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, 2005
[ ] 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
--------------------- ---------------------
(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 May 13, 2005, 15,483,445 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 - March 31, 2005 3
Statements of Operations for the Three Months Ended 4
March 31, 2005 and 2004 and Cumulative from Inception
(August 5, 1988) to March 31, 2005
Statements of Cash Flows for the Three Months Ended 5
March 31, 2005 and 2004 and Cumulative from Inception
(August 5, 1988) to March 31, 2005
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 6. Exhibits 11
Signatures 13
Delcath Systems, Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)
March 31, 2005
March 31,
Assets 2005
---------------
Current assets:
Cash and cash equivalents $ 1,617,687
Certificate of deposit 5,047,077
Interest receivable 42,088
Prepaid insurance 64,330
---------------
Total current assets 6,771,182
Furniture and fixtures, net 12,092
---------------
Total assets $ 6,783,274
===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 622,227
---------------
Total current liabilities 622,227
---------------
Stockholders' equity
Common stock, $.01 par value, 70,000,000
shares authorized 154,834
Additional paid-in capital 29,892,088
Deficit accumulated during development stage (23,885,875)
---------------
Total stockholders' equity 6,161,047
---------------
Total liabilities and stockholders'
equity $ 6,783,274
===============
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
2005 2004 March 31, 2005
------------------------------- -------------------
Costs and expenses:
General and administrative expenses $ 415,258 $ 228,644 $ 7,486,119
Research and development costs 551,361 487,840 15,867,590
------------------------------- --------------
Total costs and expenses 966,619 716,484 23,353,709
------------------------------- ----------------
Operating loss (966,619) (716,484) (23,353,709)
Interest income 51,292 6,950 1,137,911
Interest expense - - (171,473)
------------------------------- ----------------
Net loss $ (915,327) $ (709,534) $ (22,387,270)
============= ================ ===============
Common share data:
Basic and diluted loss
per share $ (0.06) $ (0.07)
============= ================
Weighted average number
of shares of common 15,358,028 9,805,626
============= ================
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)
2005 2004 to March 31, 2005
---------------------------- --------------------
Cash flows from operating activities:
Net loss $ (915,327) $ (709,534) $ (22,387,270)
Adjustments to reconcile net
loss to net cash used in operating
activities
Stock option compensation expense - - 2,525,392
Stock and warrant compensation expense
issued for consulting services - - 236,286
Depreciation expense 1,515 1,248 33,207
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses (16,514) 15,000 (64,330)
(Increase) interest receivable (9,202) (1,099) (42,087)
Increase in accounts
payable and accrued expenses 57,602 81,538 622,227
---------------------------- --------------------
Net cash used in operating activities (881,927) (612,847) (19,034,409)
---------------------------- --------------------
Cash flows from investing activities:
Purchase of furniture and fixtures - - (45,300)
Purchase of short-term investments (1,047,077) - (12,016,781)
Proceeds from maturities of short-term
investments 3,055,129 1,014,575 6,969,704
Organization costs - - (42,165)
---------------------------- --------------------
Net cash provided by (used in)
investing activities 2,008,052 1,014,575 (5,134,542)
---------------------------- --------------------
Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants 289,227 2,949,201 24,632,312
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 289,227 2,949,201 25,786,638
---------------------------- --------------------
Increase (decrease) in cash and cash
equivalents 1,415,352 3,350,929 1,617,687
Cash and cash equivalents at beginning of
period 202,335 313,615 -
---------------------------- --------------------
Cash and cash equivalents at end of period $ 1,617,687 $ 3,664,544 $ 1,617,687
============================ ====================
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 (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 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 March 31, 2005 and 2004
and cumulative from inception (August 5, 1988) to March 31, 2005.
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, 2004, which are
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004 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: Stockholders' Equity
During the three months ended March 31, 2005, the Company received net proceeds
of $32,377 ($1.022 per share) upon the exercise of 6,336 of the Representative
Unit Purchase Warrants that were issued to underwriters as part of the 2003
public offering. This resulted in the issuance of 31,680 shares of common stock
together with a similar amount of Representative's Common Stock Warrants. In
addition, 146,680 Representative's Common Stock Warrants were exercised ($1.28
per share) with a similar amount of common stock being issued and receipt of net
proceeds of $188,751.
The Company received a net amount of $68,100 upon the exercise of 90,000 in
stock options during the quarter. 60,000 options were exercised at a price of
$0.71 per share and 30,000 were exercised at a price of $0.85 per share.
6.
The following table sets forth changes in stockholders' equity during the three
months ended March 31, 2005:
Common Stock, $0.01 Par Value Deficit Accumulated
Issued and Outstanding Additional During
-----------------------------
No. of shares Amount Paid in Capital Development Stage Total
------------- ------ --------------- ----------------- -----
Balance at December 31, 2004 15,215,085 $152,151 $29,605,543 $(22,970,548) $6,787,146
Issuance of common stock in
connection with the exercise of
2003 Representative's Unit
Warrants 31,680 317 32,060 32,377
Issuance of common stock in
connection with the exercise of
Representative's Common Stock
Warrants 146,680 1,466 187,285 188,751
Issuance of common stock in
connection with the exercise of
stock options 90,000 900 67,200 68,100
Net loss for three months ended
March 31, 2005 (915,327) (915,327)
---------- ------- ----------- ------------ ----------
Balance at March 31, 2005 15,483,445 $154,834 $29,892,088 $(23,885,875) $6,161,047
========== ========= ============ ============= ===========
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.
7.
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, 2005 and 2004 would have been
increased to the pro forma amounts indicated as follows:
Three Months Ended March 31,
-----------------------------------------
2005 2004
--------------- ---------------------
Net loss, as reported $ (915,327) $ (709,534)
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 (17,618) (25,392)
--------------- ---------------------
Pro forma net loss (932,945) (734,926)
=============== =====================
Loss per share (basic and diluted):
As reported $ (0.06) $ (0.07)
Pro forma (0.06) (0.07)
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-based
Payment" that will require the Company to expense costs related to share-based
payment transaction with employees. With limited exceptions, SFAS No. 123(R)
requires that the fair value of share-based payments to employees be expensed
over the period service is received and eliminates the ability to account for
these instruments under the intrinsic value method prescribed by APB No. 25, and
allowed under the original provisions of SFAS No. 123. SFAS No. 123(R) becomes
mandatorily effective for the Company on January 1, 2006. SFAS No. 123(R) allows
for either prospective recognition of compensation expense or retrospective
recognition, which may be back to the original issuance of SFAS No. 123 or only
to interim periods in the year of adoption. The Company is currently evaluating
these transition methods.
SFAS No. 123(R) allows the use of both closed form models (e.g., Black-Scholes
Model) and open form models (e.g., lattice models) to measure the fair value of
the share-based payment as long as that model is capable of incorporating all of
the substantive characteristics unique to share-based awards. In accordance with
the transition provisions of SFAS No. 123(R), the expense attributable to an
award will be measured in accordance with the Company's measurement model at
that award's date of grant.
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 and the clinical trials of
our product, and the pursuit of patents worldwide. 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. The Phase I trial
at the National Cancer Institute marked an expansion in the potential labeled
usage beyond doxorubicin, the chemotherapeutic agent used in our initial
clinical trials. Enrollment of new patients in the Phase I trial was completed
in 2003 and following the 2004 presentation and adoption of a Phase II clinical
trial protocol, patients are being enrolled and treated.
During 2004, we commenced a Phase III clinical trial in Australia to proceed
with study of the Delcath drug delivery system for inoperable cancer in the
liver using doxorubicin. We are currently in discussions with additional sites
worldwide to expand this trial.
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
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.
Liquidity and Capital Resources
Our available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures at least through the end of 2006. 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.
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 believes
its capital resources are adequate to fund operations for at least the next
twelve months but anticipates that it will require additional working capital
after 2006. There can be no assurance that such working capital will be
available on acceptable terms, if at all.
During the three months ended March 31, 2005, the Company had exercises of
previously issued warrants together with exercises of stock options. Please see
Note 4 to the March 31, 2005 Condensed Financial Statements included in Part I
of this filing and incorporated herein by reference for a complete description
of share 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.
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 10-KSB for the year ended December 31, 2004 as filed with
the Securities and Exchange Commission. The Company has not adopted any
significant new accounting policies or modified the application of existing
policies during the three months ended March 31, 2005.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
Not Applicable.
(c) Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
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 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.
11.
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 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 16, 2005 /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
Number 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.