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, 2003
[ ] Transition report under 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.
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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)
As of September 30, 2003, there were 9,744,632 shares of the Issuer's common
stock, $.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, 2003 3
Statements of Operations for the Three and Nine Months Ended 4
September 30, 2003 and 2002 and Cumulative from Inception
(August 5, 1988) to September 30, 2003
Statements of Cash Flows for the Nine Months Ended 5
September 30, 2003 and 2002 and Cumulative from Inception
(August 5, 1988) to September 30, 2003
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 9
Item 3. Controls and Procedures 10
Part II. OTHER INFORMATION
Item 5. Other Information 11
Signatures 12
2
Delcath Systems, Inc.
Condensed Balance Sheet
(Unaudited)
September 30, 2003
September 30,
Assets 2003
--------------
Current assets:
Cash and cash equivalents $ 944,737
Certificate of deposit 2,000,000
Interest receivable 17,941
Prepaid insurance 34,540
-------------
Total current assets 2,997,218
Furniture and fixtures, net 15,035
Due from affiliate 24,000
-------------
Total assets $ 3,036,253
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 336,915
-------------
Total current liabilities 336,915
-------------
Stockholders' equity
Common stock 97,446
Additional paid-in capital 21,777,064
Deficit accumulated during development stage (19,175,172)
--------------
Total stockholders' equity 2,699,338
--------------
Total liabilities and stockholders'
equity $ 3,036,253
==============
See accompanying notes to financial statements
3
Delcath Systems, Inc.
Condensed Statements of Operations
(Unaudited)
Cumulative
From Inception
Three Months Ended Nine Months Ended (August 5, 1988)
September 30, September 30, to
2003 2002 2003 2002 September 30, 2003
-------------------------- ------------------------------ ------------------
Costs and expenses:
General and administrative expenses $ 169,816 $ 128,889 $ 591,604 $ 591,287 $ 5,894,913
Research and development costs 508,428 326,626 1,168,434 886,802 12,579,315
-------------------------- -------------- -------------- ------------------
Total costs and expenses 678,244 455,515 1,760,038 1,478,089 18,474,228
-------------------------- ------------------------------ ------------------
Operating loss (678,244) (455,515) (1,760,038) (1,478,089) (18,474,228)
Interest income 24,133 24,260 38,671 72,956 969,134
Interest expense - - - - (171,473)
-------------------------- ------------------------------ ------------------
Net loss $ (654,111) $ (431,254) $ (1,721,367) $ (1,405,133) $ (17,676,567)
============ ============ ============== ============== =================
Common share data:
Basic and diluted loss $ (0.07) $ (0.10) $ (0.26) $ (0.35)
per share ============ ============ ============== ==============
Weighted average number
of shares of common 9,721,662 4,146,997 6,681,195 4,066,747
stock outstanding ============ ============ ============== ==============
See accompanying notes to financial statements
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
Cumulative
Nine Months Ended from inception
September 30, (August 5, 1988)
2003 2002 to September 30, 2003
------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (1,721,367) $ (1,405,133) $ (17,676,567)
Adjustments to reconcile net
loss to net cash used in operating activities
Stock option compensation expense - - 2,520,170
Stock and warrant compensation expense - - 236,286
Depreciation expense 3,744 5,203 24,918
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 62,043 66,000 (34,540)
(Increase) decrease in interest receivable (12,535) 51,496 (17,941)
Due from affiliate - - (24,000)
Increase in accounts payable and accrued expenses 161,744 172,894 336,914
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Net cash used in operating activities (1,506,371) (1,209,540) (14,592,595)
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Cash flows from investing activities:
Purchase of furniture and fixtures (5,029) (6,652) (39,953)
Purchase of short-term investments (2,000,000) (370,000) (4,900,000)
Proceeds from maturities of short-term investments 370,000 1,500,000 2,900,000
Organization costs - - (42,165)
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Net cash used in investing activities (1,635,029) 1,123,348 (2,082,118)
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Cash flows from financing activities:
Decrease (increase) in deferred costs in connection
with a proposed financing transaction 238,571 (125,659) -
Net proceeds from sale of stock and
exercise of stock options and warrants 2,783,916 267,500 16,465,124
Repurchases of outstanding common stock - - (51,103)
Dividends paid - - (499,535)
Proceeds from short-term borrowings - - 1,704,964
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Net cash provided by financing activities 3,022,487 141,841 17,619,450
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(Decrease) increase in cash and cash equivalents (118,913) 55,649 944,737
Cash and cash equivalents at beginning of period 1,063,650 1,743,068 -
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Cash and cash equivalents at end of period $ 944,737 $ 1,798,717 $ 944,737
================================ ============
Cash paid for interest $ - $ - $ 171,473
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Supplemental disclosure of non-cash activities:
Conversion of debt to common stock $ - $ - $ 1,704,964
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Common stock issued for preferred stock dividends $ - $ - $ 999,070
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Conversion of preferred stock to common stock $ - $ - $ 24,167
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Common stock issued as compensation
for stock sale $ - $ - $ 510,000
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Common stock, options and warrants issued as
compensation for consulting services $ - $ - $ 236,286
================================ ============
See accompanying notes to 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 that was
founded in 1988 for the purpose of developing and marketing a proprietary drug
delivery system capable of introducing and removing high doses of chemotherapy
agents to a diseased organ 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 and an Investigational New Drug status for its
product by the Food and Drug Administration ("FDA"). The Company is seeking to
complete clinical trials in order to obtain FDA pre-market approval for the use
of its delivery system using various chemotherapy agents to treat malignant
melanoma that has spread to 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, 2003 and
2002 and cumulative from inception (August 5, 1988) to September 30, 2003.
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, 2002, which are
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2002 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: Reclassifications
Reclassifications have been made to reflect cost and expense accounts,
particularly research and development, on a functional basis for 2002 and prior,
which is consistent with the Company's current presentation.
Note 5: Sale of Common Stock and Warrants
On May 20, 2003, the Company completed the sale of 677,419 units of its
securities at a selling price of $3.10 per unit. Each unit consisted of five
shares of common stock and five warrants (the "2003 Warrants") each to purchase
one share of common stock. The 2003 Warrants are exercisable at $0.775, and they
expire on May 20, 2008. A total of 3,387,095 shares of common stock and 2003
Warrants each were issued, and the Company received gross proceeds of
$2,099,999. In addition, the Company granted the underwriters an option to
purchase up to an aggregate of an additional 15% of the total units sold in the
public offering. On June 10,
6
2003 the underwriters exercised their option for the full allotment of
additional units, and the Company issued 508,060 shares of its common stock and
508,060 of its 2003 Warrants, and received gross proceeds of $314,997. The
Company received $68 for granting the underwriters an option to purchase until
May 14, 2008, 67,741 units at 165% of the offering price. As a result of the
foregoing, the Company received $2,415,064 of proceeds ($1,517,666 after
underwriting fees and other expenses).
As of September 30, 2003, the Company has received $1,266,249 of net proceeds
from the exercise of 2003 Warrants for which it has issued 1,730,580 shares of
its common stock.
The following table sets forth changes in stockholders' equity since December
31, 2002:
Common Stock, $.01 Par Value Deficit Accumulated
Outstanding Additional During
-----------------------------
No. of shares Amount Paid in Capital Development Stage Total
------------- ------ --------------- ----------------- -----
Balance at December 31, 2002 4,118,897 $41,189 $19,049,406 $(17,453,805) $1,636,790
Sale of stock May 20, 2003 including 3,895,155 38,952 1,478,646 1,517,598
underwriter's exercise of over allot-
ment option, net of related costs
Proceeds from sale of underwriters'
unit option 68 68
Exercise of 2003 Warrants 1,730,580 17,305 1,248,944 1,266,249
Net loss for nine months ended
September 30, 2003 (1,721,367) (1,721,367)
--------- ------- ---------- ----------- -----------
Balance at September 30, 2003 9,744,632 $97,446 $21,777,064 $(19,175,172) $2,699,338
Note 6: 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.
On August 25, 2003, stock options totaling 470,000 shares were granted to
selected employees, nonemployees and directors. The per share weighted average
fair value of the stock options for employees and directors was $.32 estimated
on the date of grant using the Black-Scholes option-pricing model.
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, 2003 and 2002 would
have been increased to the pro forma amounts indicated as follows:
7
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $(654,111) $ (431,254) $ (1,721,367) $ (1,405,133)
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 (18,653) (8,638) (50,063) (25,914)
-------- ------------ ------------ --------------
Pro forma net loss (672,764) (439,892) (1,771,430) (1,431,047)
Loss per share (basic and diluted):
As reported $ (0.07) $ (0.10) $ (0.26) $ (0.35)
Pro forma (0.07) (0.11) (0.27) (0.35)
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 any of our current or
future drug-delivery systems and uncertainties regarding our ability to obtain
financial and other resources for our 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 finalized arrangements with the Sydney Melanoma Unit of the
University of Sydney, Sydney Cancer Centre to proceed with recruiting patients
for a Phase III study of the Delcath drug delivery system using doxorubicin for
inoperable cancer in the liver.
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.
Enrollment of new patients by the NCI in the Phase I trial using melphalan will
continue further through the end of 2003.
NCI is currently preparing a clinical trial protocol for a Phase II trial using
melphalan, based on the data collected in the Phase I study. Enrollment in this
Phase II study is expected to begin in 2004.
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 I and II
clinical trials using melphalan with the Delcath system. Additional funds, when
and if 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.
9
Liquidity and Capital Resources
We stated in our Annual Report on Form 10-KSB for the year ended December 31,
2002 that, without raising any additional funds, we anticipated that our
available funds would be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months. The funds
we raised in our common stock offering that closed in May, discussed below, was
less than we originally planned. Therefore, we intend to make efforts to raise
additional funds in the next 12 months. We are not projecting any capital
expenditures that will significantly affect our liquidity during the next 12
months unless we raise additional funds. Our cash and cash equivalents and
certificates of deposit balance at September 30, 2003 was $2,944,737.
Our future liquidity and capital requirements will depend on numerous factors,
including the progress of our research and product development programs, the
success or failure of our 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.
Our 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 had working capital at September 30, 2003 of $2,660,304. 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.
In May 2003, we issued 3,387,095 shares of common stock and an equal number of
2003 Warrants upon the closing of an underwritten public offering. In June 2003,
we issued an additional 508,060 shares of common stock and an equal number of
2003 Warrants upon exercise in full of the over allotment option we had granted
to the underwriters. During the quarter ended June 30, 2003, 1,655,440 of the
2003 Warrants were exercised. During the quarter ended September 30, 2003, an
additional 75,140 of the 2003 Warrants were exercised. As a result of the
issuances and exercises, we received net proceeds of approximately $2.8 million.
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. We
also anticipate using a portion of the net proceeds to hire an additional
employee.
Application of Critical Accounting Policies
Our 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 our financial statements included in our 2002 Annual Report
on Form 10-KSB. We have not adopted any significant new accounting policies
during the nine months ended September 30, 2003, but have reclassified our
Statements of Operations to reflect cost and expense accounts on a functional
basis for 2002 and prior.
(b) Management's Discussion and Analysis of Financial Condition and Results
of Operations
Not Applicable.
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 within 90 days of the filing of this report, the
10
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 5. OTHER INFORMATION
As of October 7, 2003, Paul M. Feinstein was elected as the Company's Chief
Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) 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.
(b) Reports on Form 8-K.
None.
11
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.
DELCATH SYSTEMS, Inc.
(Registrant)
November 6, 2003 /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)
12
EXHIBIT INDEX
Exhibit 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.