UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2004
[ ] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from ____________ to ____________
Commission file number: 001-16133
DELCATH SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 06-1245881
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Summer Street, 3rd Floor, Stamford, CT 06905
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(Address of Principal Executive Offices)
(203) 323-8668
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 October 31, 2004, there were 12,039,571 shares of the Issuer's common
stock, $0.01 par value, issued and outstanding.
Transitional Small Business Disclosure
Format (check one): Yes _____ No __X__
DELCATH SYSTEMS, INC.
Index
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheet - September 30, 2004 3
Statements of Operations for the Three and Nine Months Ended 4
September 30, 2004 and 2003 and Cumulative from Inception
(August 5, 1988) to September 30, 2004
Statements of Cash Flows for the Nine Months Ended 5
September 30, 2004 and 2003 and Cumulative from Inception
(August 5, 1988) to September 30, 2004
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 9
Item 3. Controls and Procedures 11
Part II. OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of 11
Proceeds
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
Delcath Systems, Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)
September 30, 2004
September 30,
Assets 2004
------------------
Current assets:
Cash and cash equivalents $ 920,590
Certificate of deposit 3,017,321
Interest receivable 44,795
Prepaid insurance 17,216
------------------
Total current assets 3,999,922
Furniture and fixtures, net 15,121
Due from affiliate 24,000
------------------
Total assets $ 4,039,043
==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 513,343
------------------
Total current liabilities 513,343
------------------
Stockholders' equity
Common stock 116,859
Additional paid-in capital 25,477,468
Deficit accumulated during development stage (22,068,627)
------------------
(22,024,258)
Total stockholders' equity 3,525,700
------------------
Total liabilities and stockholders'
equity $ 4,039,043
==================
See accompanying notes to condensed financial statements
3
Delcath Systems, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
Cumulative
From Inception
Three Months Ended Nine Months Ended (August 5, 1988)
September 30, September 30, to
2004 2003 2004 2003 September 30, 2004
-------------------------- ------------------------------ ------------------
Costs and expenses:
General and administrative expenses $ 206,975 $ 169,816 $ 714,263 $ 591,604 $ 6,725,309
Research and development costs 644,854 508,428 1,717,028 1,168,434 14,726,524
-------------------------- ------------------------------ -------------
Total costs and expenses 851,829 678,244 2,431,291 1,760,038 21,451,833
-------------------------- ------------------------------ -------------
Operating loss (851,829) (678,244) (2,431,291) (1,760,038) (21,451,833)
Other income (expense):
Interest income 23,577 24,133 66,880 38,671 1,053,284
Interest expense - - - - (171,473)
-------------------------- ------------------------------ -------------
Net loss $ (828,252) $ (654,111) $ (2,364,411) $ (1,721,367) $(20,570,022)
============= ========== ============= ============ ============
Common share data:
Basic and diluted loss
per share $ (0.07) $ (0.07) (0.22) $ (0.26)
============= ========== ============= ===========
Weighted average number
of shares of common 11,616,406 9,721,662 10,983,188 6,681,195
============= ========== ============= ===========
stock outstanding
See accompanying notes to condensed financial statements
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative
Nine Months Ended from inception
September 30, (August 5, 1988)
2004 2003 to September 30,
2004
-------------------------- -----------------
Cash flows from operating activities:
Net loss $(2,364,411) $ (1,721,367) $ (20,570,022)
Adjustments to reconcile net
loss to net cash used in operating activities
Stock option compensation expense 5,222 - 2,525,392
Stock and warrant compensation expense
issued for consulting services - - 236,286
Depreciation expense 4,012 3,744 30,178
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 30,284 62,043 (17,216)
(Increase) decrease in interest receivable (30,523) (12,535) (44,795)
Due from affiliate - - (24,000)
Increase in accounts
payable and accrued expenses 213,996 161,744 474,195
---------------------------- ----------------
Net cash used in operating activities (2,141,420) (1,506,371) (17,347,816)
---------------------------- ----------------
Cash flows from investing activities:
Purchase of furniture and fixtures (5,347) (5,029) (45,300)
Purchase of short-term investments (2,000,000) (2,000,000) (6,917,321)
Proceeds from maturities of short-term investments 1,014,575 370,000 3,914,575
Organization costs - - (42,165)
---------------------------- ----------------
Net cash used in
investing activities (990,772) (1,635,029) (3,090,210)
---------------------------- ----------------
Cash flows from financing activities:
Deferred costs in connection with a proposed
financing transaction - 238,571 -
Net proceeds from sale of stock and
exercise of stock options and warrants 3,739,167 2,783,916 20,204,291
Repurchases of outstanding common stock - (51,103)
Dividends paid - - (499,535)
Proceeds from short-term borrowings - - 1,704,964
---------------------------- ----------------
Net cash provided by
financing activities 3,739,167 3,022,487 21,358,617
---------------------------- ----------------
Increase (decrease) in cash and cash equivalents 606,975 (118,913) 920,590
Cash and cash equivalents at beginning of period 313,615 1,063,650 -
---------------------------- ----------------
Cash and cash equivalents at end of period $ 920,590 $ 944,737 $ 920,590
============================ ================
Cash paid for interest $ - $ - $ 171,473
============================ ================
Supplemental disclosure of non-cash activities:
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
5
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 which was
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
IDE (Investigational Device Exemption) and an IND status (Investigational New
Drug) for its product by the FDA (Food and Drug Administration). The Company is
seeking to complete clinical trials in order to obtain separate FDA premarket
approvals for the use of its delivery system using doxorubicin and melphalan,
chemotherapeutic agents, to treat inoperable tumors in the liver.
Note 2: Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America. 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 September 30, 2004 and
2003 and cumulative from inception (August 5, 1988) to September 30, 2004.
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, 2003, which are
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003 as filed with the Securities and Exchange Commission.
Note 3: 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.
Note 4: Sale of Common Stock and Warrants
During the nine months ended September 30, 2004, the Company received net
proceeds of $233,291 as 266,505 of the warrants the Company issued in its public
offering in 2003 were exercised as were the 20,265 warrants the Company issued
in a private placement in 2002.
In March 2004 the Company completed the sale of 1,197,032 shares of its common
stock and the issuance of warrants to purchase 299,258 common shares at $3.01
per share in a private placement to institutional and accredited investors. The
Company received net proceeds of $2,672,595 in this transaction and agreed to
register the shares of common stock and the shares issuable upon exercise of the
warrants under the Securites Act of 1933.
In April 2004 the Company completed an additional private placement of 290,457
shares of common stock and an aggregate of 72,614 warrants to purchase shares of
its common stock, under the same terms and conditions
6.
as those sold in March 2004 for which it received net proceeds of $638,035. The
Company also received during the nine months ended September 30, 2004 net
proceeds of $170,673 upon the exercise of some of the Representative Unit
Purchase Warrants that were issued to underwriters as part of the 2003 public
offering.
The following table sets forth changes in stockholders' equity during the nine
months ended September 30, 2004:
Common Stock, $0.01 Par Value Deficit Accumulated
Outstanding Additional During
-----------------------------
No. of shares Amount Paid in Capital Development Stage Total
------------- ------ --------------- ------------------ ------
Balance at December 31, 2003 9,744,632 $97,446 $21,777,065 $(19,704,216) $2,170,295
Sale of common stock and warrants
in March 2004, net of related costs 1,197,032 11,970 2,660,625 2,672,595
Sale of common stock and warrants
in April 2004, net of related costs 290,457 2,905 635,130 638,035
Exercise of 2002 Warrants 20,265 203 26,547 26,750
Exercise of 2003 Warrants 266,505 2,665 203,876 206,541
Exercise of 2003 Representative's Unit 167,025 1,670 169,003 170,673
Warrants
Stock option compensation expense 5,222 5,222
Net loss for nine months ended
September 30, 2004
(2,364,411) (2,364,411)
---------- -------- ---------- ------------- ------------
Balance at September 30, 2004 11,685,916 $116,859 $25,477,468 $(22,068,627) $3,525,700
========== ======== =========== ============== ===========
Note 5: Stock Option Plan
The Company has historically accounted for its employee stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense is recorded on the date of grant only if the
current fair market value of the underlying stock exceeds the exercise price.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income (loss) and pro
forma earnings (loss) per share disclosures for employee stock option grants as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure required by SFAS No. 123.
Following the methodology of SFAS No. 123 regarding compensation costs based on
the fair value for all employee stock option grants, the net loss and net loss
per share for the three and nine months ended September 30, 2004 and 2003 would
have been increased to the pro forma amounts indicated as follows:
7.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- ------------------------------------
2004 2003 2004 2003
--------------- ----------------- ----------------- -------------
Net loss, as reported $ (828,252) $ (654,111) $ (2,364,411) $ (1,721,367)
Stock-based employee
compensation expense included
in net loss, net of related
tax effects 0 0 0 0
Stock-based employee
compensation determined under
the fair value based method,
net of related tax effects (25,392) (18,653) (76,175) (50,063)
--------------- ----------------- ---------------- -------------
Pro forma net loss $ (853,644) $ (672,764) $ (2,440,586) $ (1,771,430)
=============== ================= ================ =============
Loss per share (basic and diluted):
As reported $ (0.07) $ (0.07) $ (0.22) $ (0.26)
Pro forma (0.07) (0.07) (0.22) (0.27)
Note 6: Subsequent Event
On October 1, 2004, the Company issued a notice of redemption to holders of the
2003 Redeemable Common Stock Purchase Warrants. This notice, issued in
accordance with the terms of the Warrants, stated that the Warrants would be
redeemed as of 5:00 P.M., New York time, on November 3, 2004 (the "Redemption
Date') and that any 2003 Warrant not properly exercised by the Redemption Date
would thereafter represent only the right to receive the redemption price of
$0.01 for each 2003 Warrant. As of October 1, 2004, there were 1,898,070
Warrants outstanding.
8.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) Plan of Operation
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements which are subject to certain
risks and uncertainties that can cause actual results to differ materially from
those described. Factors that may cause such differences include, but are not
limited to, uncertainties relating to our ability to successfully complete Phase
III clinical trials and secure regulatory approval of our current or future
drug-delivery system and uncertainties regarding our ability to obtain financial
and other resources for any research, development and commercialization
activities. These factors, and others, are discussed from time to time in our
filings with the Securities and Exchange Commission. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
they are made. We undertake no obligation to publicly update or revise these
forward-looking statements to reflect events or circumstances after the date
they are made.
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, the clinical trials of our
product and the vigorous pursuit of patents worldwide, which now total nine. We
expect to continue to incur significant losses from expenditures for product
development, clinical studies, securing patents, regulatory activities,
manufacturing and establishment of a sales and marketing organization without
any significant revenues. 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 the
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.
We have entered into arrangements with the Sydney Melanoma Unit of the
University of Sydney, Sydney Cancer Centre to recruit patients for a Phase III
study of the Delcath drug delivery system using doxorubicin to treat malignant
melanoma that has spread to the liver and these trials have been started. We are
currently treating and recruiting patients and are in discussions with other
sites worldwide.
During 2001, we initiated the clinical trial of the system for isolated liver
perfusion using the chemotherapy agent, melphalan. The Phase I clinical trial at
the National Cancer Institute ("NCI") marked an expansion in the potential
labeled usage beyond doxorubicin, the chemotherapy agent used in our initial
clinical trials. The Phase I trial using melphalan has been completed.
NCI and the Company prepared clinical trial protocols for Phase II trials using
melphalan, based on the data collected in the Phase I study. Enrollment and
treatment of patients by the NCI in the Phase II studies began during this
quarter.
Based on recommendations by a panel of leading medical oncologists and surgeons
convened by the Company, the Company has drafted a Phase I protocol to treat
non-operable colorectal cancer in the liver with a high-dose hepatic infusion of
melphalan. This protocol is being reviewed by several major hospitals.
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
clinical trials using doxorubicin with the Delcath system and Phase II clinical
trials using melphalan with the Delcath system. Additional funds, when and if
9.
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 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.
Liquidity and Capital Resources
We believe that our available funds will be sufficient to meet our anticipated
needs for working capital and capital expenditures at least through 2005. The
Company is not projecting any capital expenditures that will significantly
affect the Company's liquidity during the next 12 months. The Company has
recently hired one additional employee to assist with regulatory affairs.
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.
The Company's future results are subject to substantial risks and uncertainties.
We have operated at a loss for our entire history and we may never achieve
consistent profitability. We expect to require additional working capital in the
future and such working capital may not be available on acceptable terms, if at
all. In addition, we may need additional capital in the future to fully
implement our business strategy.
During the nine months ended September 30, 2004, the Company had stock issuances
together with exercises of previously issued warrants. Please see Note 4 to the
September 30, 2004 Condensed Financial Statements included in Part I of this
filing and incorporated herein by reference for a complete description of such
issuances together with receipt of proceeds. We plan to use the net proceeds to
fund, in part, the Phase III clinical trial using doxorubicin and the Phase II
clinical trial at NCI using melphalan.
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.
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 its Annual
Report on Form 10-KSB for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission. The Company has not adopted any significant
new accounting policies during the nine months ended September 30, 2004.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
Not Applicable.
(c) Off-balance Sheet Arrangements
None
10.
Item 3. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and its Chief Financial
Officer as of the end of the period covered by this report, the Company's Chief
Executive Officer and its 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 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. 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
Securities 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.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
PART II
Other Information
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) On August 26, 2004 and September 23, 2004, the Company sold an
aggregate of 88,605 shares of its Common Stock and issued an aggregate of 88,605
Redeemable Common Stock Purchase Warrants upon the exercise of 17,721
Representative's Unit Warrants that were issued in connection with the Company's
underwritten public offering in 2003. The aggregate purchase price for such
shares and warrants was $90,554. The sales of these shares and warrants were
made in transactions exempt from registration under Rule 506 under the
Securities Act of 1933, as amended, to purchasers each of whom qualified as an
"accredited investor" within the meaning of Rule 501 thereunder. No underwriting
costs were associated with these transactions.
(b) Not applicable.
(c) Not applicable.
11.
Item 6. Exhibits
31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14.
31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14.
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.
12.
Signatures
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DELCATH SYSTEMS, Inc.
(Registrant)
November 12 , 2004 /s/ PAUL M. FEINSTEIN
------------------------------
Paul M. Feinstein
Chief Financial Officer (on behalf of
the registrant and as the principal
financial and accounting officer
of the registrant)
13.
EXHIBIT INDEX
No. Description
--- -----------
31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14.
31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14.
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.