UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
|_| 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: 001-16133
DELCATH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1245881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Summer Street, 3rd Floor, Stamford, CT 06905
(Address of principal executive offices)
(203) 323-8668
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of April 19, 2007, 21,358,007 shares of the Company's common stock, $0.01 par
value, were issued and outstanding.
DELCATH SYSTEMS, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION.............................................. 1
Item 1: Condensed Financial Statements (Unaudited)..................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 5
Item 4. Controls and Procedures........................................ 5
PART II: OTHER INFORMATION................................................. 6
Item 1. Legal Proceedings.............................................. 6
Item 1A. Risk Factors................................................... 6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 7
Item 3. Defaults Upon Senior Securities................................ 7
Item 4. Submission of Matters to a Vote of Security Holders............ 7
Item 5. Other Information.............................................. 7
Item 6. Exhibits....................................................... 7
SIGNATURES.................................................................. 8
i
PART I:
FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Condensed Balance Sheets..........................................................F-1
MARCH 31, 2007 AND DECEMBER 31, 2006
Condensed Statements of Operations................................................F-2
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 AND CUMULATIVE FROM
INCEPTION (AUGUST 5, 1988) TO MARCH 31, 2007
Condensed Statements of Cash Flows................................................F-3
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 AND CUMULATIVE FROM
INCEPTION (AUGUST 5, 1988) TO MARCH 31, 2007
Notes to Condensed Financial Statements...........................................F-4
1
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2007 2006
(UNAUDITED) (AUDITED)
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 7,574,247 $ 6,289,723
Certificates of deposit 540,972 2,408,302
Prepaid expenses 311,417 61,917
------------ ------------
Total current assets $ 8,426,636 $ 8,759,942
Property and equipment, net 11,490 3,719
------------ ------------
Total assets $ 8,438,126 $ 8,763,661
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses 275,942 670,367
------------ ------------
Total current liabilities $ 275,942 $ 670,367
Commitments and contingencies - -
Stockholders' equity
Common stock, $.01 par value; 70,000,000 shares authorized $ 212,727 $ 206,608
Additional paid-in capital 46,010,343 44,673,458
Deficit accumulated during development stage (38,060,886) (36,786,772)
------------ ------------
Total stockholders' equity $ 8,162,184 $ 8,093,294
------------ ------------
Total liabilities and stockholders' equity $ 8,438,126 $ 8,763,661
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-1
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
CUMULATIVE FROM
INCEPTION
(AUGUST 5, 1988)
THREE MONTHS ENDED TO
MARCH 31, MARCH 31,
------------------------------ ------------
2007 2006 2007
------------ ------------ ------------
COSTS AND EXPENSES:
General and administrative expenses $ 500,819 $ 561,550 $ 17,920,448
Research and development costs 888,951 766,640 20,666,515
------------ ------------ ------------
Total costs and expenses $ 1,389,770 $ 1,328,190 $ 38,586,963
------------ ------------ ------------
Operating loss $ (1,389,770) $ (1,328,190) $(38,586,963)
Interest income 115,656 144,052 2,069,655
Other income - - 126,500
Interest expense - - (171,473)
------------ ------------ ------------
Net loss $ (1,274,114) $ (1,184,138) $(36,562,281)
============ ============ ============
COMMON SHARE DATA:
Basic and diluted loss per share $ (0.06) $ (0.06)
============ ============
Weighted average number of shares
of common stock outstanding $ 21,004,943 $ 19,205,957
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-2
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CUMULATIVE FROM
INCEPTION
THREE MONTHS ENDED (AUG. 5, 1988)
MARCH 31, TO MARCH 31,
2007 2006 2007
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,274,114) $ (1,184,138) $(36,562,281)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense - 505,282 3,576,110
Stock and warrant compensation expense issued for legal settlement,
consulting services - - 645,711
Depreciation expense 969 1,126 42,548
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Increase in prepaid expenses (249,500) (16,500) (311,417)
Increase in interest receivable - (90,814) -
(Decrease) increase in accounts payable and accrued expenses (394,425) (130,977) 275,942
------------ ------------ ------------
Net cash used in operating activities $ (1,917,070) $ (916,021) $(32,291,222)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (8,740) - $ (54,038)
Purchase of short-term investments - $ (1,800,000) (27,492,042)
Proceeds from maturities of short-term investments 1,867,330 1,047,077 26,951,070
Organization costs - - (42,165)
------------ ------------ ------------
Net cash provided by (used in) investing activities $ 1,858,590 $ (752,923) $ (637,175)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock and exercise of stock options and warrants $ 1,343,004 $ 1,247,047 $ 39,348,318
Repurchases of common stock - - (51,103)
Dividends paid - - (499,535)
Proceeds from short-term borrowings - - 1,704,964
------------ ------------ ------------
Net cash provided by financing activities $ 1,343,004 $ 1,247,047 $ 40,502,644
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents
1,284,524 (421,897) 7,574,247
Cash and cash equivalents at beginning of period 6,289,723 1,704,131 -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 7,574,247 $ 1,282,234 $ 7,574,247
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest - - $ 171,473
============ ============ ============
SUPPLEMENTAL NON-CASH ACTIVITIES:
Cashless exercise of stock options $ 91,166
============
Conversion of debt to common stock - - $ 1,704,964
============ ============ ============
Common stock issued for preferred stock dividends - - $ 999,070
============ ============ ============
Conversion of preferred stock to common stock - - $ 24,167
============ ============ ============
Common stock issued as compensation for stock sale - - $ 510,000
============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-3
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS
Delcath Systems, Inc. (the "Company") is a development stage company founded in
1988 for the purpose of developing and marketing a proprietary drug delivery
system capable of introducing and removing high dose chemotherapy agents to a
diseased organ system, while greatly inhibiting their entry into the general
circulation system. It is hoped that the procedure will result in a meaningful
treatment for cancer. In November 1989, the Company was granted an
Investigational Device Exemption (IDE) and an Investigational New Drug (IND)
status for its product by the Food and Drug Administration (FDA). The Company is
seeking to complete clinical trials in order to obtain separate FDA pre-market
approvals for the use of its delivery system using Melphalan, a chemotherapeutic
agent, to treat malignant melanoma that has spread to the liver.
NOTE 2: BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying condensed financial statements are unaudited and were prepared
by the Company in accordance with accounting principles generally accepted in
the United States of America ("GAAP"). Certain information and footnote
disclosures normally included in the Company's annual financial statements have
been condensed or omitted. The interim financial statements, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair statement of the results for the interim periods ended
March 31, 2007 and 2006, and cumulative from inception (August 5, 1988) to March
31, 2007.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These interim
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 2006, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2006 as filed with the Securities and Exchange Commission (the
"SEC") on March 16, 2007.
NOTE 3: COSTS AND EXPENSES
RESEARCH AND DEVELOPMENT COSTS
Research and development costs include the costs of materials, personnel,
outside services and applicable indirect costs incurred in development of the
Company's proprietary drug delivery system. All such costs are charged to
expense when incurred.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs include the Company's general and
administrative operating expenses.
NOTE 4: STOCKHOLDERS' EQUITY
The Company received a net amount of $1,343,004 upon the exercise of stock
options for 611,850 shares during the three months ended March 31, 2007. Of
those options: (i) 100,000 were exercised at a price of $0.71 per share, (ii)
120,000 were exercised at a price of $1.03 per share, (iii) 20,000 were
exercised at a
F-4
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
price of $1.32 per share, (iv) 200,000 were exercised at a price of $2.78 per
share, (v) 100,000 were exercised at a price of $3.28 per share, and (vi) 71,850
were exercised at a price of $3.31 per share.
The following table sets forth changes in stockholders' equity during the three
months ended March 31, 2007:
COMMON STOCK,
$0.01 PAR VALUE
ISSUED AND OUTSTANDING DEFICIT ACCUMULATED
------------------------------- ADDITIONAL PAID DURING DEVELOPMENT
NO. OF SHARES AMOUNT IN CAPITAL STAGE TOTAL
------------- ------------ ------------ ------------ ------------
Balance at December 31, 2006 20,660,763 $ 206,608 $ 44,673,458 $(36,786,772) $ 8,093,294
Exercise of stock options 611,850 6,119 1,336,885 - 1,343,004
Net loss for three months ended
March 31, 2007 (1,274,114) (1,274,114)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2007 21,272,613 $ 212,727 $ 46,010,343 $(38,060,886) $ 8,162,184
============ ============ ============ ============ ============
NOTE 5: STOCK OPTION PLAN
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
(SFAS 123R). This Statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), and supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and its
related implementation guidance. SFAS 123R establishes accounting for equity
instruments exchanged for employee services. Under the provisions of SFAS 123R,
share-based compensation is measured at the grant date, based upon the fair
value of the award, and is recognized as an expense over the option holders'
requisite service period (generally the vesting period of the equity grant).
Prior to January 1, 2006, the Company accounted for share-based compensation to
employees in accordance with APB 25, as permitted by SFAS No. 123, and,
accordingly, did not recognize compensation expense for the issuance of options
with an exercise price equal to or greater than the market price at the date of
grant. The Company also followed the disclosure requirements of SFAS 123 as
amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." Effective January 1, 2006, the Company adopted the modified
prospective approach and, accordingly, prior period amounts have not been
restated. Under this approach, the Company is required to record compensation
cost for all share-based payments granted after the date of adoption based upon
the grant date fair value, estimated in accordance with the provisions of SFAS
123R, and for the unvested portion of all share-based payments previously
granted that remain outstanding based on the grant date fair value, estimated in
accordance with the original provisions of SFAS 123. The Company has expensed
its share-based compensation for share-based payments granted after January 1,
2006 under the ratable method, which treats each vesting tranche as if it were
an individual grant.
The Company periodically grants stock options for a fixed number of shares of
common stock to its employees, directors and non-employee contractors, with an
exercise price greater than or equal to the fair market value of our common
stock at the date of the grant. The Company estimates the fair value of stock
options using a Black-Scholes valuation model. Key inputs used to estimate the
fair value of stock
F-5
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
options include the exercise price of the award, the expected post-vesting
option life, the expected volatility of our stock over the option's expected
term, the risk-free interest rate over the option's expected term, and our
expected annual dividend yield. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by persons who
receive equity awards. There were no share-based grants in 2007.
The required adoption of SFAS No. 123R as of January 1, 2006 has significantly
increased compensation expense for future grants. The actual impact on future
years will be dependent on a number of factors, including our stock price and
the level of future grants and awards. In addition, costs related to accounting
and valuation services of stock options currently outstanding in accordance with
SFAS No. 123R would have been cost prohibitive to the Company if the Company had
not adopted certain measures. Based on these considerations and after discussion
of applicable accounting literature, the Compensation Committee of the Board of
Directors approved accelerating the vesting of all unvested stock options
effective January 1, 2006. The acceleration of vesting resulted in the
recognition of a non-cash compensation expense of $505,282 on January 1, 2006
which is included in costs and expenses in the statements of operations for
2006.
The Company established its Incentive Stock Option Plan, Non-Incentive Stock
Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan and 2004 Stock
Incentive Plan (collectively, the "Plans"), under which stock options, stock
appreciation rights, restricted stock, and stock grants may be awarded. A stock
option grant allows the holder of the option to purchase a share of the
Company's Common Stock in the future at a stated price. The Plans are
administered by the Compensation and Stock Option Committee of the Board of
Directors, which determines the individuals to whom the options shall be granted
as well as the terms and conditions of each option grant, the option price and
the duration of each option.
During 2000, 2001 and 2004, respectively, the 2000 and 2001 Stock Option Plans
and 2004 Stock Incentive Plan became effective. Options granted under the Plans
vest as determined by the Company and expire over varying terms, but not more
than five years from the date of grant. All currently outstanding options are
fully vested. Stock option activity for the three-month period ended March 31,
2007 is as follows:
THE PLANS
----------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
EXERCISE PRICE AVERAGE REMAINING LIFE
STOCK OPTIONS PER SHARE EXERCISE PRICE (YEARS)
------------- -------------- ---------------- ----------------
Outstanding at December 31, 2006 1,465,650 $0.71 - $3.59 $2.87 3.57
Granted - - -
Expired 202,500 $3.59 $3.59
Exercised 611,850 $0.71 - $3.31 $2.19
-------------
Outstanding at March 31, 2007 651,300 $1.03 - $3.59 $3.28 3.86
=============
F-6
DELCATH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 6: INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 9"
("FIN No. 48"), on January 1, 2007. FIN No. 48 requires that the impact of tax
positions be recognized in the financial statements if they are more likely than
not of being sustained upon examination, based on the technical merits of the
position. As discussed in the consolidated financial statements in the 2006 Form
10-K, the Company has a valuation allowance against the full amount of its net
deferred tax assets. The Company currently provides a valuation allowance
against deferred tax assets when it is more likely than not that some portion,
or all of its deferred tax assets, will not be realized. The Company has not
recognized any unrecognized tax benefits in their balance sheet under the
provisions of FIN No. 48. In addition, there is no impact to accumulated deficit
at the date of adoption as a result of the implementation of FIN No. 48.
The Company is subject to U.S. federal income tax as well as income tax of
certain state jurisdictions. The Company has not been audited by the I.R.S. or
any states in connection with income taxes. The periods from 2004 - 2006 remain
open to examination by the I.R.S. and state authorities.
We recognize interest accrued related to unrecognized tax benefits in interest
expense. Penalties, if incurred, are recognized as a component of income tax
expense.
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements of our and
management's expectations, intentions, plans, objectives and beliefs, including
those contained in or implied by "Management's Discussion and Analysis of
Financial Condition and Results of Operations," are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, that is subject to certain events, risks and uncertainties that may be
outside our control. These forward-looking statements may be identified by the
use of words such as "expects," "anticipates," "intends," "plans" and similar
expressions. They include statements of our future plans and objectives for our
future operations and statements of future economic performance, information
regarding our expansion and possible results from expansion, our expected
growth, our capital budget and future capital requirements, the availability of
funds and our ability to meet future capital needs, the realization of our
deferred tax assets, and the assumptions described in this report underlying
such forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including without limitation, those described in the context of such
forward-looking statements, our expansion strategy, our ability to achieve
operating efficiencies, industry pricing and technology trends, evolving
industry standards, domestic and international regulatory matters, general
economic and business conditions, the strength and financial resources of our
competitors, our ability to find and retain skilled personnel, the political and
economic climate in which we conduct operations, the risks discussed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed
with the SEC on March 16, 2007 (the "2006 Form 10-K"), under Item 1,
"Description of Business," and other risk factors described from time to time in
our other documents and reports filed with the Securities and Exchange
Commission (the "SEC"). We do not assume any responsibility to publicly update
any of our forward-looking statements regardless of whether factors change as a
result of new information, future events or for any other reason. We advise you
to review any additional disclosures we make in our Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K filed with the
SEC.
OVERVIEW
Since our founding in 1988 by a team of physicians, we have been a development
stage company engaged primarily in developing and testing the Delcath system for
the treatment of liver cancer. A substantial portion of our historical expenses
have been for the development of our medical device and the clinical trials of
our product, and the pursuit of patents worldwide, as described in our 2006 Form
10-K under Item 1, "Patents, Trade Secrets and Proprietary Rights." We expect to
continue to incur significant losses from costs for product development,
clinical studies, securing patents, regulatory activities, manufacturing and
establishment of a sales and marketing organization without any significant
revenues. A detailed description of the cash used to fund historical operations
is in the financial statements and the notes thereto. Without an FDA-approved
product and commercial sales, we will continue to be dependent upon existing
cash and the sale of equity or debt to fund future activities. While the amount
of future net losses and time required to reach profitability are uncertain, our
ability to generate significant revenue and become profitable will depend on our
success in commercializing our device.
During 2001, Delcath initiated the clinical trial of the system for isolated
liver perfusion using the chemotherapeutic agent Melphalan. Enrollment of new
patients in the Phase I trial was completed in 2003.
In 2004, we commenced a Phase II clinical trial protocol for the study of the
Delcath drug delivery system for inoperable primary liver cancer and
adenocarcinomas and neuroendocrine cancers that have metastasized to the liver
using Melphalan.
2
In 2006, we started enrolling and treating patients in a Phase III protocol for
the study of the Delcath drug delivery system for inoperable melanoma in the
liver using Melphalan under the Fast Track and SPA approved protocol.
Over the next 12 months, we expect to continue to incur substantial expenses
related to the research and development of our technology, including Phase III
and Phase II clinical trials using Melphalan with the Delcath system. Additional
funds, when available, will be committed to pre-clinical and clinical trials for
the use of other chemotherapy agents with the Delcath system for the treatment
of liver cancer and other cancers, and the development of additional products
and components. We will also continue efforts to qualify additional sources of
the key components of our device, in an effort to further reduce manufacturing
costs and minimize dependency on a single source of supply.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007
The Company has operated at a loss for its entire history. We had a net loss for
the three months ended March 31, 2007, of $1,274,114, which is $89,976 more than
the net loss from continuing operations for the same period in 2006. This
increased loss was primarily due to additional expenses relating to a Settlement
Agreement in connection with the lawsuit brought by the Company against Jonathan
Foltz, which was previously disclosed in our 2006 Form 10-K.
General and administrative expenses decreased from $561,550 during the three
months ended March 31, 2006, to $500,819 for the three months ended March 31,
2007, or 10.8%. This decrease is primarily attributed to the charge to
operations of share-based compensation for options granted in November 2006,
which occurred during the three months ended March 31, 2006 as part of the
adoption of SFAS 123R as explained in "Note 5: Stock Option Plan" of the Notes
to Condensed Financial Statements filed with this Report. There was no similar
charge during the three months ended March 31, 2007.
During the first quarter of 2007, we incurred $888,951 in research and
development costs, as compared to $766,640 during the first quarter of 2006.
This increase is primarily due to expenses relating to a five year extension to
the Company's Cooperative Research and Development Agreement ("CRADA") with the
National Cancer Institute ("NCI") that expired in December 2006. This extension
was quite important in continuing and expanding the collaboration between the
Company and the NCI, but will result in greater costs to the Company.
Interest income shown is from our money market and CD investments. During the
three months ended March 31, 2007, the Company had interest income of $115,656,
as compared to interest income of $144,052, or a 19.7% change, for the same
period in 2006. This decrease is primarily due to a reduced cash position in
2007 from that in 2006. There was no other income during the three months ended
March 31, 2007 or the comparable period in 2006.
3
LIQUIDITY AND CAPITAL RESOURCES
The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a loss for its entire history and there can be no
assurance of its ever achieving consistent profitability. The Company is not
projecting any capital expenditures that will significantly affect the Company's
liquidity during the next 12 months. However, our future liquidity and capital
requirements will depend on numerous factors, including the progress of our
research and product development programs, including clinical studies; the
timing and costs of making various United States and foreign regulatory filings,
obtaining approvals and complying with regulations; the timing and effectiveness
of product commercialization activities, including marketing arrangements
overseas; the timing and costs involved in preparing, filing, prosecuting,
defending and enforcing intellectual property rights; and the effect of
competing technological and market developments. In addition, the Company
intends to hire one additional employee.
At March 31, 2007, we had cash and cash equivalents of $7,574,247, as compared
to $6,289,723 at December 31, 2006 and $1,282,234 at March 31, 2006. Because
money market rates have been equal to or greater than what the Company could
receive in CD investments, nearly all of our funds are currently invested in
money market accounts which are shown in our financial statements as part of
"Cash and Cash Equivalents." In the quarter ended March 31, 2006, the majority
of our funds had been invested in CDs that became due during 2006.
During the three months ended March 31, 2007, we used $1,917,070 of cash in our
operating activities. This amount compares to $916,021 used in our operating
activities during the comparable three-month period in 2006. The increase of
$1,001,047 was primarily due to payments to NCI as part of our newly extended
CRADA agreement, and final payments to various parties as part of the
settlements of the lawsuits that had commenced in 2006.
We have funded our operations through a combination of private placements of our
securities and through the proceeds of our public offerings in 2000 and 2003.
Please see the detailed discussion of our various sales of securities described
in Note 2 to our 2006 financial statements in our 2006 Form 10-K. In addition,
we received proceeds of approximately $5.6 million from private placements we
completed in 2004, approximately $2.2 on exercise of warrants and options in
2004, approximately $2.5 million from a private placement we completed in 2005,
approximately $5.5 million on exercise of warrants and options in 2005; and
approximately $5.1 million on exercise of warrants and options in 2006. In the
quarter ended March 31, 2007, we received approximately $1.3 million on exercise
of warrants and options.
While the Company has sufficient capital to conduct its operations through the
end of 2007, it requires additional capital for research and development and for
additional clinical trials. Accordingly, simultaneously with the filing of this
Report, the Company is filing a Registration Statement on Form S-3 (the
"Registration Statement") to register an offering of common stock, preferred
stock, debt securities, warrants, stock purchase contracts and stock purchase
units, as may from time to time be issued, with a maximum offering price of
$17,200,000, in order to raise additional funds. However, there are no
assurances that the Registration Statement will become effective or that the
Company will successfully consummate any transactions under the offerings, nor
can the Company estimate when, if such offerings are successful, these offerings
may close and capital will become available to the Company. If the offerings are
successful, the Company intends to use the funds raised for research and
development, furthering our clinical trials, FDA compliance, and general
corporate purposes, including working capital.
4
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 1 to the Company's financial statements contained
in the Company's 2006 Form 10-K. The Company is still in the development stage
and has no revenues, trade receivables, inventories, or significant fixed or
intangible assets, and therefore has very limited opportunities to choose among
accounting policies or methods. In many cases, the Company must use an
accounting policy or method because it is the only policy or method permitted
under GAAP. The Company has not adopted any significant new accounting policies
or modified the application of existing policies during the three months ended
March 31, 2007.
Additionally, the Company devotes substantial resources to clinical trials and
other research and development activities relating to obtaining FDA and other
approvals for the Delcath system, the cost of which is required to be charged to
expense as incurred. This further limits the Company's choice of accounting
policies and methods. Similarly, management believes there are very limited
circumstances in which the Company's financial statement estimates are
significant or critical.
The Company considers the valuation allowance for the deferred tax assets to be
a significant accounting estimate. In applying SFAS No. 109, "Accounting for
Income Taxes," management estimates future taxable income from operations and
tax planning strategies in determining if it is more likely than not that the
Company will realize the benefits of its deferred tax assets.
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to
the approach described in SFAS No. 123. However, SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The Company adopted SFAS 123R in 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments. The Company's
marketable securities consist of short-term and/or variable rate instruments
and, therefore, a change in interest rates would not have a material impact on
the value of these securities.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and Chief Financial Officer
as of the end of the period covered by this report, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded,
processed, summarized and reported within the time periods specified in the
rules and
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forms issued by the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer or officers and its principal
financial officer or officers, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation described above that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II:
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been involved in a legal proceeding that was originally filed on August
12, 2005 in the United States District Court, District of Connecticut against
Elizabeth L. Enney. The named plaintiffs are Delcath Systems, Inc. and M.S. Koly
(former CEO, President, Treasurer and Director of Delcath), individually and as
a Director of Delcath Systems, Inc. The operative complaint seeks damages for
libel. In May 2006, the libel claims were dismissed for lack of personal
jurisdiction, and in July 2006, Plaintiffs filed a new libel claim in the United
States District Court for the Northern District of Georgia. On November 1, 2006,
Defendant filed a Motion for Judgment claiming that Plaintiffs' complaint and
the attachments thereto, on their face, were insufficient to support Plaintiffs'
libel claim as a matter of law. On December 22, 2006, Defendant filed a motion
under Rule 11 of the Federal Rules of Civil Procedure seeking an order directing
payment to the Defendant of reasonable attorneys' fees and expenses by
Plaintiff. On April 19, 2007, the entire action was ordered and adjudged to be
dismissed, and the Defendant was granted recovery of its costs.
ITEM 1A. RISK FACTORS
Our 2006 Form 10-K contains a detailed discussion of certain risk factors that
could materially adversely affect our business, operating results or financial
condition. The following risk factor has been amended and updated to reflect
recent events, and should be read in conjunction with the risk factors and
information disclosed in the 2006 Form 10-K.
OUR COMMON STOCK IS LISTED ON THE NASDAQ CAPITAL MARKET. IF WE FAIL TO MEET THE
REQUIREMENTS OF THE NASDAQ CAPITAL MARKET FOR CONTINUED LISTING, OUR COMMON
STOCK COULD BE DELISTED.
Our common stock is currently listed on the NASDAQ Capital Market. To keep such
listing, we are required to maintain: (i) a minimum bid price of $1.00 per
share, (ii) a certain public float, (iii) a certain number of round lot
shareholders and (iv) one of the following: a net income from continuing
operations (in the latest fiscal year or two of the three last fiscal years ) of
at least $500,000, a market value of listed securities of at least $35 million
or a stockholders' equity of at least $2.5 million. We were notified by the
NASDAQ Capital Market on one occasion that we failed to meet the minimum bid
price requirement and on two occasions that we did not meet the requirement that
we meet one of the following conditions: that the market value of our common
stock be at least $35 million; that we have stockholders' equity of not less
than $2.5 million; or that we meet certain income tests. We have since complied
with these requirements.
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We are also required to maintain certain corporate governance requirements. On
April 30, 2007, we were notified by NASDAQ that due to the resignations of two
of our independent directors on April 16, 2007, we no longer comply with
NASDAQ's requirements to have a majority of independent directors on our Board
of Directors, and for our Audit Committee to have three members. The Company
fully intends to regain compliance with both of these requirements within the
cure period allowed by NASDAQ (i.e., by October 13, 2007). If we do not regain
compliance by then, our common stock could be delisted from the NASDAQ Capital
Market. In addition, if we fail to meet any of the other applicable criteria,
our common stock could be delisted from the NASDAQ Capital Market.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
There were no matters required to be disclosed in a Current Report on Form 8-K
during the fiscal quarter covered by this report that were not so disclosed.
There were no changes to the procedures by which security holders may recommend
nominees to the Company's Board of Directors since the Company last disclosed
such procedures in our proxy statement filed in connection with our annual
meeting of stockholders to be held on June 5, 2007.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
May 10, 2007 DELCATH SYSTEMS, INC.
(Registrant)
/S/ PAUL M. FEINSTEIN
---------------------------------------------
Paul M. Feinstein
Chief Financial Officer and Treasurer (on
behalf of the registrant and as the principal
financial and accounting officer of the
registrant)
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