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 September 30, 2004
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 000-30959
RITA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 94-3199149 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
As of October 29, 2004, there were 36,787,586 shares of the registrant’s Common Stock outstanding.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 3,070 | $ | 4,580 | ||||
| Marketable securities |
1,043 | 4,022 | ||||||
| Accounts and note receivable, net |
6,889 | 2,990 | ||||||
| Inventories |
7,742 | 2,192 | ||||||
| Prepaid and other current assets |
1,821 | 1,028 | ||||||
| Total current assets |
20,565 | 14,812 | ||||||
| Long term marketable securities |
— | 933 | ||||||
| Long term note receivable, net |
274 | 338 | ||||||
| Property and equipment, net |
2,107 | 1,089 | ||||||
| Goodwill |
91,339 | — | ||||||
| Intangible assets |
31,316 | 4,814 | ||||||
| Other assets |
41 | 47 | ||||||
| Total assets |
$ | 145,642 | $ | 22,033 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,710 | $ | 757 | ||||
| Accrued liabilities |
5,166 | 2,169 | ||||||
| Deferred revenue |
648 | — | ||||||
| Current portion of long term debt |
8,271 | — | ||||||
| Total current liabilities |
16,795 | 2,926 | ||||||
| Long term debt, less current portion |
9,810 | — | ||||||
| Deferred maintenance revenue, less current portion |
18 | 23 | ||||||
| Other long term liabilities |
79 | — | ||||||
| Total liabilities |
26,702 | 2,949 | ||||||
| Stockholders’ equity |
||||||||
| Common stock |
37 | 18 | ||||||
| Additional paid-in capital |
205,309 | 98,037 | ||||||
| Accumulated other comprehensive income (loss) |
(2 | ) | 2 | |||||
| Accumulated deficit |
(86,404 | ) | (78,973 | ) | ||||
| Total stockholders’ equity |
118,940 | 19,084 | ||||||
| Total liabilities and stockholders’ equity |
$ | 145,642 | $ | 22,033 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Sales |
$ | 7,951 | $ | 3,865 | $ | 17,254 | $ | 12,412 | ||||||||
| Cost of goods sold |
2,821 | 1,253 | 6,106 | 4,530 | ||||||||||||
| Gross profit |
5,130 | 2,612 | 11,148 | 7,882 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
928 | 976 | 2,752 | 3,395 | ||||||||||||
| Selling, general and administrative |
6,139 | 4,182 | 14,523 | 13,482 | ||||||||||||
| Restructuring charges |
1,089 | — | 1,089 | — | ||||||||||||
| Total operating expenses |
8,156 | 5,158 | 18,364 | 16,877 | ||||||||||||
| Loss from operations |
(3,026 | ) | (2,546 | ) | (7,216 | ) | (8,995 | ) | ||||||||
| Interest expense |
(242 | ) | — | (242 | ) | — | ||||||||||
| Interest income and other expense, net |
10 | 32 | 27 | 157 | ||||||||||||
| Net loss |
$ | (3,258 | ) | $ | (2,514 | ) | $ | (7,431 | ) | $ | (8,838 | ) | ||||
| Net loss per common share, basic and diluted |
$ | (0.10 | ) | $ | (0.14 | ) | $ | (0.33 | ) | $ | (0.50 | ) | ||||
| Shares used in computing net loss per common share, basic and diluted |
31,079 | 17,807 | 22,399 | 17,538 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (7,431 | ) | $ | (8,838 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
1,587 | 1,228 | ||||||
| Loss on disposal of property and equipment |
23 | 158 | ||||||
| Revaluation of common stock warrants for services received |
— | (101 | ) | |||||
| Amortization of stock-based compensation |
103 | — | ||||||
| Allowance for doubtful accounts |
(101 | ) | 56 | |||||
| Provision for obsolete inventories |
(117 | ) | 393 | |||||
| Changes in operating assets and liabilities, net of assets and liabilities acquired: |
||||||||
| Accounts and note receivable |
(912 | ) | 82 | |||||
| Inventories |
282 | 736 | ||||||
| Prepaid and other current assets |
(6 | ) | (102 | ) | ||||
| Accounts payable and accrued liabilities |
454 | (1,267 | ) | |||||
| Deferred revenue |
643 | — | ||||||
| Net cash used in operating activities |
(5,475 | ) | (7,655 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
(509 | ) | (720 | ) | ||||
| Purchase of marketable securities |
(297 | ) | (7,855 | ) | ||||
| Sales and maturities of marketable securities |
4,204 | 6,560 | ||||||
| Net cash used in merger with Horizon Medical Products, Inc. |
(224 | ) | — | |||||
| Capitalization of patent litigation costs |
— | (621 | ) | |||||
| Acquisition of intangibles |
— | (2,650 | ) | |||||
| Note receivable and other assets |
117 | 106 | ||||||
| Net cash provided by (used in) investing activities |
3,291 | (5,180 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from assumption of short term debt |
503 | — | ||||||
| Principle payments on long term debt |
(117 | ) | — | |||||
| Proceeds from issuance of common stock |
288 | 9,274 | ||||||
| Net cash provided by financing activities |
674 | 9,274 | ||||||
| Net decrease in cash and cash equivalents |
(1,510 | ) | (3,561 | ) | ||||
| Cash and cash equivalents at beginning of period |
4,580 | 6,888 | ||||||
| Cash and cash equivalents at end of period |
$ | 3,070 | $ | 3,327 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying unaudited condensed consolidated 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 the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2003 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 consolidated financial statements contain all adjustments (all of which are of a normal recurring nature, including the elimination of intercompany accounts) 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 unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2003 contained in the Company’s annual report on Form 10-K.
2. Business Combination
On July 29, 2004, the Company merged with Horizon Medical Products, Inc. (“Horizon”) in a transaction accounted for under the purchase method of accounting. The combined companies will continue to operate under the name RITA Medical Systems, Inc. The merger was pursued and completed because the management groups and stockholders of each company believe the combined entity will achieve higher sales and profitability than either or both of the pre-merger companies on a stand-alone basis. These factors contributed to a purchase price in excess of the fair value of Horizon’s net tangible and intangible assets acquired and, as a result, the Company has recorded goodwill in connection with this transaction.
Each Horizon common stockholder received 0.4212 of a share of the Company’s common stock for each share of Horizon common stock held. The Company thereby issued approximately 18.7 million shares of its common stock to acquire all issued and outstanding shares of Horizon common stock, and further assumed all outstanding Horizon options and warrants that, upon exercise, will result in the issuance of approximately 3.9 million shares of the Company’s common stock. The fair value of shares issued by the Company was approximately $91.6 million based on a price per share of $4.896, the Company’s average closing price the day the proposed merger was announced (May 13, 2004), the two business days preceding the announcement and the two business days following the announcement. The fair value of options and warrants, all of which were fully vested when assumed by the Company was determined to be approximately $15.4 million using the Black-Scholes valuation model. Costs incurred to effect the merger included as a component of purchase price were $2.3 million. The total purchase price was approximately $109.3 million. The fair value of assets acquired, net of liabilities assumed, was approximately $18.0 million, resulting in goodwill of $91.3 million.
The allocation of purchase price is as follows (in thousands):
| Current assets |
$ | 10,666 | ||
| Property and equipment |
1,312 | |||
| Intangible assets |
27,309 | |||
| Goodwill |
91,339 | |||
| Other assets |
6 | |||
| Current liabilities |
(11,337 | ) | ||
| Debt |
(9,928 | ) | ||
| Other long term liabilities |
(81 | ) | ||
| Net assets |
$ | 109,286 | ||
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The merger was completed on July 29, 2004 and none of Horizon’s results of operations prior to that date are included in the Company’s condensed consolidated statements of operations for the three or nine month periods ended September 30, 2004. However, the Company has pr