net proceeds of
$42.8 million after deducting underwriting discounts and commissions and other
expenses of the offering. The Company used approximately $2.7 million of the net
proceeds from its 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 June 30, 2000, in the normal course
of business, the Company has paid salaries and bonuses in excess of $100,000
each to ten present and former officers of the Company and used $20.4 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 second quarter of 2000, 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 shares of Series B Preferred Stock of Radiance Medical Systems, Inc.
for $1.5 million. In January 1999, the Company paid $692,000 to stockholders of
RMS who elected to receive cash for their RMS common stock and $588,000 in costs
relating to the acquisition of the remaining common stock of RMS not held by the
Company. At June 30, 2000, approximately $19.7 million was held in temporary
investments, of which approximately $5.5 million, $10.0 million and $4.2 million
was invested in U.S. Federal and State Agency debt securities, corporate debt
securities and foreign government debt securities, respectively.
24
<PAGE> 25
Item 4. Submission of Matters to a Vote of Security-Holders
The Company's Annual Meeting of Stockholders was held on June 6, 2000. The
following action was taken at this meeting:
<TABLE>
<CAPTION>
Abstentions
and
Broker Non-Votes Affirmative Negative Votes
Votes Votes Votes Withheld
---------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
a. Amendment to 1996
Stock Option/Stock
Issuance Plan to effect
an increase in the number
of shares available for
issuance by an additional
600,000 shares of Common
Stock. 5,031,345 2,131,368 1,071,639 -0-
b. Amendment to Employee
Stock Purchase Plan to effect
an increase in the number
of shares available for
issuance by an additional
200,000 shares of Common
Stock. 5,028,520 3,058,441 147,391 -0-
c. Election of Directors:
Franklin D. Brown 7,619,616 614,736
Edward Leonard 7,619,616 614,736
d. Ratification of
PricewaterhouseCoopers LLP
as independent accountants for
the fiscal year ending
December 31, 2000. 13,394 8,100,463 120,495 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed
herewith:
Exhibit 27 -- Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter.
25
<PAGE> 26
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 10, 2000 /s/ Michael R. Henson
------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 /s/ Stephen R. Kroll
------------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
