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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, 2001
[ ] 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)
NONE
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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 ___
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As of August 10, 2001, there were 3,903,816 shares of the Issuer's Common Stock,
$0.01 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 - June 30, 2001............................................... 2
Statements of Operations for the Three Months and Six
Months Ended June 30, 2001 and 2000 and Cumulative
from Inception (August 5, 1988) to June 30, 2001...................... 3
Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 and Cumulative from
Inception (August 5, 1988) to June 30, 2001........................... 4
Notes to Financial Statements............................................... 5
Item 2. Plan of Operation................................................ 5
Part II. OTHER INFORMATION................................................ 7
Item 2. Changes in Securities and Use of Proceeds........................ 7
Item 6. Exhibits and Reports on Form 8-K................................. 8
Signatures....................................................... 9
1
DELCATH SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
JUNE 30, 2001
JUNE 30,
ASSETS 2001
------------
Current assets:
Cash and cash equivalents $ 4,097,202
Interest receivable 43,039
Prepaid insurance 23,331
Total current assets 4,163,572
Furniture and fixtures, net 12,814
Due from affiliate 24,000
------------
Total assets $ 4,200,386
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 199,425
------------
Total current liabilities 199,425
------------
Stockholders' equity
Common Stock 39,039
Additional Paid-In Capital 18,637,159
Deficit accumulated during development stage (14,675,237)
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Total stockholders' equity 4,000,961
------------
Total liabilities and stockholders'
equity $ 4,200,386
============
2
DELCATH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
From Inception
Three Months Ended Six Months Ended (August 5, 1988)
June 30, June 30, to
2001 2000 2001 2000 June 30, 2001
-------------------------- -------------------------- ------------
Costs and expenses:
Legal consulting and accounting fees 271,209 74,653 495,503 172,926 5,482,933
Stock option compensation expense - - 2,523,970
Compensation and related expenses 135,330 51,844 258,308 104,765 3,005,924
Other operating expenses 146,897 62,684 269,973 127,116 2,759,453
-------------------------- -------------------------- ------------
Total costs and expenses 553,436 189,181 1,023,784 404,807 13,772,280
-------------------------- -------------------------- ------------
Operating loss (553,436) (189,181) (1,023,784) (404,807) (13,772,280)
Interest income 58,099 7,534 134,870 13,036 767,121
Interest expense (2,939) - (15,571) - (171,473)
-------------------------- -------------------------- ------------
Net loss (498,276) (181,647) (904,485) (391,771) (13,176,632)
========================== ========================== ============
Common Share data:
Basic and diluted loss
per share (0.13) (0.17) (0.23) (0.40)
========================== ==========================
Weighted average number
of Shares of common
stock outstanding 3,903,816 1,055,590 3,903,816 978,633
3
DELCATH SYSTEMS, INC.
CASH FLOWS
(UNAUDITED)
Cumulative
from inception
SIX MONTHS ENDED (August 5, 1988)
6/30/2001 6/30/2000 to June 30, 2001
-------------------------- ----------------
Cash flow from operating activities:
Net loss $ (904,485) (391,771) (13,176,632)
Adjustments to reconcile net
loss to net cash used in operating activities
Stock option compensation expense - - 2,523,971
Stock compensation expense - - 34,485
Depreciation expense 2,388 1,500 12,138
Amortization of organization costs - 42,165
(Increase) decrease in prepaid expenses 45,835 (62,855) (23,331)
(Increase) decrease in interest receivable (10,671) 2,351 (43,039)
Due from affiliate - - (24,000)
(Decrease) increase in accounts
payable and accrued expenses (599,490) 96,784 199,425
-------------------------- ------------
Net cash used in operating activities (1,466,423) (353,991) (10,454,818)
-------------------------- ------------
Cash flows from investing activities:
Purchase of furniture and fixtures (9,952) - (24,952)
Purchase of short-term investments - - (1,030,000)
Proceeds from maturities of short-term investments - - 1,030,000
Organization costs - - (42,165)
-------------------------- ------------
Net cash used in investing activities (9,952) - (67,117)
-------------------------- ------------
Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants - 501,825 13,413,708
Dividends Paid - - (499,535)
Deferred IPO costs - (291,363) -
Proceeds from short-term borrowings - - 1,934,964
Repayment of short-term borrowings (230,000) - (230,000)
-------------------------- ------------
Net cash provided by (used in) financing
activities (230,000) 210,462 14,619,137
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Increase (decrease) in cash and cash equivalents (1,706,375) (143,529) 4,097,202
Cash and cash equivalents at beginning of period 5,803,577 561,078 -
-------------------------- ------------
Cash and cash equivalents at end of period $ 4,097,202 417,549 4,097,202
========================== ============
Supplemental cash flow activities:
Conversion of debt to common stock $ - - 1,704,964
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Common stock issued for preferred stock dividends $ - - 999,070
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Conversion of preferred stock to common stock $ - - 24,167
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Common stock issued as compensation
for stock sale $ - - 510,000
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Cash paid for interest $ 36,141 - 174,118
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4
Delcath Systems Inc.
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 system while greatly inhibiting their entry into the
general circulation system. 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").
Note 2: Basis of Presentation
The accompanying financial statements are unaudited and have been prepared by
the Company in accordance with generally accepted accounting principles. 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, 2001 and 2000.
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, 2000, which are
contained in the Company's Form 10-KSB as filed with the Securities and Exchange
Commission on March 30, 2001.
Note 3: Capital Stock
The common stock and per share data for all periods gives effect to reverse
stock splits of 1 for 2.2881 shares on September 28, 2000 and 1 for 1.2666
shares on October 11, 2000, resulting in an aggregate reverse split of
approximately 1 for 2.8981 shares.
ITEM 2. PLAN OF OPERATION
OVERVIEW
The Company was founded in 1988 by a team of physicians. Since our inception, 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 in support of the development and
the clinical trials of our product. Until our initial public offering, we had
been dependent upon venture capital financing to fund our activities. Without an
FDA pre-marketing approved product, we have generated minimal revenues from
product sales. We have been unprofitable to date and have had losses of $572,581
and $960,185 for the years ended December 31, 1999 and 2000 and $904,485 for the
six months ended June 30, 2001. Cumulative losses from inception through June
30, 2001 were $13,176,632. Losses have continued through the date of this
report. We expect to incur additional losses over the next three years and
anticipate these losses will increase significantly in this period due to
continued requirements for product development, clinical studies, regulatory
activities, manufacturing and establishment of a sales and marketing
organization. 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.
Development of the Company's platform technology for isolated perfusion began in
1988 and has progressed through Phase I and II human clinical trials using
doxorubicin to treat
5
cancers in the liver. In December 1999, the Company received approval from the
FDA to conduct Phase III clinical trials using doxorubicin to treat certain
cancers in the liver. The Company is now contacting physicians at medical
centers who have expressed interest in participating in these clinical trials.
In June 2001, the Company announced that The National Cancer Institute approved
a clinical study protocol for administering escalating doses of melphalan
through the Delcath drug delivery system to patients with unresectable cancer of
the liver.
While there can be no assurance regarding the start of these trials, the Company
anticipates the physicians will be ready to start recruiting patients during
2001.
The Company continues to expend substantial resources on the testing of its
initial product for isolated perfusion of the liver. These expenditures are
expected to rise substantially now that the Company has completed its initial
public offering and received FDA approval to proceed with Phase III human
clinical trials using doxorubicin for the treatment of malignant melanoma that
has spread to the liver. The Phase III trials will seek to demonstrate the
safety and efficacy of the Delcath system for this use. There can be no
assurance that the trials will be completed or that the FDA will approve
marketing of the Company's product once they are complete.
Sale of medical devices in the United States requires approval by the FDA, which
is contingent upon the results of the Phase III human clinical trials. Sale of
medical devices outside of the United States is controlled by local regulations
and the FDA regulates export of the devices from the United States.
The Company will also continue to expend resources on other projects, including
research and development stage clinical trials for other chemotherapy agents. If
additional funds are raised, other projects may be started as well.
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, uncertainties regarding our ability to obtain
financial and other resources for our research, development and commercial
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.
LIQUIDITY AND CAPITAL RESOURCES
Until completion of its initial public offering, the Company financed its
operations primarily through private placements of our common and preferred
stock. Prior to the completion of the initial public offering, the Company
raised $9,816,686 through the private sale of shares of its Class A Preferred
Stock, Class B Preferred Stock and Common Stock. In August and September 2000,
the Company also borrowed $230,000 for which it issued $230,000 principal amount
of promissory notes, which paid interest at an annual rate of 22% and were
repaid on May 27, 2001. Of these notes, $50,000 in principal amount was
subscribed to by M.S. Koly, Chief Executive Officer, President and Director of
the Company, and $40,000 principal amount was subscribed to by the mother of
Samuel Herschkowitz, M.D., our Chairman of the Board and Chief Technology
Officer.
In October 2000, the Company completed an initial public offering. We sold
1,200,000 units for $6.00 per unit, each unit consisting of one share of our
Common Stock and one redeemable warrant to purchase one share of our Common
Stock for $6.60 per share until October 18, 2005. The Company received $7.2
million before
6
offering costs and before paying cash dividends on preferred shares of
approximately $499,535. After underwriting discounts and cash expenses of the
offering, the net proceeds to us were approximately $5.4 million.
Our cash and cash equivalents totaled $4,097,202 on June 30, 2001, a decrease of
$1,706,375 from December 31, 2000. This change reflects a reduction in accounts
payable and accrued expenses by $599,490, including accounts payable and accrued
expenses related to the initial public offering.
Over the next 12 months, the Company expects to continue to incur expenses
related to the research and development of our technology, including clinical
trials using doxorubicin and melphalan with the Delcath system and pre-clinical
and clinical trials for the use of other chemotherapy agents with the Delcath
System for the treatment of cancers in the liver. We expect to begin doxorubicin
and melphalan trials during 2001.
We expect to incur significant additional operating losses over each of the next
several years and expect cumulative losses to increase significantly as we
continue to expand our research and development, clinical trials and marketing
efforts. During the next 12 months, we expect to purchase approximately $45,000
in computer, laboratory and testing equipment. We also expect to hire
approximately two additional employees in the areas of research and development,
regulatory and clinical management, marketing and administrative functions at an
estimated annual expense of $235,000. The number and timing of such hiring will
vary depending upon the success of the international marketing efforts and
progress of the clinical trials.
The Company anticipates that the net proceeds of our initial public offering,
together with our other available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. These operating expenses are expected to be at significantly
higher levels than past periods primarily in order to support and monitor the
envisioned Phase III clinical trials. Our future liquidity and capital
requirements, however, will depend on numerous factors, including: the progress
of our research and product development programs, including clinical studies;
the timing and costs of various United States and foreign regulatory filings;
the timing and effectiveness of product commercialization activities, including
marketing arrangements overseas; the timing and costs involved in obtaining
regulatory approvals, if ever, and complying with regulatory requirements; the
timing and costs involved in preparing, filing, prosecuting, defending and
enforcing intellectual property rights; and the effect of competing
technological and market developments.
If the proceeds of the initial public offering, together with our currently
available funds, are not sufficient to satisfy our spending plans, we will be
required to revise our capital requirements or to seek additional funding
through borrowings and/or additional sales of securities. We cannot assure you
that our available funds will be sufficient to fund our clinical trials with
respect to the use of the Delcath system with doxorubicin to treat liver cancer.
We also cannot assure you that additional financing will become available if
needed.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) - (c) Not applicable.
(d) 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, 2001,
approximately $1,350,000 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.
7
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Actual through
June 30, 2001
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Research and development:
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Phase III clinical trials using the
Delcath system with doxorubicin $795,000
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Research and development stage clinical
trials for other chemotherapy agents $50,000
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Repayment of indebtedness $270,000
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Working capital and general corporate purposes $235,000
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Total $1,350,000
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on June 12, 2001 regarding the approval by The National
Cancer Institute ("NCI") of a clinical study protocol for administering
escalating doses of melphalan through the Company's drug delivery system to
patients with unresectable cancer of the liver.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly 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 13, 2001 /s/ Joseph P. Milana
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Joseph P. Milana
Chief Financial Officer (on behalf
of the registrant and as the
Principal Financial Officer of the
registrant)
9
