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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2001.
[ ] 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)
13900 Alton Parkway, Suite 122, Irvine, California 92618
(Address of principal executive offices)
Registrant's telephone number, including area code (949) 457-9546
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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 April 24, 2001, the Registrant had outstanding approximately 13,073,000
shares of Common Stock 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
March 31, 2001
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at March 31, 2001 and
December 31, 2000 3
Condensed consolidated statements of operations for the three
months ended March 31, 2001 and 2000 4
Condensed consolidated statements of cash flows for the three
months ended March 31, 2001 and 2000 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. 21
Signatures 22
Exhibit Index 23
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, December 31,
2001 2000
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,276 $ 6,311
Marketable securities available-for-sale 13,872 15,162
Trade accounts receivable, net 585 564
Notes receivable from officers 140 14
Other receivables 2,104 2,497
Inventories 1,037 1,085
Other current assets 166 239
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Total current assets 22,180 25,872
Property and equipment, net 831 743
Marketable securities available-for-sale 9,825 8,884
Intangibles, net 2,561 2,786
Note receivable from officer -- 126
Other assets 217 43
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Total Assets $ 35,614 $ 38,454
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,889 $ 2,589
Deferred revenue 81 81
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Total current liabilities 2,970 2,670
Deferred revenue 339 360
Minority interest 160 184
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Total liabilities 3,469 3,214
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Commitments and contingencies (Note 9)
Stockholders' equity:
Convertible preferred stock, $.001 par value;
5,000,000 shares authorized, no shares issued and
outstanding -- --
Common stock, $.001 par value; 30,000,000 authorized,
13,067,000 and 13,049,000 shares issued as of March 31,
2001 and December 31, 2000, respectively 13 13
Additional paid-in capital 81,004 80,886
Deferred compensation (182) (208)
Accumulated deficit (49,031) (45,796)
Accumulated other comprehensive income 341 345
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Total stockholders' equity 32,145 35,240
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Total Liabilities and Stockholders' Equity $ 35,614 $ 38,454
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See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
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2001 2000
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Revenue:
Sales $ 429 $ 570
License revenue 1,596 1,792
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Total revenue 2,025 2,362
Cost of sales 307 493
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Gross profit 1,718 1,869
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Operating expenses:
Research, development and clinical 4,328 2,745
Marketing and sales 394 323
General and administrative 737 727
Minority interest (7) (1)
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Total operating expenses 5,452 3,794
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Loss from operations (3,734) (1,925)
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Other income (expense):
Interest income 451 293
Gain on sale of assets 23 233
Other income (expense) 25 (48)
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Total other income 499 478
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Net loss $ (3,235) $ (1,447)
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Basic and diluted net loss per share $ (0.25) $ (0.13)
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Shares used in computing basic and
diluted net loss per share 13,061 11,279
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31,
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2001 2000
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Cash flows from operating activities:
Net loss $ (3,235) $ (1,447)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 328 322
Amortization of deferred compensation 45 46
Provision for doubtful accounts (62) 38
Foreign currency exchange (gain) loss (35) 46
Loss (gain) on sale of assets (23) 28
Minority interest in losses of Radiatec (7) (1)
Change in:
Trade accounts receivable, net 41 466
Inventories 48 56
Other receivables and other assets 366 (1,273)
Accounts payable and accrued expenses 300 (422)
Deferred revenue (20) (267)
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Net cash used in operating activities (2,254) (2,408)
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Cash flows provided by investing activities:
Purchases of available-for-sale securities (11,650) (3,979)
Sales of available-for-sale securities 12,137 5,680
Capital expenditures for property and equipment
and other assets (368) (19)
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Net cash provided by investing activities 119 1,682
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Cash flows provided by financing activities:
Proceeds from sale of common stock 100 107
Proceeds from exercise of common stock options -- 282
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Net cash provided by financing activities 100 389
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Net decrease in cash and cash equivalents (2,035) (337)
Cash and cash equivalents, beginning of period 6,311 2,051
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Cash and cash equivalents, end of period $ 4,276 $ 1,714
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Supplemental disclosure of non-cash operating activities:
In February 2001, the Company amended the Assets Sale and Purchase agreement and
exchanged accounts receivable ($182) due from Escalon Medical Corporation for
cash ($18), notes receivable ($64) and 50,000 shares of their common stock ($100
fair value).(Note 4)
See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, 2001
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 the State of
Delaware in June 1993. The Company and its subsidiaries are developing
proprietary devices to deliver 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 (the "RDX system"). The Company also manufactures, licenses
and sells angioplasty catheters and stent products, including its Focus
technology product line, on a limited basis, primarily through medical device
distributors. 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 unaudited three-month period ended
March 31, 2001 are not necessarily indicative of results that may be expected
for the year ending December 31, 2001 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, 2000.
2. Net Loss Per Share
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's common stock granted under the Company's stock option
plan have been excluded from the calculation of diluted earnings per share, as
they are anti-dilutive.
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
March 31, 2001 December 31, 2000
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Raw materials $ 563 $ 498
Work-in-process 99 178
Finished goods 375 409
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$ 1,037 $ 1,085
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4. Notes Receivable
In February 2001, the Company amended the assets sale and purchase agreement
with Escalon Medical Corporation ("Escalon") regarding the payment of royalties.
As payment for $182 in royalties due the Company in the first quarter of 2001,
Escalon gave the Company 50,000 shares of Escalon common stock with a fair value
of $100, a prime plus one percent interest bearing note receivable due in
January 2002 for $65, and cash of $17. The shares of Escalon common stock are
included as marketable securities available-for-sale on the condensed
consolidated balance sheet.
Additionally, the Company received a prime plus one percent interest bearing
note receivable for $718, payable in eleven equal quarterly installments from
April 2002 to October 2004, representing the remaining minimum royalties, on a
discounted basis, due for 2001 to 2003 under the aforementioned agreement.
Additional royalties, above the minimums, will only be paid, under the amended
agreement, if related product sales exceed $3,000 annually. The Company will
recognize interest income and license revenue under the $718 note receivable
when collected.
5. 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 is recognizing the
revenue ratably over the seven-year term of the distribution agreement. During
the first quarter of 2001 and 2000, the Company recognized $20 and $36,
respectively, of the aforementioned revenue.
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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 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 had until December 2000 to
exercise the option. The option premium was being recognized on a straight-line
basis over the option term, resulting in a gain of $231 being recognized as
other income in the first quarter of 2000. The option holder did not exercise
the option prior to its expiration.
6. License Revenue
In June 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant Guidant 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 final milestone payments were received and
recognized in 1999. During the first quarter of 2001 and 2000, the Company
recorded $1,558 and $1,681, respectively, in license revenue due on licensed
product sales by Guidant.
7. 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, as
"comprehensive income or loss." The Company's comprehensive loss included the
following:
Three Months Ended
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March 31, 2001 March 31, 2000
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Net loss $ (3,235) $ (1,447)
Unrealized gain (loss) on
available-for-sale securities 15 (22)
Foreign currency translation
adjustment (19) 47
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Comprehensive loss $ (3,239) $ (1,422)
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
8. 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"). Under the merger agreement, in addition to the
consideration paid at the time of the merger, RMS share and option holders could
have received product development milestone payments of up to $2.00 for each
share of preferred stock and up to $3.00 for each share of common stock. The
first three milestones were not met. As a result, the total potential milestone
payment, before adjustment for early or late achievement of the fourth and final
milestone, is reduced to $0.46 for each share of preferred stock and $0.69 for
each share of common stock. The milestone payment may be increased up to 30%, or
reduced or eliminated if the milestone is 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. The fourth and final milestone payment
due October 2001, if made, will be capitalized as an addition to the purchase
price.
9. Commitments and Contingencies
Legal Matters
On September 15, 1999, EndoSonics Corporation, now a wholly-owned subsidiary of
Jomed N.V., filed a complaint for declaratory relief in the Superior Court in
Orange County, California, claiming that under a May 1997 agreement between the
parties, EndoSonics had rights to combine Radiance's Focus balloon technology
with an EndoSonics' ultrasound imaging transducer on the same catheter with a
coronary vascular stent. In February 2001 the court ruled in the Company's
favor, ruling that Jomed-EndoSonics had no such rights to include a stent with
the Focus balloon and ultrasound imaging transducer. Under the judgment, the
Company is entitled to recover its legal fees. Although Jomed-EndoSonics may
appeal the judgment, the Company believes that this matter would not have a
material adverse effect on its financial position, results of operations or cash
flows.
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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 activate the radioactive sources and
complete final assembly of the RDX system in Europe. Pursuant to the agreement,
which was amended in July 2000, Radiance paid $732 during 2000 and will pay
approximately $665 in 2001 of certain facility set-up fees. In February 2001,
the Company agreed to second and third amendments of the manufacturing
agreement. The second amendment calls for the expansion of the production
capacity, and the Company will pay additional fees of approximately $635 in
2001, bringing the total fees for 2001 to approximately $1,300. In the first
quarter of 2001, the Company paid $276 of the aforementioned fees and
anticipates paying the remaining fees in the second and third quarters of 2001,
following the achievement of manufacturing milestones by Bebig. 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 two quarters. In addition, the Company will
prepare manufacturing equipment to be used by Bebig to perform the final
assembly of the RDX system, estimated to cost $450, and Bebig will purchase the
equipment from Radiance at cost.
The third amendment increases the amount the Company will pay Bebig for each
unit produced and sets a minimum facility charge. The Company will also pay all
material and third party costs associated with production validation and 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 with Bebig for certain radiation
technology that it believed 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. In the quarter ended March 2001, the
Company recorded $25 in license
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
fee expense. All license fees due under the license agreement for prior periods
were offset by payments under the manufacturing agreement. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We caution 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 we operate,
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 our 2000 Annual Report on Form 10-K, including, but not limited to,
those discussed in "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 radiation to prevent the
recurrence of blockages in arteries following balloon angioplasty, vascular
stenting and other interventional treatments of blockages in coronary and
peripheral arteries. We incorporate our proprietary RDX technology into
catheter-based systems that deliver 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.
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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 widely available and were 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:
- - licensed our proprietary Focus technology for balloon angioplasty to Guidant
Corporation for use in Guidant's stent delivery systems;
- - 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;
- - sold our vascular access product line and related assets; and,
- - reduced our direct sales force.
We continue to sell our remaining stent and catheter products, including our
Focus technology products, on a limited basis through medical device
distributors.
We have completed a European clinical trial of the RDX system and are awaiting
European regulatory approval to sell the product in Europe and other markets
that accept said approval. We believe said regulatory approval will occur in
2001. In the first quarter of 2001, we began two U.S. clinical trials of the RDX
system.
Development and Operations
We plan to continue to dedicate our corporate resources to:
- - completing clinical trials for the RDX system;
- - obtaining regulatory approvals for the RDX system; and
- - continuing research and development related to devices for the delivery of
radiation to treat restenosis.
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 21 other
countries, the most significant of which is our license agreement with Guidant
Corporation.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
In June 1998, we entered into a technology license agreement with Guidant
Corporation, granting Guidant rights, including exclusive rights in the United
States, to manufacture and distribute products using our Focus technology for
the delivery of stents. In exchange, we received milestone payments based upon
the transfer of the technological knowledge to Guidant, and continue to 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 6 to the Condensed Consolidated Financial Statements.
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:
- - the timing and amount of expenses associated with development of the RDX
system;
- - the progress of clinical trials and the timing of regulatory approvals;
- - new product introductions both in the United States and internationally;
- - varying product sales by our licensee;
- - variations in foreign exchange rates; and,
- - changes in third-party payors' reimbursement policies.
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.
Organizational History
We were formed in 1992, and our common stock began trading publicly in 1996. The
current Radiance Medical Systems, Inc. resulted from our 1999 acquisition 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
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
cardiovascular disease, and to obtain outside sources of financing for such
research and development. In January 1999, we paid approximately $6.9 million in
stock and $692,000 in cash, and assumed $1.1 million in common stock options to
acquire the portion of the former Radiance that we did not already own. In
addition, the stockholders and optionholders of the former Radiance may still
receive a product development milestone payment of up to $0.46 for each share of
preferred stock and $0.69 for each share of common stock. The milestone payment
may be increased up to 30%, or reduced or eliminated if the milestone is reached
earlier or later, respectively, than the milestone target date. The first three
milestones were not achieved. See Note 8 to the Condensed Consolidated Financial
Statements.
Results of Operations
Comparison of the Three Months Ended March 31, 2000 and 2001
Sales. Sales decreased 25% to $0.4 million in the three months ended
March 31, 2001 from $0.6 million in the three months ended March 31, 2000. The
decrease resulted primarily from increasing competition and the sale of
competing products by Guidant using our Focus technology. We anticipate that
product sales revenue will be materially lower in the second quarter of 2001
compared with the same period of 2000 for the above-mentioned reasons.
License Fee and Other. License revenue decreased 11% to $1.6 million in
the three months ended March 31, 2001 from $1.8 million in the three months
ended March 31, 2000. $1.6 million and $1.7 million in license revenue were
recognized in the first quarter of 2001 and 2000, respectively, for royalties on
product sales under the technology license agreement with Guidant. Management
anticipates that license revenues could be lower in the second quarter of 2001
compared with the same period of 2000 as Guidant licensed products encounter
increasing competition.
Cost of Sales. The cost of sales decreased 38% to $0.3 million, or 72%
of sales revenues, in the three months ended March 31, 2001 from $0.5 million,
or 86% of sales revenues, in the three months ended March 31, 2000. The decrease
in cost of sales, relative to sales revenues, is attributable primarily to
higher manufacturing efficiency due to an increase in production for RDX system
clinical trials.
Research and Development. Research and development expenses, which
include clinical expenses, increased 58% to $4.3 million in the three months
ended March 31, 2001 from $2.7 million in the three months ended March 31, 2000.
The increase in expenses during the quarter ended March 31, 2001 resulted
primarily
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
from expenditures for U.S. clinical trials and the setup of our third party
European manufacturing facility. The Company expects the overall expenditures to
increase for the remainder of 2001, compared to the expenditures for the same
periods of 2000, due to higher expenditures anticipated for clinical trials and
the set-up of our third party European and a higher capacity, third party U.S.
manufacturing facility.
Marketing and Sales. Marketing and sales expenses increased 22% to $0.4
million in the three months ended March 31, 2001 from $0.3 million in the three
months ended March 31, 2000 as we began to make expenditures relating to the
product launch of the RDX system in Europe. Management anticipates that
marketing and sales expenses will increase materially for the remainder of 2001,
compared to expenses for the same periods of 2000, due to the preparation for
and the launch of RDX system sales in Europe and other foreign markets.
General and Administrative. General and administrative expenses totalled
$0.7 million in the three months ended March 31, 2001 and 2000.
Minority Interest. The minority interest relates to our partner's 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 will
begin marketing the RDX system in Japan once it receives regulatory approval.
Other Income (Expense). Other income was $0.5 million in the three
months ended March 31, 2001 and 2000. Interest income increased 54% to $0.5
million in the three months ended March 31, 2001 from $0.3 million in the three
months ended March 31, 2000, primarily due to an increase in invested cash from
the proceeds of our secondary offering in October 2000. Gain on sale of assets
was $0.2 million in the three months ended March 31, 2000. The primary source
for the 2000 gain on sale of assets was the sale of an option to purchase
certain equity investments held by us, which expired without exercise in
December 2000. See Note 5 to the Condensed Consolidated Financial Statements.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources
Since inception, we have financed our operations primarily by:
- - selling our equity securities;
- - obtaining advances from EndoSonics Corporation, our former
parent company;
- - licensing our technologies; and
- - 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.
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 until January 1,
2001. The distribution agreement with Cathex was terminated in the fourth
quarter of 2000.
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.
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, with an affiliate of Cosmotec. The joint venture,
named Radiatec, was formed to gain regulatory approval of and provide
distribution for the RDX system in Japan.
We borrowed $1.0 million from Cosmotec and recorded $1.4 million in debt in June
2000 to reflect the fair value of the 5%, $1.0 million face amount convertible
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
debenture. On September 13, 2000, Cosmotec converted the debenture into 142,857
shares of our common stock at $7.00 per share.
In July 1999, we entered into a two-year contract manufacturing agreement with
Bebig GmbH ("Bebig") to activate the radioactive sources and complete final
assembly of the RDX system in Europe. Pursuant to the agreement, which was
amended in July 2000, Radiance paid $732 during 2000 and will pay approximately
$665 in 2001 for facility set-up fees. In February 2001, we agreed to second and
third amendments of the manufacturing agreement. The second amendment calls for
expansion of the production capacity, which will result in our payment of
additional fees of approximately $635 in 2001, bringing the total fees for 2001
to approximately $1.3 million. In the first quarter of 2001, we paid $276 of the
aforementioned charges and anticipate paying the remaining fees in the second
and third quarters of 2001, following the achievement of manufacturing
milestones by Bebig. In addition, we will prepare manufacturing equipment to be
used by Bebig to perform the final assembly of the RDX system, estimated to cost
$450, and Bebig will purchase the equipment at cost. The third amendment
increases the amount we will pay Bebig for each unit produced and sets a minimum
facility charge. We will also pay all material and third party costs associated
with production validation and 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 next two quarters. We have expensed
all costs incurred by us with Bebig as research and development costs.
In conjunction with the contract manufacturing agreement, in July 1999, we
entered into a three-year sub-license agreement to use Bebig's exclusive license
of the Hehrlein patents for radiation technology that may be useful in the
development of the RDX system. Beginning in July 2000, there is a minimum annual
license fee of $200, subject to offset by certain amounts paid under the
aforementioned manufacturing agreement and royalty fees for any products sold
worldwide that incorporate the licensed technology. In the quarter ended March
2001, the Company recorded $25 in license fee expense. All license fees due
under the license agreement for prior periods were offset by payments under the
manufacturing agreement. The sub-license is subject to renewal, without cost,
until the underlying patents' expiration dates.
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
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
system in Europe once we receive CE Mark approval, which we expect to receive in
2001. Beginning in the second half of 2001, we plan to initiate the development
of a third party, U.S.-based RDX system manufacturing facility with higher
capacity than our current third party facility.
In October 2000, we sold in a secondary offering 686,000 and 814,000 shares of
our common stock held in treasury and newly issued, respectively. We received
$13.0 million in net proceeds, after deducting underwriting discounts,
commissions and other expenses.
Net cash used in operating activities decreased 6% to $2.3 million for the three
months ended March 31, 2001 from $2.4 million for the three months ended March
31, 2000. The decrease in net cash used resulted primarily from the increase in
royalty payments receivable for the first quarter of 2000, which Guidant makes
in the quarter after it recognizes revenue related to the license of our Focus
technology.
At March 31, 2001, we had cash, cash equivalents and marketable securities
available for sale of $28.0 million. We expect to incur substantial costs
related to, among other things, clinical testing, product development, marketing
and sales expenses of the RDX system, 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, 2002. Our future capital requirements will depend on
many factors, including:
- - our 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.
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
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
us to grant rights to certain technologies or products that we would not
otherwise grant.
Trade accounts receivable, net, were $0.6 million at March 31, 2001 and December
31, 2000.
Other receivables decreased 16% to $2.1 million at March 31, 2001 from $2.5
million at December 31, 2000. The decrease is attributable primarily to a
decrease in the license revenue receivable from Escalon, as we began recording
license revenue from them only as it is collected in 2001. See Note 4 to the
Condensed Consolidated Financial Statements.
Accounts payable and accrued expenses increased 12% to $2.9 million at March 31,
2001 from $2.6 million at December 31, 2000, due primarily to higher accruals
for research and development and clinical expenditures.
Deferred revenue decreased 6% to $0.3 million at March 31, 2001 from $0.4
million at December 31, 2000. The decrease was due continuing amortization of
deferred distributor fees from Cosmotec. See Note 5 to the Condensed
Consolidated Financial Statements.
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Part II.
OTHER INFORMATION
Items 1. Legal Proceedings
On September 15, 1999, EndoSonics Corporation, now a wholly-owned subsidiary of
Jomed N.V., filed a complaint for declaratory relief in the Superior Court in
Orange County, California, claiming that under a May 1997 agreement between the
parties, EndoSonics had rights to combine Radiance's Focus balloon technology
with an EndoSonics' ultrasound imaging transducer on the same catheter with a
coronary vascular stent. In February 2001 the court ruled in the Company's
favor, ruling that Jomed-EndoSonics had no such rights to include a stent with
the Focus balloon and ultrasound imaging transducer. Under the judgment, which
may be appealed by Jomed-EndoSonics, the Company is entitled to recover its
legal fees.
Items 2,3, 4 and 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 2.5.1* Amendment and Supplement to Assets Sale and
Purchase Agreement and Release dated February 28,
2001 by and between the Company and Escalon Medical
Corp.
Exhibit 10.27.2 Third Amendment to Employment Agreement dated December 22, 2000
between the Company and Michael R. Henson
Exhibit 10.29.2 Second Amendment to Employment Agreement dated December 22, 2000
between the Company and Jeffrey Thiel
Exhibit 10.34.2* Amendment No. 2 to the Facility Set-UP and Contract Manufacturing
Agreement and the License Agreement dated February 12, 2001 between
the Company and Bebig GmbH
Exhibit 10.34.3* Amendment No. 3 to the Facility Set-UP and Contract Manufacturing
Agreement and the License Agreement dated February 12, 2001 between
the Company and Bebig GmbH
Exhibit 10.37* Form of Employment Agreement dated January 15, 2001 by and between
the Company and Paul A. Molloy
* Previously filed as an exhibit to the Company's Report on Form 10-K
filed with the Securities and Exchange Commission on March 29, 2001.
(b) No Reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
RADIANCE MEDICAL SYSTEMS, INC.
Date: May 1, 2001 /s/ Jeffrey H. Thiel
-----------------------------------------
Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 1, 2001 /s/ Stephen R. Kroll
-----------------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit 2.5.1* Amendment and Supplement to Assets Sale and
Purchase Agreement and Release dated February 28,
2001 by and between the Company and Escalon Medical
Corp.
Exhibit 10.27.2 Third Amendment to Employment Agreement dated December 22, 2000
between the Company and Michael R. Henson
Exhibit 10.29.2 Second Amendment to Employment Agreement dated December 22, 2000
between the Company and Jeffrey Thiel
Exhibit 10.34.2* Amendment No. 2 to the Facility Set-UP and Contract Manufacturing
Agreement and the License Agreement dated February 12, 2001 between
the Company and Bebig GmbH
Exhibit 10.34.3* Amendment No. 3 to the Facility Set-UP and Contract Manufacturing
Agreement and the License Agreement dated February 12, 2001 between
the Company and Bebig GmbH
Exhibit 10.37* Form of Employment Agreement dated January 15, 2001 by and between
the Company and Paul A. Molloy
* Previously filed as an exhibit to the Company's Report on Form 10-K
filed with the Securities and Exchange Commission on March 29, 2001.
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