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 March 31, 2004
[ ] 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 April 15, 2004, there were 11,498,626 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.
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheet - March 31, 2004 3
Statements of Operations for the Three Months Ended 4
March 31, 2004 and 2003 and Cumulative from Inception
(August 5, 1988) to March 31, 2004
Statements of Cash Flows for the Three Months Ended 5
March 31, 2004 and 2003 and Cumulative from Inception
(August 5, 1988) to March 31, 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. Changes in Securities and Small Business Issuer Purchases
Equity Securities 11
Signatures 13
Delcath Systems, Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)
March 31, 2004
March 31,
Assets 2004
---------------------
Current assets:
Cash and cash equivalents $ 3,949,544
Certificate of deposit 1,017,321
Interest receivable 796
Prepaid insurance 32,500
---------------------
Total current assets 5,000,161
Furniture and fixtures, net 12,539
Due from affiliate 24,000
---------------------
Total assets $ 5,036,700
=====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 389,238
Deposit regarding sale of shares 285,000
---------------------
Total current liabilities 674,238
---------------------
Stockholders' equity
Common stock 112,230
Additional paid-in capital 24,663,982
Deficit accumulated during development stage (20,413,750)
---------------------
Total stockholders' equity 4,362,462
---------------------
Total liabilities and stockholders'
equity $ 5,036,700
=====================
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 (August 5, 1988)
March 31, to
2004 2003 March 31, 2004
----------------------------------- ----------------
Costs and expenses:
General and administrative expenses $ 228,644 $ 237,433 $ 6,239,690
Research and development costs 487,840 300,829 13,497,336
--------------------------------- ----------------
Total costs and expenses 716,484 538,262 19,737,026
--------------------------------- ----------------
Operating loss (716,484) (538,262) (19,737,026)
Interest income 6,950 7,621 993,354
Interest expense - - (171,473)
--------------------------------- ----------------
Net loss $ (709,534 $ (530,641) $ (18,915,145)
============= ============= =================
Common share data:
Basic and diluted loss
per share $ (0.07) $ (0.13)
============= =============
Weighted average number
of shares of common 9,805,626 4,118,897
stock outstanding ============= =============
See accompanying notes to condensed financial statements
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative
Three Months Ended from inception
March 31, (August 5, 1988)
2004 2003 to March 31, 2004
-------------------------- ---------------
Cash flows from operating activities:
Net loss $ (709,534) $ (530,641) $ (18,915,145)
Adjustments to reconcile net
loss to net cash used in operating
activities
Stock option compensation expense - - 2,520,170
Stock and warrant compensation expense
issued for consulting services - - 236,286
Depreciation expense 1,248 1,248 27,414
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 15,000 30,500 (32,500)
(Increase) decrease in interest
receivable (1,099) 5,406 (15,371)
Due from affiliate - - (24,000)
Increase in accounts
payable and accrued expenses 81,538 123,882 341,738
-------------------------- ---------------
Net cash used in operating activities (612,847) (369,605) (15,819,243)
-------------------------- ---------------
Cash flows from investing activities:
Purchase of furniture and fixtures - (5,029) (39,953)
Purchase of short-term investments - - (4,917,321)
Proceeds from maturities of short-term
investments 1,014,575 370,000 3,914,575
Organization costs - - (42,165)
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Net cash provided by (used in)
investing activities 1,014,575 364,971 (1,084,864)
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Cash flows from financing activities:
Deferred costs in connection with a
proposed financing transaction - (118,751) -
Deposit regarding sale of shares 285,000 - 285,000
Net proceeds from sale of stock and
exercise of stock options and warrants 2,949,201 - 19,129,325
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 3,234,201 (118,751) 20,853,651
-------------------------- ---------------
Increase (decrease) in cash and cash
equivalents 3,635,929 (123,385) 3,949,544
Cash and cash equivalents at beginning of
period 313,615 1,063,650 -
-------------------------- ---------------
Cash and cash equivalents at end of
period $ 3,949,544 $ 940,265 $ 3,949,544
========================== ===============
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 dividend $ - $ - $ 999,070
========================== ===============
Conversion of preferred stock to
common stock $ - $ - $ 24,167
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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 pre-market
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 March 31, 2004 and 2003
and cumulative from inception (August 5, 1988) to March 31, 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
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, 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 total proceeds of $2,415,064
($1,517,666 after underwriting fees and other expenses).
6.
During the quarter ended March 31, 2004, the Company received net proceeds of
$229,106 as 261,105 of the 2003 Warrants were exercised along with the 20,265
warrants the Company issued in a private placement in 2002. From issuance
through March 31, 2004, the Company has received $1,493,556 of net proceeds from
the exercise of 2003 Warrants for which it has issued 1,991,685 shares of its
common stock.
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 (after estimated accrued registration costs of
approximately $47,500) of $2,672,595 in this transaction, and has agreed to
register the shares of common stock and the shares issuable upon exercise of the
warrants under the Securites Act of 1933.
The following table sets forth changes in stockholders' equity during the three
months ended March 31, 2004:
Common Stock, $.01 Par Value Deficit Accumulated
Outstanding Additional During
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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
Exercise of 2002 Warrants 20,265 203 26,547 26,750
Exercise of 2003 Warrants 261,105 2,611 199,745 202,356
Net loss for three months ended
March 31, 2004 (709,534) (709,534)
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Balance at March 31, 2004 11,223,034 $112,230 $24,663,982 $(20,413,750) $4,362,462
The Company completed an additional private placement of 290,257 shares of
Common Stock and an aggregate of 74,814 warrants to purchase shares of its
common stock in early April 2004, under the same terms and conditions as those
sold in March 2004. In this connection, a deposit of $285,000 (net of
commission) was received for the sale of this common stock and warrants prior to
the end of the quarter and is reflected as such on the balance sheet as a
liability.
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 months ended March 31, 2004 and 2003 would have been
increased to the pro forma amounts indicated as follows:
7.
Three Months Ended Mar. 31,
-----------------------------------
2004 2003
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Net loss, as reported $ (709,534) $ (530,641)
Stock-based employee
compensation expense included in
net loss, net of related tax
effects 0 0
Stock-based employee compensation
determined under the fair value
based method, net of related tax
effects (25,392) (16,978)
----------------- ----------------
Pro forma net loss $ (734,926) $ (547,619)
================= ================
Loss per share (basic and diluted):
As reported $ (0.07) $ (0.13)
Pro forma (0.07) (0.13)
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 recently been
started.
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 was completed in 2003 and enrolled patients will continue to be
followed.
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 during 2004. The Principal Investigator
at the NCI has informed the Company that he has presented his findings in
appropriate medical forums and is reviewing his data in preparation for a
meeting with the FDA to discuss the Phase II 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
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. 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.
9.
On April 1, 2004 we received a letter from The Nasdaq Stock Market that noted
our failure as of December 31, 2003 to meet any of the alternative criteria for
continued listing of our common stock set forth in Marketplace Rule
4310(c)(2)(B) (the "Rule"). As of December 31, 2003, we did not have $2.5
million of stockholders' equity or net income from continuing operations of
$500,000 for the year ended December 31, 2003 or for two of the three years
ended December 31, 2003. Further, at that date, the market value of our common
stock was less than $35 million. On April 7, 2004, we responded to the Nasdaq
letter noting our completion of the transactions described in Part II, Item 2 of
this Report and the additional private sale in early April of common stock and
warrants for which we received gross proceeds of approximately $700,000. Based
on our response to Nasdaq, Nasdaq granted us an extension to time to May 17,
2004 to demonstrate compliance with the Rule. Our unaudited balance sheet as of
March 31, 2004 included in this Report shows stockholders equity of $4.3 million
(which amount does not include the proceeds of the private placements we closed
in April). Based on the foregoing, we believe we have regained compliance with
the stockholders' equity requirement of the Rule.
Liquidity and Capital Resources
Our available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures at least through 2004. The Company is not
projecting any capital expenditures that will significantly affect the Company's
liquidity during the next 12 months. The Company is projecting the hiring of one
additional employee.
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.
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 2003, 1,730,580 of the 2003 Warrants were exercised.
During the quarter ended March 31, 2004, an additional 261,105 of the 2003
Warrants were exercised along with the 20,265 warrants the Company issued in a
private placement in 2002. As a result of the issuances and exercises, we
received net proceeds of approximately $3.0 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.
During March 2004, the Company completed the sale of approximately 1,200,000
shares of its Common Stock and the issuance of warrants to purchase
approximately 300,000 common shares at $3.01 per share in a private placement to
institutional and accredited investors. The Company received net proceeds (after
estimated accrued registration costs of approximately $48,000) of approximately
$2,700,000 in this transaction, and has agreed to register the shares of common
stock and the shares issuable upon exercise of the warrants under the Securites
Act of 1933.
10.
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 the Company's
Annual Report on Form 10KSB 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 three months ended March 31,
2004.
(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 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. CHANGES IN SECURITIES AND SMALL BUSNISS ISSUER PURCHASES OF EQUITY
SECURITIES
(a) Not applicable
(b) Not applicable
(c) On March 19 and 22, 2004, the Company sold an aggregate of 1,197,032
shares of its Common Stock and an aggregate of 299,258 warrants to purchase
shares of its common stock. The sales of these securities were made in
transactions exempt from registration under Rule 506 under the Securites Act of
1933, as amended, to purchasers each of whom qualified as an "accredited
investor" with the meaning of Rule 501 thereunder. The aggregate offering price
for the securities sold was $2,884,847. While the Company did not pay any
underwriting discount or commission with respect to these transactions,, it paid
cash and issued warrants to purchase 59,851 shares of its common stock to an
entity that acted as placement agent.
11.
An additional sale of 290,257 shares of Common Stock and an aggregate of 74,814
warrants to purchase shares of its common stock were sold in early April 2004 on
the same terms and conditions as those sold during March 2004. In connection
with these transactions, the Company also paid the placement agents fees in the
amount of $179,242.
The warrants issued to the purchasers and to the placement agent have an
exercise price per share of $3.01, subject to adjustment under certain
circumstances and have a term expiring on March 19, 2009. The Company has filed
a Registration Statement on Form S-3 covering, among other things, the resale of
the shares sold in the offering and of the shares that might be issued upon
exercise of the warrants. Commencing one year after the effective date of the
registration statement, the Company has the right to redeem all or a portion of
the warrants if certain conditions are met, including that the average per share
market value of the Company's common stock for the twenty trading days
immediately prior to the notice of redemption has been more than $6.02.
(d) Not applicable
(e) Not applicable
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.
During the quarter ended March 31, 2004, the Company filed five Current
Reports on Form 8-K as follows:
Date of Report Items Responded To
January 26, 2004 5 and 7
February 24, 2004 5 and 7
March 9, 2004 5 and 7
March 11, 2004 5 and 7
March 19, 2004 5 and 7
12.
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)
May 17, 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.