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 June 30, 2002
[ ] 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)
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 X
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As of August 9, 2002, there were 4,146,997 shares of the Issuer's common stock,
$.01 par value (the "Common Stock"), issued and outstanding and 1,200,000
warrants expiring October 18, 2005 each with a right entitling the holder to
purchase one share of the Issuer's Common Stock for $6.60.
Transitional Small Business Disclosure Format (check one): Yes No X
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DELCATH SYSTEMS, INC.
Index
Page No.
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Part I. FINANCIAL INFORMATION
0Item 1. Financial Statements (Unaudited)
Balance Sheet - June 30, 2002 3
Statements of Operations for the Three Months and Six 4
Months Ended June 30, 2002 and 2001 and Cumulative
from Inception (August 5, 1988) to June 30, 2002
Statements of Cash Flows for the Six Months Ended June 5
30, 2002 and 2001 5 and Cumulative from Inception
(August 5, 1988) to June 30, 2002
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 7
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 8
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 11
2
Delcath Systems, Inc.
Balance Sheet
(Unaudited)
June 30, 2001
June 30,
Assets 2002
------ ------------
Current assets:
Cash and cash equivalents .............................. $ 1,012,017
Certificate of deposit ................................. 1,590,261
Interest receivable .................................... 89
Prepaid insurance ...................................... 25,667
------------
Total current assets ................ 2,628,034
Furniture and fixtures, net ................................. 16,428
Due from affiliate .......................................... 24,000
------------
Total assets ........................ $ 2,668,462
============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses .................. $ 147,401
------------
Total current liabilities ........... 147,401
------------
Stockholders' equity
Common stock ........................................... 41,470
Additional paid-in capital ............................. 19,100,228
Deficit accumulated during development stage ........... (16,620,637)
------------
Total stockholders' equity ............. 2,521,061
------------
Total liabilities and stockholders'
equity .............................. $ 2,668,462
============
3
Delcath Systems, Inc.
Statements of Operations
(Unaudited)
Cumulative
From Inception
Three Months Ended Six Months Ended (August 5, 1988)
June 30, June 30, to
2002 2001 2002 2001 June 30, 2002
------------------------------ ------------------------------ ----------------
Costs and expenses:
Legal, consulting and accounting fees $ 173,772 $ 271,209 $ 495,788 $ 693,503 $ 6,521,043
Compensation and related expenses .. 163,154 135,330 328,328 258,308 6,153,201
Other operating expenses ........... 86,851 146,897 198,458 269,973 3,165,482
------------ ------------ ------------ ------------ ------------
Total costs and expenses ......... 423,777 553,436 1,022,574 1,221,784 15,839,726
------------ ------------ ------------ ------------ ------------
Operating loss ................... (423,777) (553,436) (1,022,574) (1,221,784) (15,839,726)
Interest income .................... 24,838 58,099 48,696 134,870 889,167
Interest expense ................... -- (2,939) -- (15,571) (171,473)
------------ ------------ ------------ ------------ ------------
Net loss ......................... $ (398,939) $ (498,276) $ (973,878) $ (1,102,485) $(15,122,032)
============ ============ ============ ============ ============
Common share data:
Basic and diluted loss ............. $ (0.10) $ (0.13) $ (0.24) $ (0.28)
per share ============ ============ ============ ============
Weighted average number
of shares of common .............. $ 4,146,997 $ 3,903,816 $ 4,025,407 $ 3,903,816
stock outstanding ============ ============ ============ ============
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative
from inception
Six Months Ended (August 5, 1988)
6/30/2002 6/30/2001 to June 30, 2002
--------------------------------- ----------------
Cash flows from operating activities:
Net loss ......................................... $ (973,878) $ (1,102,485) $(15,122,032)
Adjustments to reconcile net
loss to net cash used in operating activities
Stock option compensation expense ............... -- -- 2,520,170
Stock and warrant compensation expense .......... -- 198,000 236,286
Depreciation expense ............................ 3,468 2,388 18,232
Amortization of organization costs .............. -- -- 42,165
Changes in assets and liabilities
Decrease (increase) in prepaid expenses ......... 44,000 45,835 (25,667)
Decrease (increase) in interest receivable ...... 967 (10,671) (89)
Due from affiliate .............................. -- -- (24,000)
(Decrease) increase in accounts
payable and accrued expenses .................. (28,679) (599,490) 147,401
------------ ------------ ------------
Net cash used in operating activities ......... (954,122) (1,466,423) (12,207,534)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and fixtures ............... (6,400) (9,952) (34,660)
Purchase of short-term investments ............... (1,590,261) -- (2,620,261)
Proceeds from maturities of short-term investments -- -- 1,030,000
Organization costs ............................... -- -- (42,165)
------------ ------------ ------------
Net cash used in
investing activities .................... (1,596,661) (9,952) (1,667,086)
------------ ------------ ------------
Cash flows from financing activities:
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 .............. -- -- 1,704,964
Net cash provided by
financing activities ..................... 267,500 -- 14,886,637
------------ ------------ ------------
(Decrease) increase in cash and casts ......... (2,283,283) (1,476,375) 1,012,017
Cash and cash equivalents at beginning of period .... 3,295,300 5,803,577 --
------------ ------------ ------------
Cash and cash equivalents at end of period .......... $ 1,012,017 $ 4,327,202 $ 1,012,017
============ ============ ============
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 dose 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 June 30, 2002 and 2001
and cumulative from inception (August 5, 1988) to June 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 and Form 10-KSB/A for the year ended
December 31, 2001 as filed with the Securities and Exchange Commission.
Note 3: Development Expenses
The Company considers that substantially all of its efforts are directed toward
development of its proprietary drug delivery system and activities in support of
such development. Such development expenses for the three and six months ended
June 30, 2002 amounted to $257,710 and $560,176, respectively.
Note 4: 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 $1.32 per share until April 3, 2005.
6
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 over at least the next three years. 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 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 system for
isolated kidney perfusion. Similar 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 continued to speak to
potential investors and investment analysts at a series of meetings in several
major U. S. cities and Europe during the first half of 2002. Management expects
to continue scheduling such meetings in the second half of 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 the Delcath System.
The NYU trial is pending approval by their Institutional Review Board. Both
trials are pending budget approval by the respective institution. 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 June 30, 2002 was
$2,602,278.
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 June 30, 2002
of $2,480,633. 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.
(b) Management's Discussion and Analysis of Financial Condition
and Results of Operations
Not Applicable.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) - (b) Not applicable.
(c) Recent Sales of Unregistered Securities. On April 3, 2002, we sold 243,181
shares of our Common Stock and warrants to purchase up to 20,265 shares of our
Common Stock at $1.32 per share until April 3, 2005. We
8
received proceeds of $267,500. There were no underwriting costs associated with
this transaction. An exemption from registration was claimed under Rule 506 of
Regulation D.
(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 June 30, 2002, approximately $3,079,000 of the net proceeds were
expended as shown in the table below. The remaining net proceeds are being held
in temporary investments in short-term commercial paper.
Actual through
June 30, 2002
Research and development:
Phase III clinical trials using the Delcath system with doxorubicin $1,765,000
Phase I clinical trials using the Delcath system with melphalan $564,000
Research and development stage clinical trials for other chemotherapy $78,000
agents
Repayment of indebtedness $270,000
Working capital and general corporate purposes $402,000
Total $3,079,000
Item 4. Submission of Matters to a Vote of Security Holders.
On May 23, 2002, the Company held its 2002 Annual Meeting of
Stockholders. At the meeting, the stockholders voted to elect Class II directors
of the Company to hold office until the Annual Meeting of Stockholders in 2005
and until their successors are elected and qualified. The stockholders voted
3,078,608 shares in favor of electing each of M. S. Koly and Samuel
Herschkowitz, M.D. to serve as Class II directors and withheld the authority to
vote 3,500 shares. The term of office for each of Mark Corigliano and Victor
Nevins will continue until the Annual Meeting of Stockholders in 2003 and the
term of office for Daniel Isdaner will continue until the Annual Meeting of
Stockholders in 2004. No other matter was submitted for vote by the
stockholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 99.1 Certification of Chief Executive 8Officer Pursuant
to 18 U.S.C. Section 1350 As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 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.
The Company filed a Current Report on Form 8-K, dated April 12, 2002,
responding to Item 4 to announce the resignation of KPMG LLP as
independent auditors for the Company and filed an
9
amendment to the report, dated April 12, 2002, responding to Item 4 to
file the letter from KPMG LLP as required under Item 304(a)(3) of
Regulation S-B.
The Company filed a Current Report on Form 8-K, dated April 26, 2002,
responding to Item 4 to announce the engagement of Eisner LLP (formerly
Richard A. Eisner & Company, LLP) as independent auditors for the
Company.
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.
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(Registrant)
Date: August 14, 2002 /s/ Thomas S. Grogan
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Thomas S. Grogan
Chief Financial Officer (on behalf
of the registrant and as the
Principal Financial Officer of the
registrant)