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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 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
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On July 25, 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
June 30, 2001
TABLE OF CONTENTS
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at June 30, 2001 and
December 31, 2000 3
Condensed consolidated statements of operations for the three
and six months ended June 30, 2001 and 2000 4
Condensed consolidated statements of cash flows for the six
months ended June 30, 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. 24
Signatures 25
Exhibit Index 26
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,543 $ 6,311
Marketable securities available-for-sale 13,251 15,162
Trade accounts receivable, net 443 564
Notes receivable from officers -- 14
Other receivables 1,905 2,497
Inventories 912 1,085
Other current assets 365 239
-------- --------
Total current assets 21,419 25,872
Property and equipment, net 771 743
Marketable securities available-for-sale 8,280 8,884
Intangibles, net 2,336 2,786
Notes receivable from officers 143 126
Other assets 217 43
-------- --------
Total Assets $ 33,166 $ 38,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,595 $ 2,589
Deferred revenue 81 81
-------- --------
Total current liabilities 3,676 2,670
Deferred revenue 319 360
Minority interest 156 184
-------- --------
Total liabilities 4,151 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,
13,073,000 and 13,049,000 shares issued and outstanding
as of June 30, 2001 and December 31, 2000, respectively 13 13
Additional paid-in capital 81,061 80,886
Deferred compensation (195) (208)
Accumulated deficit (52,182) (45,796)
Accumulated other comprehensive income 318 345
-------- --------
Total stockholders' equity 29,015 35,240
-------- --------
Total Liabilities and Stockholders' Equity $ 33,166 $ 38,454
======== ========
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 Six Months Ended
June 30, June 30,
------------------ ----------------------
2001 2000 2001 2000
------- ------- -------- --------
Revenue:
Product $ 336 $ 623 $ 765 $ 1,193
License revenue 1,498 1,919 3,094 3,711
------- ------- -------- --------
Total revenue 1,834 2,542 3,859 4,904
Cost of product revenue 346 366 653 859
------- ------- -------- --------
Gross profit 1,488 2,176 3,206 4,045
------- ------- -------- --------
Operating expenses:
Research, development and clinical 3,914 2,814 8,242 5,559
Marketing and sales 445 319 839 642
General and administrative 661 750 1,398 1,477
Minority interest (6) (8) (13) (9)
------- ------- -------- --------
Total operating expenses 5,014 3,875 10,466 7,669
------- ------- -------- --------
Loss from operations (3,526) (1,699) (7,260) (3,624)
------- ------- -------- --------
Other income (expense):
Interest income 356 294 807 587
Gain on sale of assets 43 234 66 467
Other income (expense) (24) 0 1 (48)
------- ------- -------- --------
Total other income 375 528 874 1,006
------- ------- -------- --------
Net loss $(3,151) $(1,171) $ (6,386) $ (2,618)
======= ======= ======== ========
Basic and diluted net loss per share $ (0.24) $ (0.10) $ (0.49) $ (0.23)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss per share 13,072 11,352 13,066 11,316
======= ======= ======== ========
See accompanying notes
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (6,386) $ (2,618)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 657 660
Amortization of deferred compensation 68 92
Provision for doubtful accounts (92) 38
Foreign currency exchange (gain) loss (30) 23
Loss (gain) on sale of assets (66) 28
Minority interest in losses of Radiatec (13) (9)
Change in:
Trade accounts receivable 214 442
Inventories 173 (238)
Other receivables and other assets 463 (1,283)
Accounts payable and accrued expenses 1,006 251
Deferred revenue (40) (507)
-------- --------
Net cash used in operating activities (4,046) (3,121)
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Cash flows provided by investing activities:
Purchases of available-for-sale securities (14,984) (7,283)
Sales of available-for-sale securities 17,555 10,523
Capital expenditures for property and equipment
and other assets (413) (26)
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Net cash provided by investing activities 2,158 3,214
-------- --------
Cash flows provided by financing activities:
Proceeds from issuance of convertible obligation -- 1,000
Proceeds from sale of common stock 100 107
Proceeds from exercise of common stock options 20 334
-------- --------
Net cash provided by financing activities 120 1,441
-------- --------
Net increase (decrease) in cash and cash equivalents (1,768) 1,534
Cash and cash equivalents, beginning of period 6,311 2,051
-------- --------
Cash and cash equivalents, end of period $ 4,543 $ 3,585
======== ========
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 ($17), notes receivable ($65) 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)
June 30, 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 is 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. 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(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 and six month periods
ended June 30, 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. If they were included for the second quarter of 2001 and
2000, the number of shares used to compute net loss per share would have been
increased by approximately 0.4 million shares and 1.0 million shares,
respectively. However, for the second quarter of 2001 and 2000, options to
purchase approximately 1.1 million shares and 0.0 million shares, respectively,
would have still been excluded from the computation of diluted loss per share
because the options' exercise price was greater than the average market price of
the common shares. If they were included for the first six months of 2001 and
2000, the number of shares used to compute net loss per share would have been
increased by approximately 0.5 million shares and 1.0 million shares,
respectively. However, for the first six months of 2001 and 2000, options to
purchase approximately 0.5 million shares and 0.0 million shares, respectively,
would have still been excluded from the computation of diluted loss per share
because the options' exercise price was greater than the average market price of
the common shares.
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
June 30, 2001 December 31, 2000
-------------- -----------------
Raw materials $ 551 $ 498
Work-in-process 33 178
Finished goods 328 409
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$ 912 $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. No revenue has been recognized through June 30, 2001 under this
arrangement.
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 second quarter and first six months of 2001, the Company recognized $20 and
$41, respectively, of the aforementioned revenue, compared to $5 and $41,
respectively, recognized during the same periods of 2000.
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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 and $462 being
recognized as other income in the second quarter and first six months,
respectively, 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 second quarter and first six months of 2001, the
Company recorded $1,479 and $3,037, respectively, in license revenue due on
licensed product sales by Guidant, compared to $1,840 and $3,520, respectively,
in the same periods of 2000.
7. Comprehensive Loss
The Company's comprehensive loss included the following:
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net loss $(3,151) $(1,171) $(6,386) $(2,618)
Unrealized loss on available-
for-sale securities (26) (29) (11) (51)
Foreign currency translation
adjustment 3 (16) (16) 31
------- ------- ------- -------
Comprehensive loss $(3,174) $(1,216) $(6,413) $(2,638)
======= ======= ======= =======
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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 is due
October 2001, and if it is met, the payment 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 approximately $460 of its legal fees it had
previously expensed. In May 2001, Jomed-EndoSonics appealed the judgment. A
court date has not yet been set. The Company believes that this matter will not
have a material adverse effect on its financial position, results of operations
or cash flows. No amounts have been included in the financial statements as of
June 30, 2001 for this potential legal fee recovery.
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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, results of operations or cash flows.
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 six
months of 2001, the Company paid $653 of the aforementioned fees and anticipates
paying the remaining fees in the third quarter of 2001, following the
achievement of manufacturing milestones by Bebig. In addition, the Company
completed the preparation of certain manufacturing equipment to be used by Bebig
to perform the final assembly of the RDX system during the second quarter of
2001 and it was purchased by Bebig for $450, which approximated Radiance's 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. In May 2001, the Company agreed to a
fourth amendment to the agreement under which Bebig will fulfill certain
customer service functions for an annual fee of $95. 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 might 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,
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Continued)
and royalty fees for any products sold worldwide that incorporate the licensed
technology. In the second quarter and first six months of 2001, the Company
recorded $50 and $75, respectively, 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. All costs associated with the
contract manufacturing and license agreements with Bebig have been expensed as
research and development costs.
10. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued FAS No. 141 and
142. FAS No. 141, Business Combinations, is effective for all business
combinations for which the date of acquisition is after June 30, 2001 and
requires that the purchase method of accounting be used for all business
combinations, establishes specific criteria for the recognition of intangible
assets separately from goodwill, and requires unallocated negative goodwill to
be written off immediately as an extraordinary gain. FAS No. 142, Goodwill and
Other Intangible Assets, requires that goodwill and indefinite lived intangible
assets will no longer be amortized, goodwill will be tested for impairment at
least annually at the reporting unit level, intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. Both FAS No. 141 and 142 will be adopted by the Company
on January 1, 2002. The Company is currently evaluating the impact of the
adoption of FAS No. 141 and 142 to its consolidated financial statements.
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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 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, the availability of third party
payor medical reimbursements, 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)
Thus far, we have developed an RDX system which is being or has been clinically
tested for use in treating restenosis in coronary arteries, saphenous vein
grafts, and peripheral arteries. Currently, clinical testing has only been
completed and approval to sell the RDX system received in Europe for the
treatment of coronary artery de novo lesions and in stent restenosis. Although
future clinical trials may not demonstrate it, we designed the RDX system to
provide safe and effective treatment for the prevention of restenosis without
many of the disadvantages inherent in alternative radiation delivery systems.
Our proprietary RDX system is the only device in clinical trials or being
marketed that carries a radiation source on an inflatable balloon catheter. This
patented technology allows the RDX system to deliver a therapeutic dose of
radiation with up to 80% less total radiation activity than competing systems.
As a result, the RDX system is easier to use, does not require supplemental
capital equipment, and is readily disposable. In addition, we believe that the
RDX system is suitable to treat arteries that are significantly larger or
smaller than can be treated with alternative radiation delivery systems. This
flexibility should allow the RDX to treat a larger number of patients than said
alternative systems.
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:
o licensed our proprietary Focus technology for balloon angioplasty to
Guidant Corporation for use in Guidant's stent delivery systems;
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; and,
o 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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
At the end of June 2001, we received European regulatory approval to sell our
RDX system in Europe, which also facilitates the sale of the RDX system in some
other foreign markets, including Latin America and parts of Asia. In the first
quarter of 2001, we began two U.S. clinical trials of the RDX system. One trial,
BRITE II, is a randomized, pivotal trial to test the effectiveness of the RDX
system for in stent restenosis, and the other trial, BRITE SVG, is a feasibility
study for de novo and in stent restenosis in saphenous vein grafts. In the
second quarter of 2001, we began an international feasibility clinical trial,
RAPID, of the RDX system for treating restenosis in two main vessels in the leg,
the femoral and popliteal arteries.
Development and Operations
We plan to continue to dedicate our corporate resources to:
o completing clinical trials;
o obtaining regulatory approvals for the RDX system; and
o continuing research and development related to devices for the delivery of
radiation to treat restenosis and expand the application of the technology.
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 18 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, 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 (See Note 6 to the Condensed Consolidated Financial Statements). We
anticipate that our product revenues will continue to decline, until we
successfully develop and commercialize the RDX system, as sales of products
incorporating our licensed technology decline and as our Focus technology
becomes obsolete.
We have experienced an operating loss for each of the last three years and
expect to continue to incur operating losses through at least mid-year 2002. Our
results of operations have varied significantly from quarter to quarter, and we
expect that our
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 and related manufacturing capability;
o our ability to manufacture and distribute the RDX system successfully;
o the progress and success of clinical trials and 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; and,
o 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 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 and the fourth and final milestone is due in
October 2001. See Note 8 to the Condensed Consolidated Financial Statements.
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16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
Comparison of the Three Months Ended June 30, 2000 and 2001
Product Sales. Product sales decreased 46% to $336,000 in the three months
ended June 30, 2001 from $623,000 in the three months ended June 30, 2000. The
decrease resulted primarily from increasing competition and the sale of
competing products by Guidant using our Focus technology. We expect to begin
limited sales of the RDX systems during the third quarter of 2001 in a limited
launch to key customers in select countries. Due to the competitive pressures on
our Focus technology products and limited launch planned for the RDX system in
the third quarter of 2001, we anticipate that product sales revenue will be
materially lower in the third quarter of 2001 compared with the same period of
2000. During the fourth quarter of 2001, we expect to initiate a full-scale
product launch of the RDX system in European countries.
License Fee. License revenue decreased 22% to $1.5 million in the three
months ended June 30, 2001 from $1.9 million in the three months ended June 30,
2000. We recognized $1.5 million in license revenue in the second quarter of
2001 and $1.8 million in license revenue in the second quarter of 2000 for
royalties on product sales under the technology license agreement with Guidant.
Management anticipates that license revenues could be lower in the third quarter
of 2001 compared with the same period of 2000 as Guidant licensed products
encounter increasing competition.
Cost of Product Sales. The cost of product sales decreased 5% to $346,000,
or 103% of product sales revenues, in the three months ended June 30, 2001 from
$366,000, or 59% of product sales revenues, in the three months ended June 30,
2000. The increase in cost of product sales, relative to product sales revenues,
is attributable primarily to a $93,000 increase in inventory write-offs of slow
moving and obsolete Focus technology inventory.
We expect that cost of product sales will exceed sales during the third
quarter of 2001 as both Focus technology and RDX manufacturing facilities will
be at low volume production levels. Due to the uncertainty of market acceptance
and our limited production experience with the RDX system, we cannot determine
that we will be able to produce the RDX system in sufficient quantities or at a
low enough cost to achieve a positive gross margin from our sales of the RDX
system.
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17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Research and Development. Research and development expenses, which include
clinical expenses, increased 39% to $3.9 million in the three months ended June
30, 2001 from $2.8 million in the three months ended June 30, 2000. The increase
in expenses during the quarter ended June 30, 2001 resulted primarily from
expenditures for U.S. clinical trials and the continued set-up of our third
party European manufacturing facility.
We expect research and development expenses to increase for the remainder
of 2001, compared to the expenditures for the same periods of 2000, due to
expenditures anticipated for clinical trials and the set-up of a higher
capacity, third party U.S. manufacturing facility.
Marketing and Sales. Marketing and sales expenses increased 39% to $445,000
in the three months ended June 30, 2001 from $319,000 in the three months ended
June 30, 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 decreased
12% to $661,000 in the three months ended June 30, 2001 from $750,000 in the
three months ended June 30, 2000. The decrease was primarily attributable to
lower legal expenses as a result of the judgment in the Jomed-Endosonics matter.
See Note 9 to the Condensed Consolidated Financial Statements.
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 decreased 29% to $375,000 in the three
months ended June 30, 2001 from $528,000 in the three months ended June 30,
2000. Interest income increased 21% to $356,000 in the three months ended June
30, 2001 from $294,000 in the three months ended June 30, 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 $234,000 in the three months ended June
30, 2000. The primary source for the 2000 gain on sale of assets was the sale of
an option to
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
purchase certain equity investments held by us, which expired without exercise
in December 2000. See Note 5 to the Condensed Consolidated Financial Statements.
Comparison of the Six Months Ended June 30, 2000 and 2001
Product Sales. Product sales decreased 36% to $765,000 in the six months
ended June 30, 2001 from $1.2 million in the six months ended June 30, 2000. The
decrease resulted primarily from increasing competition and the sale of
competing products by Guidant using our Focus technology.
License Fee. License revenue decreased 17% to $3.1 million in the six
months ended June 30, 2001 from $3.7 million in the six months ended June 30,
2000. We recognized $3.0 million in license revenue in the first six months of
2001 and $3.5 million in license revenue in the first six months of 2000 for
royalties on product sales under the technology license agreement with Guidant.
Cost of Product Sales. The cost of product sales decreased 24% to $653,000,
or 85% of product sales revenues, in the six months ended June 30, 2001 from
$859,000, or 72% of product sales revenues, in the six months ended June 30,
2000. The increase in product cost of sales, relative to sales revenues, is
attributable primarily to a $92,000 increase in inventory write-offs of slow
moving and obsolete Focus technology inventory.
Research and Development. Research and development expenses, which include
clinical expenses, increased 48% to $8.2 million in the six months ended June
30, 2001 from $5.6 million in the six months ended June 30, 2000. The increase
in expenses during the six months ended June 30, 2001 resulted primarily from
expenditures for U.S. clinical trials and the continued set-up of our
third-party European manufacturing facility.
Marketing and Sales. Marketing and sales expenses increased 31% to $839,000
in the six months ended June 30, 2001 from $642,000 in the six months ended June
30, 2000 as we began to make expenditures relating to the product launch of the
RDX system in Europe.
General and Administrative. General and administrative expenses decreased
5% to $1.4 million in the six months ended June 30, 2001 from $1.5 million in
the six months ended June 30, 2000. The decrease is primarily attributable to
lower bad debt expense.
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19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Minority Interest. See above discussion under "Results of Operations,
Comparison of the Three Months Ended June 30, 2000 and 2001."
Other Income (Expense). Other income decreased 13% to $874,000 in the six
months ended June 30, 2001 from $1.0 million in the six months ended June 30,
2000. Interest income increased 37% to $807,000 in the six months ended June 30,
2001 from $587,000 in the six months ended June 30, 2000, primarily due to an
increase in invested cash from the proceeds of our secondary offering in October
2000. Gain on sale of assets decreased 86% to $66,000 in the six months ended
June 30, 2001 from $467,000 in the six months ended June 30, 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.
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.
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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
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 $732,000 during 2000 and will pay
approximately $665,000 in 2001 for certain facility set-up fees. In February
2001, we agreed to second and third amendments of the manufacturing agreement.
The second amendment calls for the expansion of the production capacity, which
will result in our payment of additional fees of approximately $635,000 in 2001,
bringing the total fees for 2001 to approximately $1.3 million. In the first six
months of 2001, we paid $653,000 of the aforementioned fees and anticipate
paying the remaining fees in the third quarter of 2001, following the
achievement of manufacturing milestones by Bebig. In addition, we completed the
preparation of manufacturing equipment to be used by Bebig to perform the final
assembly of the RDX system during the second quarter of 2001 and it was
purchased by Bebig for $450,000, which approximated our 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. In May 2001 we agreed to a fourth amendment to the agreement under
which Bebig will
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
fulfill certain customer service functions for an annual fee of $95,000. For a
nominal charge, we can renew the agreement for three successive, two-year terms.
In conjunction with the contract manufacturing agreement, we entered into a
three year sub-license agreement with Bebig for radiation technology that we
believed may be useful in the development of the RDX system. Beginning in July
2000, there is a minimum annual license fee of $200,000, 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 second quarter of 2001 ,we recorded $50,000 in license fee
expense; and, in first six months of 2001, we recorded $75,000 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. All
costs associated with the contract manufacturing and license agreements with
Bebig have been expensed as research and development costs.
We believe that research and development expenses relating to the RDX system
will increase, as will costs associated with commercialization of the RDX system
as we obtain regulatory approvals. 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.
Because of the uncertainty of market acceptance of the RDX system and of our
ability to manage the many logistical, manufacturing and delivery issues
commonly associated with new product production and sales and those unique to
sales of radioactive medical devices, we cannot provide any assurance that we
will ever achieve significant revenues from its sales. If we have RDX product
failures, including radiation leaks, because of our limited product offerings,
sales will be adversely affected and we could be forced to discontinue product
sales for an indeterminate period of time.
Key components, including isotopes and catheter materials, and processes for the
manufacture of the RDX system are produced and provided, respectively, by single
sources due to the technology, availability, price, quantity and other
considerations.
In the event of a disruption or delay in supply of these components or
processes, RDX sales, which will begin in the third quarter of 2001, and
clinical trials could be adversely affected. To mitigate these risks, the
company attempts to secure long-term contracts and commitments from the sources
and to locate other sources for
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
them. However, because of the aforementioned device-related factors, we may have
to rely on limited sources for the foreseeable future.
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 increased 30% to $4.0 million for the six
months ended June 30, 2001 from $3.1 million for the six months ended June 30,
2000. The increase in net cash used resulted primarily from the increase in
clinical and research and development expenditures.
At June 30, 2001, we had cash, cash equivalents and marketable securities
available for sale of $26.1 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. However, our future capital requirements will
depend on many factors, including:
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Trade accounts receivable, net, decreased 21% to $443,000 at June 30, 2001 from
$564,000 at December 31, 2000. The decrease was attributable primarily to a
decrease in product sales for the period.
Other receivables decreased 24% to $1.9 million at June 30, 2001 from $2.5
million at December 31, 2000. The decrease is attributable primarily to the
$346,000 reimbursement of a portion of the secondary stock offering costs by
Endosonics Corporation and a $207,000 decrease in the license revenue receivable
from Guidant Corporation. See Note 6 to the Condensed Consolidated Financial
Statements.
Accounts payable and accrued expenses increased 39% to $3.6 million at June 30,
2001 from $2.6 million at December 31, 2000, due primarily to higher accruals
for research and development and clinical expenditures.
Deferred revenue decreased 9% to $400,000 at June 30, 2001 from $441,000 at
December 31, 2000. The decrease was due to 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, 2, 3 and 5. NOT APPLICABLE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's Annual Meeting of Stockholders was held on June 5, 2001. The
following was taken at this meeting:
Abstentions
And Broker - Affirmative Negative Votes
Non Votes Votes Votes Withheld
------------ ----------- -------- ---------
a. Election of Directors:
William G. Davis -0- 11,131,819 -0- 400,165
Michael R. Henson -0- 11,131,469 -0- 400,515
Jeffrey H. Thiel -0- 10,215,659 -0- 1,316,325
b. Ratification of
PricewaterhouseCoopers LLP
as independent accountants
for the fiscal year ending
December 31, 2001. 15,460 11,505,744 10,780 -0-
The terms of directors Maurice Buchbinder, M.D., Jeffrey F. O'Donnell, Gerard
von Hoffmann, Franklin D. Brown, and Edward M. Leonard continued after the
meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.34.4 Amendment No. 4 to Facility Set-Up and Contract Manufacturing
Agreement and the License Agreement dated May 2, 2001 between
the Company and Bebig GmbH
(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
thereunto duly authorized.
RADIANCE MEDICAL SYSTEMS, INC.
Date: July 27, 2001 /s/ Jeffrey H. Thiel
----------------------------------
Chief Executive Officer and
Director (Principal Executive
Officer)
Date: July 27, 2001 /s/ Stephen R. Kroll
----------------------------------
Vice President-Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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26
EXHIBIT INDEX
Exhibit 10.34.4 Amendment No. 4 to Facility Set-Up and Contract Manufacturing
Agreement and the License Agreement dated May 2, 2001 between
the Company and Bebig GmbH
26