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, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
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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 November 11, 2002, there were 4,146,997 shares of the Issuer's common
stock, $.01 par value issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DELCATH SYSTEMS, INC.
Index
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet - September 30, 2002 ....................................... 3
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2002 and 2001 and Cumulative from Inception
(August 5, 1988) to September 30, 2002 .............................. 4
Statements of Cash Flows for the Nine Months Ended September 30, 2002
and 2001 and Cumulative from Inception (August 5, 1988) to
September 30, 2002 .................................................. 5
Notes to Financial Statements ............................................ 6
Item 2. Management's Discussion and Analysis or Plan of Operation ....... 7
Item 3. Controls and Procedures ......................................... 9
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ........................ 9
Item 6. Exhibits and Reports on Form 8-K ................................ 10
Signatures ............................................................... 11
Certification by Chief Executive Officer ................................. 12
Certification by Chief Financial Officer ................................. 14
2
Delcath Systems, Inc.
Balance Sheet
(Unaudited)
September 30, 2002
September 30,
Assets 2002
-------------
Current assets:
Cash and cash equivalents ............................... $ 1,798,717
Certificate of deposit .................................. 370,000
Interest receivable ..................................... 1,792
Prepaid insurance ....................................... 3,667
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Total current assets ................. 2,174,176
Furniture and fixtures, net .................................. 14,946
Deferred costs in connection with
proposed financing transaction ....................... 125,659
Due from affiliate ........................................... 24,000
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Total assets ......................... $ 2,338,781
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ................... $ 248,974
------------
Total current liabilities ............ 248,974
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Stockholders' equity
Common stock ............................................ 41,470
Additional paid-in capital .............................. 19,100,228
Deficit accumulated during development stage ............ (17,051,891)
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Total stockholders' equity .............. 2,089,807
------------
Total liabilities and stockholders'
equity ............................... $ 2,338,781
============
3
Delcath Systems, Inc.
Statements of Operations
(Unaudited)
Cumulative
From Inception
Three Months Ended Nine Months Ended (August 5, 1988)
September 30, September 30, to
2002 2001 2002 2001 September 30, 2002
------------------------------ ----------------------------- ------------------------
Costs and expenses:
General and administrative $ 128,889 $ 192,843 $ 591,287 813,191 $ 5,170,833
expenses ...................
Research and development costs 326,626 247,509 886,802 848,945 11,124,408
--------------------------- --------------------------- ----------------
Total costs and expenses ... 455,515 440,352 1,478,089 1,662,136 16,295,241
--------------------------- --------------------------- ----------------
Operating loss ............. (455,515) (440,352) (1,478,089) (1,662,136) (16,295,241)
Interest income .............. 24,260 49,449 72,956 184,319 913,427
Interest expense ............. - - (15,571) (171,473)
--------------------------- --------------------------- ----------------
Net loss ................... $ (431,254) $ (390,903) $(1,405,132) $ (1,493,388) $ (15,553,286)
=========== =========== =========== ============ ================
Common share data:
Basic and diluted loss per
share ...................... $ (0.10) $ (0.10) $ (0.35) $ (0.38)
=========== =========== =========== ============
Weighted average number
of shares of common
stock outstanding .......... 4,146,997 3,903,816 4,066,747 3,903,816
=========== =========== =========== ============
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative
Nine Months Ended from inception
September 30, (August 5, 1988)
2002 2001 to September 30, 2002
----------------------------- ---------------------
Cash flows from operating activities:
Net loss ........................................ $ (1,405,132) $ (1,493,388) $(15,553,286)
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 ............... - 198,000 236,286
Depreciation expense ........................... 5,202 3,701 19,966
Amortization of organization costs ............. - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses ........ 66,000 65,835 (3,667)
Decrease (increase) in interest receivable ..... 51,496 (7,294) (1,792)
Due from affiliate ............................. - - (24,000)
Increase (decrease) in accounts
payable and accrued expenses ................. 72,894 (664,960) 248,974
----------------------------- ------------
Net cash used in operating activities ........ (1,209,540) (1,898,106) (12,515,184)
----------------------------- ------------
Cash flows from investing activities:
Purchase of furniture and fixtures .............. (6,652) (13,260) (34,912)
Purchase of short-term investments .............. (370,000) - (2,900,000)
Proceeds from maturities of short-term
investments .................................. 1,500,000 - 2,530,000
Organization costs .............................. - - (42,165)
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Net cash provided by (used in)
investing activities ................. 1,123,348 (13,260) (447,077)
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Cash flows from financing activities:
Deferred costs in connection with a
proposed financing transaction ................. (125,659) - (125,659)
Net proceeds from sale of stock and
exercise of stock options and warrants ......... 267,500 - 13,681,208
Dividends paid .................................. - - (499,535)
Proceeds from short-term borrowings ............. - (230,000) 1,704,964
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Net cash provided by (used in)
financing activities .................. 141,841 (230,000) 14,760,978
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Increase (decrease) in cash and cash
equivalents .................................. 55,649 (2,141,366) 1,798,717
Cash and cash equivalents at beginning of period... 1,743,068 5,803,577 -
----------------------------- ------------
Cash and cash equivalents at end of period ......... $ 1,798,717 $ 3,662,211 $ 1,798,717
============================= ============
Cash paid for interest .......................... $ - $ 36,141 $ 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
============================= ============
Common stock, options and warrants issued as
compensation for consulting services ........... $ - $ 198,000 $ 236,286
============================= ============
5
Delcath Systems Inc.
(A Development Stage Company)
Notes to 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 ("IDE") and an Investigational New Drug ("IND")
status for its product by the Food and Drug Administration ("FDA"). The Company
is seeking to complete clinical trials in order to obtain FDA pre-marketing
approval for the use of its delivery system using doxorubicin, a chemotherapy
agent, 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 (including normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 2002 and
2001 and cumulative from inception (August 5, 1988) to September 30, 2002.
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, 2001, which are
contained in the Company's Form 10-KSB for the year ended December 31, 2001 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: Capital Stock and Warrants
On April 3, 2002, the Company received $267,500 by completing a private
placement of 243,181 shares of its Common Stock and warrants to purchase up to
20,265 shares of common stock at an exercise price of $1.32 per share that
expire on April 3, 2005.
6
Note 6: Deferred Costs in Connection With a Proposed Financing Transaction
The Company has incurred costs of $125,659 as of September 30, 2002 in
connection with a proposed financing transaction. If the transaction is
consummated, the costs will be allocated to the financing transaction; if the
transaction is not consummated, the costs will be charged to operations.
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 the Company's 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 ten. 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. A detailed description of the cash used to fund
historical operations is included 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 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.
During 2001, Delcath 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") marks an expansion in the
potential labeled usage of the Delcath system beyond doxorubicin, the
chemotherapy agent used in our initial clinical trials. The patent protection
for the Delcath technology was also expanded in 2001, with the issuance of a U.
S. patent for the use of the Delcath system for isolated kidney perfusion.
Similar patent applications are pending in several foreign countries.
In efforts to find additional potential investors and raise the profile of the
Company within the investment community, management has continued to speak to
potential investors and investment analysts at a series of meetings in several
major U. S. cities and Europe throughout 2002.
The contracted manufacture and assembly of the commercial grade Delcath system
kit was completed in 2001, with the first human use kits shipped to NCI for use
in the clinical trials. We 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.
7
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 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. In January 2002, we announced that the New York University School of
Medicine plans to proceed with the FDA-approved Phase III clinical trial using
doxorubicin with the Delcath system. In April 2002, we announced that the Sydney
Melanoma Unit of The University of Sydney's Sydney Cancer Centre also plans to
proceed with a Phase III clinical trial using doxorubicin with the Delcath
System. We continue to have discussions with both institutions to agree on a
budget. If these trials receive the required approvals and proceed to accrue
patients, each study will involve a portion of the total of the 122 patients
that are required by the FDA to participate in the Phase III trials at several
institutions. We cannot estimate the starting date or duration of either trial.
Liquidity and Capital Resources
We currently anticipate that our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. The Company is not projecting any capital expenditures that
will significantly affect the Company's liquidity or the hiring of additional
employees during the next 12 months unless we raise additional funds. Our cash
and cash equivalents and short term investments balance at September 30, 2002
was $2,168,717.
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 there can be no assurance of our
ever achieving consistent profitability. We had working capital at September 30,
2002 of $1,925,202. We expect to require additional working capital in the
future and there can be no assurance that such working capital will be available
on acceptable terms, if at all. In addition, we may need additional capital in
the future to fully implement our business strategy as set forth herein.
The Company is exploring a proposed financing transaction and has incurred costs
through September 30, 2002 of approximately $126,000. There is no assurance
under what terms such a transaction may be consummated or that the company will
be able to complete such a transaction.
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 included in the Company's
2001 Annual Report on Form 10-KSB. The Company has not adopted any significant
new accounting policies during the nine months ended September 30, 2002, but has
reclassified its Statements of Operations to reflect cost and expense accounts
on a functional basis for 2002 and prior.
8
(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 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 Use of Proceeds.
(a) - (c) Not applicable.
(d) Use of Proceeds. The effective date of our first registration statement,
filed on Form SB-2 under the Securities Act of 1933 (no. 333-39470) relating to
our initial public offering of our Common Stock, was October 19, 2000. Net
proceeds to Delcath were approximately $5.4 million. From the time of receipt
through September 30, 2002, approximately $3,510,000 of the net proceeds were
expended as shown in the table below. The remaining net proceeds are being held
in temporary investments in money market accounts and certificates of deposit.
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Actual through
September 30, 2002
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Research and development:
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Phase III clinical trials using the Delcath system with doxorubicin $1,905,000
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Phase I clinical trials using the Delcath system with melphalan $741,000
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Product development costs $9,000
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Research and development stage clinical trials for other chemotherapy $78,000
Agents
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Repayment of indebtedness $270,000
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Working capital and general corporate purposes $507,000
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Total $3,510,000
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9
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 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.
99.2 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.
10
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)
Date: November 14, 2002 /s/ Thomas S. Grogan
-------------------------------
Thomas S. Grogan
Chief Financial Officer (on
behalf of the
registrant and as the
Principal financial and
accounting officer of the
registrant)
11
CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14
I, M. S. Koly, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of DELCATH
SYSTEMS, INC.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
12
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ M. S. Koly
--------------------------------
M. S. Koly
Chief Executive Officer
(Principal executive officer)
13
CERTIFICATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14
I, Thomas S. Grogan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of DELCATH
SYSTEMS, INC.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
14
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas S. Grogan
--------------------------------
Thomas S. Grogan
Chief Financial Officer
(Principal financial officer)
15