UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[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
OR
[_] 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 333-36160
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RITA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3199149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
967 N. Shoreline Blvd.
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
650-314-3400
(Registrant's telephone number, including area code)
================================================================================
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[_]
As of April 25, 2001, there were 14,361,810 shares of the registrant's Common
Stock outstanding.
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Condensed Balance Sheets - March 31, 2001 and 3
December 31, 2000
Condensed Statements of Operations - Three months 4
ended March 31, 2001 and 2000
Condensed Statements of Cash Flows - Three months 5
ended March 31, 2001 and 2000
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities and Use of Proceeds. 16
Item 3. Defaults Upon Senior Securities. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RITA MEDICAL SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(In thousands, unaudited)
March 31, December 31,
2001 2000
---- ----
Assets
Current assets:
Cash and cash equivalents........................... $19,946 $ 12,676
Marketable securities............................... 16,765 27,381
Accounts receivable, net............................ 3,233 2,437
Inventories, net.................................... 1,678 1,638
Prepaid assets and other current assets............. 743 823
------- --------
Total current assets............................ 42,365 44,955
Property and equipment, net............................... 1,221 1,255
Other assets.............................................. 59 60
------- --------
Total assets.................................... $43,645 $ 46,270
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................... $ 689 $ 425
Accrued liabilities................................. 1,736 1,895
Current portion of long term obligations............ 649 1,123
------- --------
Total current liabilities....................... 3,074 3,443
Long term obligations..................................... 112 180
------- --------
Total liabilities............................... 3,186 3,623
------- --------
Contingency (Note 4)
Stockholders' equity
Common stock, $0.001 par value...................... 14 14
Additional paid-in capital.......................... 88,365 88,421
Deferred stock compensation......................... (3,293) (4,202)
Receivable from stockholders........................ (125) (164)
Accumulated other comprehensive income.............. 55 13
Accumulated deficit................................. (44,557) (41,435)
------- --------
Total stockholders' equity...................... 40,459 42,647
------- --------
Total liabilities and stockholders' equity...... $43,645 $ 46,270
======= ========
See accompanying notes
-3-
RITA MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Sales................................................................. $ 3,304 $ 1,841
Cost of goods sold.................................................... 1,769 1,182
------- -------
Gross profit...................................................... 1,535 659
------- -------
Operating expenses
Research and development............................................ 1,466 1,631
Selling, general and administrative................................. 3,747 2,641
------- -------
Total operating expenses.......................................... 5,213 4,272
------- -------
Loss from operations.................................................. (3,678) (3,613)
Interest income and other expense, net................................ 556 35
------- -------
Net loss.............................................................. $(3,122) $(3,578)
======= =======
Net loss per share, basic and diluted................................. $ (0.22) $ (3.52)
======= =======
Shares used in computing basic and diluted net loss per share......... 14,167 1,017
See accompanying notes
-4-
RITA MEDICAL SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Operating activities:
Net loss........................................................................ $ (3,122) $ (3,578)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 244 172
Amortization of stock-based compensation................................... 496 1,557
Allowance for doubtful accounts............................................ 9 9
Allowance for inventory reserve............................................ 242 8
Changes in operating assets and liabilities
Accounts receivable..................................................... (804) (294)
Inventory............................................................... (283) (46)
Prepaid and other current assets........................................ 80 (99)
Accounts payable and accrued liabilities................................ 105 (2)
-------- --------
Net cash used in operating activities................................ (3,033) (2,273)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment........................................ (207) -
Purchases of short term investments........................................ (5,243) (707)
Maturities of short term investments....................................... 15,901 3,556
Notes receivable and other assets.......................................... 1 2
-------- --------
Net cash provided by investing activities............................ 10,452 2,851
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock..................................... 396 174
Proceeds from borrowings of long term debt................................. - 1,500
Proceeds from revolving term loan.......................................... 22 470
Payments on revolving term loan............................................ (500) -
Payments on capital lease obligations...................................... (67) (17)
-------- --------
Net cash provided by (used in) financing activities.................. (149) 2,127
-------- --------
Net increase in cash and cash equivalents....................................... 7,270 2,705
Cash and cash equivalents at beginning of period................................ 12,676 7,067
-------- --------
Cash and cash equivalents at end of period...................................... $19,946 $ 9,772
======= =======
See accompanying notes
-5-
RITA MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared by RITA Medical Systems, Inc. (the "Company") in accordance with
accounting principles generally accepted in the United States of America for
interim financial information. These principles are consistent in all material
respects with those applied in the Company's financial statements contained in
our annual report on Form 10-K for the fiscal year ended December 31, 2000 and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission. However, interim
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the financial position, results
of operations and cash flows of the Company for the periods indicated. Interim
results of operations are not necessarily indicative of the results to be
expected for the full year or any other interim periods. These condensed
financial statements should be read in conjunction with the financial statements
and footnotes thereto for the year ended December 31, 2000 contained in the
Company's annual report on Form 10-K.
2. Net loss per share
Basic earnings (loss) per share figures are calculated based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings (loss) per share figures include the dilutive effect of common stock
equivalents consisting of stock options, warrants, shares subject to repurchase
and shares issuable upon conversion of preferred stock provided that the
inclusion of such common stock equivalents is not antidilutive. For the three
months ended March 31, 2001 and March 31, 2000, the Company has excluded
potentially dilutive securities from earnings per share computations as they
have an antidilutive effect due to the Company's net losses. The following
weighted options and warrants (prior to application of the treasury stock
method), convertible preferred shares (on an as-if-converted method) and common
shares subject to repurchase were so excluded (in thousands):
Three months ended
March 31,
---------
2001 2000
---- ----
Options and warrants..................... 2,194 1,935
Convertible preferred stock.............. - 8,934
Common shares subject to repurchase...... 74 34
----- ------
2,268 10,903
===== ======
The reconciliation of total outstanding common shares to shares used in
determining net loss per share is as follows (in thousands):
Three months ended
March 31,
---------
2001 2000
---- ----
Weighted average shares of common
stock outstanding....................... 14,241 1,051
Less: weighted-average shares
subject to repurchase................... 74 34
------ -----
Weighted average shares used in
basic and diluted net loss per share.... 14,167 1,017
====== =====
-6-
3. Inventories (in thousands)
March 31, December 31,
2001 2000
----- ----
Raw materials....................... $ 425 $ 404
Work-in-process..................... 103 203
Finished goods...................... 1,151 1,031
------ ------
$1,679 $1,638
====== ======
4. Contingency
The Company is involved in a patent interference proceeding with
RadioTherapeutics Corporation in which the validity of a patent issued to the
Company has been called into question. Although the Company believes it has
meritorious defenses, if it does not prevail in this interference, it could be
prevented from selling the RITA System or be required to pay license fees and or
royalties on past and future product sales.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", and similar
expressions identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or
forecasted. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Factors That May Affect
Future Results" and those appearing elsewhere in this Form 10-Q. Readers are
cautioned not to place undue reliance on these forward-looking statements that
reflect management's analysis only as of the date hereof. We assume no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
Overview
We develop, manufacture and market minimally invasive products that use
radiofrequency energy to treat patients with solid cancerous or benign tumors.
From inception in 1994 through 1996, our operations consisted primarily of
various start-up activities, including development of technologies central to
our business, recruiting personnel and raising capital. In 1997, we began
commercial product shipments. In 2000, we commercially launched our Model 1500
generator and StarBurst family of disposable devices and significantly expanded
our direct domestic sales organization and our international distribution
network.
Our products are sold in the United States through our direct sales force and
internationally through distribution partners. For the three months ended March
31, 2001, sales in the United States accounted for 48% of our total sales while
sales in our international markets accounted for 52% of our total sales. We
expect that a significant portion of our revenue will continue to come from
international operations because of the high incidence of primary liver cancer
in Asian and European markets.
All of our revenue is derived from the sale of our disposable devices and
radiofrequency generators. For the three months ended March 31, 2001, 73% of our
sales were derived from our disposable devices and 27% were derived from the
sale of our generators. Placement of generators at hospitals is necessary for
customers to use our disposable devices, and we continue to focus on expanding
our base of customer accounts. We are also continuing to focus on increasing
usage of our disposable products at our established accounts, and we expect that
a significant proportion of our revenues will continue to be derived from the
sale of our higher-margin disposable devices.
Our manufacturing costs consist of raw materials, including generators
produced for us by third-party suppliers, labor to produce our disposable
devices and to inspect incoming, in-process and finished goods, sterilization
performed by an outside service provider and general overhead expenses. Gross
margins are affected by production volumes and average selling prices. In
addition, margins are affected by the sales mix of disposable devices versus
generators, the mix of domestic direct sales versus international sales, which
provide for standard distributor discounts, and our regular provisions for
obsolete or obsolescent inventory.
For the three months ended March 31, 2001, 28% of our operating expenses were
related to research and development activities, while 72% of our operating
expenses were related to selling, general and administrative activities. We
expect to continue to devote significant resources to product development and
clinical research programs. We also expect to continue to devote the majority
of our operating expenses to selling, general and administrative activities,
particularly to our sales and marketing efforts. These efforts include the
selective expansion of our domestic sales force and our international
distribution support activities as well as physician training and patient
awareness programs.
In connection with grants of stock options to employees and non-employees, we
record deferred stock-based compensation as a component of stockholders' equity.
This stock-based compensation is amortized as charges to operations over the
vesting periods of the options. We recorded amortization of deferred
compensation of $0.5 million for the three months ended March 31, 2001. We
expect to record additional amortization expense for deferred compensation in
future periods.
We incurred net losses of $3.1 million for the three months ended March 31,
2001. As of March 31, 2001, we had an accumulated deficit of $44.6 million. Due
to the high costs associated with continued research and development programs,
expanded clinical research programs and increased sales and marketing efforts,
we expect to continue to incur net losses for the near future.
Our future growth depends on expanding product usage in our current market and
finding new large markets in which we can leverage our core technologies of
applying radiofrequency energy to treat cancerous and benign tumors. To the
extent our current or new markets do not materialize in accordance with our
expectations, our sales could be lower than expected.
-8-
We are currently involved in patent proceedings and may become a party to
additional patent or product liability proceedings. The costs of such lawsuits
or proceedings may be material and could affect our earnings and financial
position. An adverse outcome in a patent lawsuit could require us to cease sales
of affected products or to pay royalties and/or license fees, which could harm
our results of operations.
Results of Operations
Sales increased 79% to $3.3 million for the quarter ended March 31, 2001 from
$1.8 million for the quarter ended March 31, 2000. We saw growth in both
domestic and international markets, with domestic sales increasing by 219% and
international sales up by 28% over the comparable prior year period. We
experienced growth in sales of our disposable products and our generators, with
disposable sales increasing by 109% and generator sales increasing by 30% over
the comparable prior year period. Higher unit shipments of generators and
disposables resulted from increased physician awareness of our technology,
expansion of our domestic sales force, increased geographical representation
through the appointment of new international distributors and the launch of our
next-generation Model 1500 generator and StarBurst XL disposable devices.
Cost of goods sold for the quarter ended March 31, 2001 was $1.8 million as
compared to $1.2 million for the corresponding period in 2000. The growth in
cost of goods sold was attributable primarily to higher material, labor, and
overhead costs associated with increased unit shipments, although a $0.2
million charge to our inventory reserves also contributed to the increase.
Charges for amortization of deferred stock-based compensation were higher as
well, totaling $0.2 million for the three-month period ended March 31, 2001,
compared to $0.1 million in the corresponding period in 2000.
Research and development expenses for the three months ended March 31, 2001
were $1.5 million as compared to $1.6 million for the corresponding period in
2000. This decrease was attributable to reduced charges for amortization of
deferred stock-based compensation, which totaled $0.1 million for the quarter
ended March 31, 2001, compared to $0.3 million in the corresponding period in
2000. Our clinical program spending increased as we continue to investigate new
applications for our technology. Expenses incurred during the quarter for new
technology development and protection of our patent portfolio remained
essentially flat when compared to expenses in the first quarter of 2000.
Selling, general and administrative expenses for the three months ended March
31, 2001 were $3.7 million as compared to $2.6 million in the corresponding
period in 2000. The increase resulted from the major expansion of our domestic
sales organization, increased administrative expenses due to added personnel to
support our growth in operations and additional costs associated with our
operation as a public company. However, amortization charges of deferred stock-
based compensation were lower, totaling $0.2 million in the three-month period
ended March 31, 2001 as compared to $1.1 million for the corresponding period in
2000.
Interest income, net of interest expense, was $0.6 million for the three
months ended March 31, 2001 as compared to $35,000 in the corresponding period
of 2000. The change was primarily attributable to earnings on short-term
investments made with cash received from our initial public offering of common
shares, completed in the third quarter of 2000.
Liquidity and Capital Resources
Prior to August 2000, we financed our operations principally through private
placements of convertible preferred stock, raising approximately $37.9 million
net of expenses. On August 1, 2000, we completed our initial public offering of
3.6 million common shares at a price of $12 per share, raising approximately
$39.0 million net of expenses. All outstanding convertible preferred shares
were converted to common shares at that time. To a lesser extent, we also
financed our operations through equipment financing and other loans, which
totaled $0.4 million in principal outstanding at March 31, 2001. As of March
31, 2001, we had $19.9 million of cash and cash equivalents, $16.8 million of
marketable securities and $39.3 million of working capital.
For the three months ended March 31, 2001, net cash used in operating
activities was $3.0 million principally due to our net loss and increases in
accounts receivable and inventory resulting from higher revenues and increased
unit shipments. Our investing activities for this period were limited to the
purchase of property and equipment in the amount of $0.2 million and net
purchases or sales of short-term investment instruments. Net cash used by
financing activities in the first quarter of 2001 was $0.1 million, due to $0.5
million in debt reduction partially offset by proceeds from the issuance of
common shares.
Our capital requirements depend on numerous factors including our research
and development expenditures, expenses related to selling, marketing and
administration as well as working capital to support business growth. Although
it is difficult for us to predict future liquidity requirements with certainty,
we believe that our current cash and cash equivalents will satisfy our cash
-9-
requirements for at least the next 18 months. During or after this period, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or debt securities or obtain
an additional credit facility. There can be no assurance that additional
financing will be available to us or, if available, that such financing will be
available on terms favorable to the Company and our stockholders.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects.
Due to our dependence on the RITA system, failure to achieve market acceptance
in a timely manner could harm our business.
Because all of our revenue comes from the sale of the RITA system, our
financial performance will depend upon physician adoption and patient awareness
of this system. If we are unable to convince physicians to use the RITA system,
we may not be able to generate revenues because we do not have alternative
products.
We are currently involved in a patent interference action and a patent
opposition action involving RadioTherapeutics Corporation, and if we do not
prevail in these actions, we may be unable to sell the RITA system.
In July 1999, the United States Patent and Trademark Office declared an
interference involving us, which was provoked by RadioTherapeutics Corporation,
a competitor of ours, in which the validity of a patent claim previously issued
to us is being called into question. The claim being questioned is one of a
number of issued patent claims that cover the curvature of the array at the tip
of our disposable devices. In February 2001, the USPTO issued a decision on
preliminary motions filed in the patent interference proceeding. The decision
found that one of the claims in our United States Patent No. 5,536,267 (claim
no. 32) is invalid. We expect to receive final confirmation of that decision
later this year. In the event that the decision is confirmed, we plan to file a
motion in a United States District Court requesting review of the decision.
Final determination of the patent interference proceeding may take several
years. If the final determination of the United States District Court results
in the issuance of patent rights related to the claim to RadioTherapeutics and
we were unable to obtain a license to use the relevant patent or successfully
modify our disposable device, we could be unable to sell our system and our
business could suffer.
In March 2000, RadioTherapeutics Corporation filed an opposition to our
European Patent No. 0777445. This patent also covers the curvature of the array
at the tip of our disposable devices. In this opposition, the validity of our
issued patent is being questioned. A final decision is not expected in this
proceeding for several years. If we do not prevail in the opposition
proceeding, we could lose our only currently issued patent in Europe.
We have a history of losses, anticipate significant increases in our operating
expenses over the next several years and may never achieve profitability.
We anticipate that our operating expenses will increase substantially in
absolute dollars for the foreseeable future as we expand our sales and
marketing, manufacturing, clinical research and product development efforts. To
become profitable, we must continue to increase our sales. If sales do not
continue to grow, we may not be able to achieve or maintain profitability in the
future. Historically, we have never shown a profit for any year or quarterly
reporting period, and our accumulated deficit stands at $44.6 million as of
March 31, 2001.
Because we face significant competition from companies with greater resources
than we have, we may be unable to compete effectively.
The market for our products is intensely competitive, subject to rapid change
and significantly affected by new product introductions and other market
activities of industry participants.
We compete directly with two companies in the domestic and international
markets: RadioTherapeutics Corporation, a privately held company, and Radionics,
Inc., a division of Tyco International, a publicly traded company with
substantial resources. Both RadioTherapeutics and Radionics sell products that
use radiofrequency energy to ablate soft tissue. In 1998, RadioTherapeutics
entered into a distribution arrangement with Boston Scientific Corporation, a
publicly traded company with substantially greater resources than we have.
-10-
Alternative therapies could prove to be superior to the RITA system, and
physician adoption could be negatively affected.
In addition to competing against other companies offering products that use
radiofrequency energy to ablate soft tissue, we also compete against companies
developing, manufacturing and marketing alternative therapies that address both
cancerous and benign tumors. If these alternative therapies prove to offer
treatment options that are superior to our system, physician adoption of our
products could be negatively affected and our revenues could decline.
We currently lack long-term data regarding the safety and efficacy of our
products and may find that long-term data does not support our short-term
clinical results.
Our products are supported by an average clinical follow-up of between five
and 14 months in published clinical reports. If longer-term studies fail to
confirm the effectiveness of our products, our sales could decline. If longer-
term patient follow-up or clinical studies indicate that our procedures cause
unexpected, serious complications or other unforeseen negative effects, we could
be subject to significant liability. Further, because some of our data has been
produced in studies that were not randomized and/or included small patient
populations, our clinical data may not be reproduced in wider patient
populations.
If we are unable to protect our intellectual property rights, we may lose market
share to a competitor and our business could suffer.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products, and yet we may be unable to do
so. A number of companies in our market, as well as universities and research
institutions, have issued patents and have filed patent applications that relate
to the use of radiofrequency energy to ablate soft tissue. Our pending United
States and foreign patent applications may not issue or may issue and be
subsequently successfully challenged by others and invalidated. In addition, our
pending patent applications include claims to material aspects of our products
that are not currently protected by issued patents. Both the patent application
process and the process of managing patent disputes can be time consuming and
expensive.
In the event a competitor infringes upon our patent or other intellectual
property rights, enforcing those rights may be difficult and time consuming.
Even if successful, litigation to enforce our intellectual property rights or to
defend our patents against challenge could be extensive and time consuming and
could divert our management's attention. We may not have sufficient resources to
enforce our intellectual property rights or to defend our patents against a
challenge. In addition, confidentiality agreements executed by our employees,
consultants and advisors may not be enforceable or may not provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure. If we are unable to protect our intellectual
property rights we could lose market share to a competitor and our business
could suffer.
If we are sued for patent infringement, we could be prevented from selling our
products and our business could suffer.
We are aware of the existence of patents held by competitors in our market,
which could result in a patent lawsuit against us. In the event that we are
subject to a patent infringement lawsuit and if the relevant patents were upheld
as valid and enforceable and we were found to infringe, we could be prevented
from selling our products unless we could obtain a license or were able to
redesign the product to avoid infringement. If we were unable to obtain a
license or successfully redesign our system, we may be prevented from selling
our system and our business could suffer.
Our dependence on international revenues, which account for a significant
portion of our revenues, could harm our business.
Because our future profitability will depend in part on our ability to grow
product sales in international markets, we are exposed to risks specific to
business operations outside the United States. These risks include:
- the challenge of managing international sales without direct access to the
end customer;
- the risk of inventory build-up by our distributors which could negatively
impact sales in future periods;
- obtaining reimbursement for procedures using our devices in some foreign
markets;
- the burden of complying with complex and changing foreign regulatory
requirements;
- longer accounts receivable collection time;
-11-
- significant currency fluctuations, which could cause our distributors to
reduce the number of products they purchase from us because the cost of our
products to them could increase relative to the price they could charge their
customers;
- reduced protection of intellectual property rights in some foreign countries;
and
- contractual provisions governed by foreign laws.
We are substantially dependent on two distributors in our international markets,
and if we lose either distributor or if either distributor significantly reduces
their product demand, our international and total revenues could decline.
We are substantially dependent on a limited number of significant distributors
in our international markets, and if we lose these distributors and fail to
attract additional distributors, our international revenues could decline. ITX
Corporation, formerly known as Nissho Iwai Corporation, is our primary
distributor in Asia. It accounted for 24 percent of our international revenues
for the three months ended March 31, 2001 and 48 percent of our international
revenues in 2000. M.D.H. s.r.l. Forniture Ospedaliere, our distributor in
Italy, accounted for 33 percent of our international revenues for the three
months ended March 31, 2001 and 17 percent of our international revenues for
2000. Because international revenues accounted for 52 percent of our total
revenues for the three months ended March 31, 2001 and these two distributors
represented 57 percent of that total, the loss of either distributor or a
significant decrease in unit purchases by either distributor could cause
revenues to decline substantially. If we are unable to attract additional
international distributors, our international revenues may not grow.
Our relationships with third-party distributors could negatively affect our
sales.
We sell our products in international markets through third-party distributors
over whom we have limited control, and, if they fail to adequately support our
products, our sales could decline. If our distributors or we terminate our
existing agreements, finding companies to replace them could be an expensive and
time-consuming process and sales could decrease during any transition period.
If customers in markets outside the United States experience difficulty
obtaining reimbursement for procedures using our products, international sales
could decline.
Certain of the markets outside the United States in which we sell our
products require that specific reimbursement codes be obtained before
reimbursement for procedures using our products can be approved. As a result,
in countries where specific reimbursement codes are strictly required and have
not yet been issued, reimbursement has been denied on that basis. ITX, our
distributor in Japan, is conducting studies that are necessary to obtain
reimbursement coverage in Japan, but to date has not yet received this approval.
If we are unable to either obtain the required reimbursement codes or develop an
effective strategy to resolve the reimbursement issue, physicians may be
unwilling to purchase our products which could negatively impact our
international revenues.
If third-party payors do not reimburse health care providers for use of the RITA
system, purchases could be delayed and our revenues could decline.
Physicians, hospitals and other health care providers may be reluctant to
purchase our products if they do not receive substantial reimbursement for the
cost of the procedures using our products from third-party payors, such as
Medicare, Medicaid and private health insurance plans. Hospitals using our
products are currently reimbursed based on established general reimbursement
codes. Because there is no specific reimbursement code for physicians performing
procedures using the RITA system, physicians need to submit a patient case
history and data supporting the applicability of our system to the patient's
condition in order to obtain reimbursement. Each payor then determines whether
and to what extent to reimburse for a medical procedure or product. Payors may
refuse to provide reimbursement for procedures covered by general codes because
the applicability of the code must be determined on a case-by-case basis.
Although we have been notified by the American Medical Association Coding
Committee that specific reimbursement codes for radiofrequency ablation of liver
tumors will be established in 2002, they reserve the right to reverse this
decision. In this case, we would be required to reapply for a specific code.
This process is time consuming and costly and may require us to provide
extensive supporting scientific, clinical and cost-effectiveness data for our
products to the American Medical Association. Even if we were successful in
establishing a new code, a payor still may not reimburse adequately for the
procedure or product. In addition, we believe the advent of fixed payment
schedules has made it difficult to receive reimbursement for disposable
products, even if the use of these products improves clinical outcomes. Fixed
payment schedules typically permit reimbursement for a procedure rather than a
device. If physicians believe that our system will add cost to a procedure but
will not add sufficient offsetting economic or clinical benefits, physician
adoption could be slowed.
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You may have a difficult time evaluating our company as an investment because we
have a limited operating history.
You can only evaluate our business based on a limited operating history
because we began selling the RITA system in 1997. This short history may not be
adequate to enable you to fully assess our ability to achieve market acceptance
of our products and respond to competition.
Any failure to build and manage our direct sales organization may negatively
affect our revenues.
We have significantly expanded our direct sales force in the United States
over the past twelve months and plan to continue to increase the domestic direct
sales force in the future. There is intense competition for skilled sales and
marketing employees, especially for people who have experience selling
disposable devices and generators to the physicians in our target market, and we
may be unable to hire skilled individuals to sell our products. Any inability
to build and effectively manage our direct sales force could negatively impact
our growth.
We depend on key employees in a competitive market for skilled personnel and
without additional employees, we cannot grow or achieve profitability.
We are highly dependent on the principal members of our management, operations
and research and development staff. Our future success will depend in part on
the continued service of these individuals and our ability to identify, hire and
retain additional personnel, including sales and marketing staff. The market for
qualified management personnel in Northern California, where our offices are
located, is extremely competitive and is expected to continue to be highly
competitive. Because the environment for good personnel is so competitive, costs
related to compensation may increase significantly. If we are unable to attract
and retain the personnel we need to support and grow our business, our business
will suffer.
We may be subject to costly and time-consuming product liability actions.
We manufacture medical devices that are used on patients in both minimally
invasive and open surgical procedures and, as a result, we may be subject to
product liability lawsuits. To date, we have not been subject to a product
liability claim; however, any product liability claim brought against us, with
or without merit, could result in the increase of our product liability
insurance rates or the inability to secure coverage in the future. In addition,
we could have to pay any amount awarded by a court in excess of policy limits.
Finally, even a meritless or unsuccessful product liability claim could be time
consuming and expensive to defend and could result in the diversion of
management's attention from managing our core business.
Any failure in our physician training efforts could result in lower than
expected product sales.
It is critical to our sales effort to train a sufficient number of physicians
and to instruct them properly in the procedures that utilize our products. We
have established formal physician training programs and rely on physicians to
devote adequate time to understanding how and when our products should be used.
If physicians are not properly trained, they may misuse or ineffectively use our
products. This may result in unsatisfactory patient outcomes, patient injury and
related liability or negative publicity that could have an adverse effect on our
product sales.
We may incur significant costs related to a class action lawsuit due to the
likely volatility of our stock.
Our stock price may fluctuate for a number of reasons including:
- failure of the public market to support the valuation established in our
initial public offering;
- our ability to successfully commercialize our products;
- announcements regarding patent litigation or the issuance of patents to us or
our competitors;
- quarterly fluctuations in our results of operations;
- announcements of technological or competitive developments;
- regulatory developments regarding us or our competitors;
- acquisitions or strategic alliances by us or our competitors;
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- changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
- general market conditions, particularly for companies with small market
capitalizations.
Securities class action litigation is often brought against a company after a
period of volatility in the market price of its stock. If our future quarterly
operating results are below the expectations of securities analysts or
investors, the price of our common stock would likely decline. Stock price
fluctuations may be exaggerated if the trading volume of our common stock is
low. Any securities litigation claims brought against us could result in
substantial expense and divert management's attention from our core business.
If we fail to support our anticipated growth in operations, our business could
suffer.
If we fail to execute our sales strategy and develop further our products, our
business could suffer. To manage anticipated growth in operations, we must
increase our quality assurance staff for both our generators and our disposable
devices and expand our manufacturing staff and facility for our disposable
devices. Our systems, procedures and controls may not be adequate to support our
expected growth in operations.
We have limited experience manufacturing our disposable devices in substantial
quantities, and if we are unable to hire sufficient additional personnel,
purchase additional equipment or are otherwise unable to meet customer demand
our business could suffer.
To be successful, we must manufacture our products in substantial quantities
in compliance with regulatory requirements at acceptable costs. If we do not
succeed in manufacturing quantities of our disposable devices that meet customer
demand, we could lose customers and our business could suffer. At the present
time, we have limited high-volume manufacturing experience. Our manufacturing
operations are currently focused on the in-house assembly of our disposable
devices. As we increase our manufacturing volume and the number of product
designs for our disposable devices, the complexity of our manufacturing
processes will increase. Because our manufacturing operations are primarily
dependent upon manual assembly, if demand for our system increases we will need
to hire additional personnel and may need to purchase additional equipment. If
we are unable to sufficiently staff our manufacturing operations or are
otherwise unable to meet customer demand for our products, our business could
suffer.
We are dependent on one supplier as the only source of a component that we use
in our disposable devices, and any disruption in the supply of this component
could negatively affect our revenues.
Because there is only one supplier that provides us with a component that we
include in our disposable devices, a disruption in the supply of this component
could negatively affect revenues. This supplier is the only source of this
component. If we were unable to remedy a disruption in supply of this component
within twelve months, we could be required to redesign the handle of our
disposable devices, which could divert engineering resources from other projects
or add to product costs. In addition, a new or supplemental filing with
applicable regulatory authorities may require clearance prior to our marketing a
product containing new materials. This clearance process may take a substantial
period of time, and we may be unable to obtain necessary regulatory approvals
for any new material to be used in our products on a timely basis, if at all.
This could also create supply disruptions that could negatively affect our
business.
We are dependent on third-party contractors for the supply of our generators,
and any failure to deliver generators to us could result in lower than expected
revenues.
One third-party supplier currently manufactures, to our specifications, one of
the generators we sell. There is only one other third-party contractor who we
have used who could readily assume this manufacturing function. Two third-party
suppliers produce the other generator we sell. We have agreements with both of
these suppliers. Any delay in shipments of generators to us could result in our
failure to ship generators to customers and could negatively affect revenues.
Complying with the FDA and other domestic and international regulatory
authorities is an expensive and time-consuming process, and any failure to
comply could result in substantial penalties.
We are subject to a host of federal, state, local and international
regulations regarding the manufacture and marketing of our products. In
particular, our failure to comply with FDA regulations could result in, among
other things, seizures or recalls of our products, an injunction, substantial
fines and/or criminal charges against our employees and us. The FDA's medical
device reporting regulations require us to report any incident in which our
products may have caused or contributed to a death or serious
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injury, or in which our products malfunctioned in a way that would be likely to
cause or contribute to a death or serious injury if the malfunction recurred.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer than that required for FDA
approval or clearance, and requirements for foreign licensing may differ from
FDA requirements. For example, some of our newer products have not received
approval in Japan. Any failure to obtain necessary regulatory approvals for our
new products in foreign countries could negatively affect revenues.
Product introductions or modifications may be delayed or canceled as a result of
the FDA regulatory process, which could cause our revenues to be below
expectations.
Unless we are exempt, we must obtain the appropriate FDA approval or clearance
before we can sell a new medical device in the United States. This can be a
lengthy and time-consuming process. To date, all of our products have received
clearances from the FDA through premarket notification under Section 510(k) of
the Federal Food, Drug and Cosmetic Act. However, if the FDA requires us to
submit a new premarket notification under Section 510(k) for modifications to
our existing products, or if the FDA requires us to go through a lengthier, more
rigorous examination than we now expect, our product introductions or
modifications could be delayed or canceled which could cause our revenues to be
below expectations. The FDA may determine that future products will require the
more costly, lengthy and uncertain premarket approval process. In addition,
modifications to medical device products cleared via the 510(k) process may
require a new 510(k) submission. We have made minor modifications to our system.
Using the guidelines established by the FDA, we have determined that some of
these modifications do not require us to file new 510(k) submissions. If the FDA
disagrees with our determinations, we may not be able to sell the RITA system
until the FDA has cleared new 510(k) submissions for these modifications. In
addition, we intend to request additional label indications, such as approvals
or clearances for the ablation of tumors in additional organs, including lung,
bone and breast, for our current products. The FDA may either deny these
requests outright, require additional extensive clinical data to support any
additional indications or impose limitations on the intended use of any cleared
product as a condition of approval or clearance. Therefore, obtaining
necessary approvals or clearances for these additional applications could be an
expensive and lengthy process.
We may need to raise additional capital in the future resulting in dilution to
our stockholders.
We may need to raise additional funds for our business operations and to
execute our business strategy. We may seek to sell additional equity or debt
securities or to obtain an additional credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to our
stockholders. If additional funds are raised through the issuance of debt
securities, these securities could have rights that are senior to holders of
common stock and could contain covenants that would restrict our operations. Any
additional financing may not be available in amounts or on terms acceptable to
us, if at all.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval.
Because our executive officers and directors, and their respective
affiliates, own approximately 29 percent of our outstanding common stock, these
stockholders may, as a practical matter, be able to exert significant influence
over matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combinations. This
concentration of voting stock could have the effect of delaying or preventing a
change in control.
Our certificate of incorporation and Delaware law contain provisions that could
discourage a takeover or prevent or delay a merger that stockholders believe is
favorable for the Company.
Our amended and restated certificate of incorporation and bylaws contain
provisions that could delay or prevent a change in control of our company. Some
of these provisions:
- authorize the issuance of preferred stock, which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those of
common stock;
- provide for a classified board of directors; and
- prohibit stockholder action by written consent.
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In addition, the provisions of Section 203 of Delaware General Corporate Law
govern us. These provisions may prohibit large stockholders, in particular those
owning 15 percent or more of our outstanding voting stock, from merging or
combining with us. These and other provisions in our amended and restated
certificate of incorporation and bylaws and under Delaware law could reduce the
price that investors might be willing to pay for shares of our common stock in
the future and result in the market price being lower than it would be without
these provisions
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk disclosures have not changed significantly from those set
forth in Management's Discussion and Analysis of Financial Condition and Results
of Operations in our Form 10-K filing dated March 27, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material legal proceedings, other than the
patent disputes described in "Risk Factors--We are currently involved in a
patent interference action and a patent opposition action involving
RadioTherapeutics Corporation, and if we do not prevail in these actions, we may
be unable to sell the RITA System." The patent interference proceeding is
pending before the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office. On July 16, 1999 the United States Patent
and Trademark Office declared interference between a claim of one of our issued
patents and claims of a patent application controlled by RadioTherapeutics
Corporation. The principal parties in the proceeding are RadioTherapeutics and
RITA. The factual basis underlying the claim is the determination by the
commissioner of the United States Patent and Trademark Office that our patent
and the RadioTherapeutics patent application interfere. In the interference
proceeding, RadioTherapeutics seeks to invalidate our patent claim and to
establish the patentability of the claims in their patent application. We seek
to maintain the priority of our patent claim. On February 26, 2001, the USPTO
issued a decision on preliminary motions filed in the patent interference
proceeding. The decision found that one of the claims in our United States
Patent No. 5,536,267 (claim no. 32) is invalid. We expect to receive final
confirmation of that decision later this year. The European opposition is
pending before the European Patent Office and was instituted on March 2, 2000.
The principal parties are RadioTherapeutics and RITA. The factual basis
underlying the claim is the allegation by RadioTherapeutics that our European
patent is not valid. In the opposition, RadioTherapeutics seeks to have our
patent declared invalid and to have our patent cancelled. We are defending our
patent and seek to defend it as issued. In addition to these patent
proceedings, we may from time to time become a party to various legal
proceedings arising in the ordinary course of our business.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended March 31, 2001, we issued 52,591 shares through
the net issue exercise of a warrant to purchase 85,091 shares of common stock,
which exercise was effected at the rate of .618 shares of common stock for each
one share of common stock underlying the warrant. This issuance of common
shares was made in reliance upon Section 4(2) of the Securities Act.
On July 26, 2000, we completed our initial public offering of 3,600,000
common shares at a price of $12.00 per share, raising approximately $39.0
million net of underwriting discounts, commissions and other offering costs.
The managing underwriters were Salomon Smith Barney and Robertson Stephens. We
intend to use the proceeds of the offering to expand sales, marketing, physician
and patient awareness programs, to continue product development and clinical
research programs, to repay debt and to fund general corporate purposes
including working capital. Additionally, we may use the proceeds of the
offering to fund the acquisition of complementary businesses, products or
technologies, although there are no current agreements or negotiations with
respect to any specific transaction.
As of March 31, 2001, we had applied $20.8 million of the $39.0 million in
net proceeds from our offering as follows:
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Approximate Dollar Amount
Use (in millions)
------------------------------------------------------------------------------------------------
Permanent working capital $ 5.0
------------------------------------------------------------------------------------------------
Repayment of term loans and other debt $ 4.0
------------------------------------------------------------------------------------------------
Sales, marketing, research and clinical programs and $11.8
general corporate purposes
------------------------------------------------------------------------------------------------
TOTAL: $20.8
------------------------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: Not applicable.
(b) Reports on Form 8-K: Not applicable.
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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 the
undersigned thereunto duly authorized.
RITA MEDICAL SYSTEMS, INC.
By: /s/ Donald Stewart
------------------
Donald Stewart
Chief Financial Officer and Vice
President, Finance and Administration
Date: May 11, 2001
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