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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 September 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.
- --------------------------------------------------------------------------------
(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)
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
----- -----
As of November 7, 2001, there were 3,903,816 shares of the Issuer's Common
Stock, $0.01 par value, issued and outstanding, and 1,200,000 warrants expiring
October 18, 2005 each with a right entitling the holder to purchase one share of
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.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet - September 30, 2001 ............................. 3
Statements of Operations for the Three Months and Nine
Months Ended September 30, 2001 and 2000 and Cumulative
from Inception (August 5, 1988) to September 30, 2001 .......... 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 and Cumulative from
Inception (August 5, 1988) to September 30, 2001 ............... 5
Notes to Financial Statements .................................. 6
Item 2. Plan of Operation .............................................. 6
Part II. OTHER INFORMATION
Item 2. Changes in Securities .......................................... 8
Item 5. Other Information .............................................. 9
Item 6. Exhibits and Reports on Form 8-K ............................... 9
Signatures ..................................................... 10
2
DELCATH SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2001
SEPTEMBER 30,
ASSETS 2001
------------
Current assets:
Cash and cash equivalents $ 3,662,211
Interest receivable 39,662
Prepaid insurance 3,331
------------
Total current assets 3,705,204
Furniture and fixtures, net 14,809
Due from affiliate 24,000
------------
Total assets $ 3,744,013
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 133,955
------------
Total current liabilities 133,955
------------
Stockholders' equity
Common Stock 39,039
Additional Paid-In Capital 18,637,159
Deficit accumulated during development stage (15,066,140)
------------
Total stockholders' equity 3,610,058
------------
Total liabilities and stockholders' equity $ 3,744,013
============
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
2001 2000 2001 2000 SEPTEMBER 30, 2001
------------------------------ ------------------------------ ------------
Costs and expenses:
Legal, consulting and accounting fees 185,528 51,344 681,031 224,270 5,668,461
Stock option compensation expense -- -- -- -- 2,523,970
Compensation and related expenses 129,480 54,437 387,788 159,202 3,135,404
Other operating expenses 125,344 50,365 395,317 177,481 2,884,797
------------------------------ ------------------------------ ------------
Total costs and expenses 440,352 156,146 1,464,136 560,953 14,212,632
------------------------------ ------------------------------ ------------
Operating loss (440,352) (156,146) (1,464,136) (560,953) (14,212,632)
Interest income 49,449 5,889 184,319 18,925 816,570
Interest expense -- (4,270) (15,571) (4,270) (171,473)
------------------------------ ------------------------------ ------------
Net loss (390,903) (154,527) (1,295,388) (546,298) (13,567,535)
============================== ============================== ============
Common Share data:
Basic and diluted loss per share (0.10) (0.18) (0.33) (0.65)
============================== ============================== ============
Weighted average number
of Shares of common
stock outstanding 3,903,816 863,197 3,903,816 836,327
4
DELCATH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
CUMULATIVE
NINE MONTHS ENDED FROM INCEPTION
SEPTEMBER 30, (AUGUST 5, 1988) TO
2001 2000 SEPTEMBER 30, 2001
------------------------------ ------------
Cash flow from operating activities:
Net loss $ (1,295,388) (546,298) (13,567,535)
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 3,701 2,250 13,451
Amortization of organization costs -- -- 42,165
(Increase) decrease in prepaid expenses 65,835 (32,261) (3,331)
(Increase) decrease in interest receivable (7,294) 2,333 (39,662)
Due from affiliate -- -- (24,000)
(Decrease) increase in accounts payable and
accrued expenses (664,960) 250,962 133,955
------------------------------ ------------
Net cash used in operating activities (1,898,106) (323,014) (10,886,501)
------------------------------ ------------
Cash flows from investing activities:
Purchase of furniture and fixtures (13,260) -- (28,260)
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 (13,260) -- (70,425)
------------------------------ ------------
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 -- (516,545) --
Proceeds from short-term borrowings -- 230,000 1,934,964
Repayment of short-term borrowings (230,000) -- (230,000)
------------------------------ ------------
Net cash provided by (used in)
financing activities (230,000) 215,280 14,619,137
------------------------------ ------------
Increase (decrease) in cash and cash equivalents (2,141,366) (107,734) 3,662,211
Cash and cash equivalents at beginning of period 5,803,577 561,078 --
------------------------------ ------------
Cash and cash equivalents at end of period $ 3,662,211 453,344 3,662,211
============================== ============
Supplemental cash flow 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
============================== ============
Cash paid for interest $ 36,141 -- 174,118
============================== ============
5
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 September 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
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 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.
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
6
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 $1,295,388 for the nine months ended September 30, 2001. Cumulative
losses from inception through September 30, 2001 were $13,567,535. 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 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. In October 2001, the Company announced that patients have begun
receiving treatments pursuant to the approved protocol.
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.
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.
7
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 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 $3,662,211 on September 30, 2001, a
decrease of $2,141,366 from December 31, 2000. This change reflects a reduction
of approximately $270,000 in notes payable and accrued interest thereon plus a
reduction in accounts payable and accrued expenses by $664,960, 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 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 $42,000
in computer, laboratory and testing equipment. We also expect to hire one
additional employee in the areas of research and development, regulatory and
clinical management. 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
recently commenced Phase I trial using melphalan and the envisioned Phase III
clinical trials using doxorubicin. 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 September 30, 2001,
8
approximately $1,960,000 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.
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ACTUAL THROUGH
SEPTEMBER 30, 2001
====================================================== =======================
Research and development:
- ------------------------------------------------------ -----------------------
Phase III clinical trials using the Delcath
system with doxorubicin $1,196,000
- ------------------------------------------------------ -----------------------
Research and development stage clinical trials
for other chemotherapy agents $ 78,000
- ------------------------------------------------------ -----------------------
Repayment of indebtedness $ 270,000
- ------------------------------------------------------ -----------------------
Working capital and general corporate purposes $ 416,000
- ------------------------------------------------------ -----------------------
Total $1,960,000
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Item 5. Other Information
(a)
1. Effective October 22, 2001, the Company's common shares and
warrants were decoupled from the units (Nasdaq SmallCap Market
symbol: DCTHU, Boston Stock Exchange symbol: DCTU) issued October
19, 2000, and commenced separate trading on the Nasdaq SmallCap
Market (respective symbols: DCTH and DCTHW) and The Boston Stock
Exchange (respective symbols: DCT and DCTW). After the decoupling,
the first recorded trade on the Nasdaq SmallCap Market was $1.59
for the Company's common stock and $.50 for the Company's warrants.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.10 Amendment to Key Employee Agreement dated October 30, 2001,
by and between the Company and M.S. Koly.
10.11 Amendment to Key Employee Agreement dated October 30, 2001,
by and between the Company and Samuel Herschkowitz.
(b) Reports on Form 8-K.
None.
9
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: November 14, 2001 /s/ Thomas S. Grogan
---------------------
Thomas S. Grogan
Chief Financial Officer
(on behalf of the registrant
and as the Principal Financial
Officer of the registrant)
10
EXHIBIT 10.10
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AMENDMENT TO KEY EMPLOYEE AGREEMENT
-----------------------------------
THIS AMENDMENT dated October 30, 2001 to the KEY EMPLOYEE AGREEMENT
effective as of April 30, 1996 by and between DELCATH SYSTEMS, INC., a Delaware
corporation with its principal offices at 1100 Summer Street, 3rd Floor,
Stamford, Connecticut 06905 (the "Company") and M.S. KOLY residing at 575
Middlesex Road, Darien, Connecticut 06820 (hereinafter referred to as the
"Employee").
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Section 2.2(d) of the Key Employment Agreement is amended by
deleting it in its entirety and inserting in place thereof the
following:
"(d) at any time without Cause, provided the Company shall be
obligated to pay to you upon notice of termination, as severance
pay, a lump sum amount equal to one (1) year's Base Salary (as set
forth on Exhibit A attached hereto), less applicable taxes and
other required withholdings and any amounts you may owe to the
Company. If, however, a change of control in the Company should
occur causing termination of your employment without Cause, then
you shall be entitled to receive as severance pay a lump sum
amount equal to the greater of (i) two (2) years' Base Salary (as
set forth on Exhibit A attached hereto), or (ii) the Base Salary
due to you for the remaining term of this Agreement at the time of
termination. For purposes of this Agreement "change of control"
shall be deemed to be the sale of all or substantially all of the
stock or assets of the Company, the merger of the Company with
another entity where the other entity survives the merger, or a
change in the composition of the Board of Directors such that the
current incumbents no longer constitute at least a majority of the
Board."
2. Exhibit A, Section 1 of the Key Employee Agreement is amended by
deleting it in its entirety and inserting in place thereof the
following:
"1. Term. The term of the Agreement to which this Exhibit A is
annexed and incorporated shall be until December 1, 2004, unless
renewed in accordance with Section 2.1 of the Agreement or
terminated prior thereto in accordance with Section 2.2 or 2.3 of
the Agreement."
3. Exhibit A, Section 2(a) of the Key Employee Agreement is amended
by deleting it in its entirety and inserting in place thereof the
following:
"(a) Base Salary. Beginning December 1, 2001, your Base Salary
shall be $225,000 per annum, payable in accordance with the
Company's payroll policies, and subject to increases thereafter as
determined by the Company's Board of Directors or Executive
Committee."
4. In all other respects, the Key Employee Agreement remains in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to the Key
Employee Agreement to be signed by its duly authorized officer, and Employee has
hereto set his hand and seal as of the day and year first hereinabove written.
EMPLOYEE: EMPLOYER:
DELCATH SYSTEMS, INC.
/s/ M.S. Koly By: /s/ Joseph Milana
- -------------------------- -------------------------
M.S. Koly Joseph Milana, Controller
EXHIBIT 10.11
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AMENDMENT TO KEY EMPLOYEE AGREEMENT
-----------------------------------
THIS AMENDMENT dated October 30, 2001 to the KEY EMPLOYEE AGREEMENT
effective as of April 30, 1996 by and between DELCATH SYSTEMS, INC., a Delaware
corporation with its principal offices at 1100 Summer Street, 3rd Floor,
Stamford, Connecticut 06905 (the "Company") and SAMUEL HERSCHKOWITZ, M.D.
residing at 122 Willow Street, Brooklyn, NY 11201 (hereinafter referred to as
the "Employee").
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Exhibit A, Section 2(a) of the Key Employee Agreement is amended
by deleting it in its entirety and inserting in place thereof the
following:
"(a) Base Salary. Beginning December 1, 2001, your Base Salary
shall be $140,000 per annum, payable in accordance with the
Company's payroll policies, and subject to increases thereafter as
determined by the Company's Board of Directors or Executive
Committee."
2. In all other respects, the Key Employee Agreement remains in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to the Key
Employee Agreement to be signed by its duly authorized officer, and Employee has
hereto set his hand and seal as of the day and year first hereinabove written.
EMPLOYEE: EMPLOYER:
DELCATH SYSTEMS, INC.
/s/ Samuel Herschkowitz By: /s/ Joseph Milana
- -------------------------- -------------------------
Samuel Herschkowitz, M.D. Joseph Milana, Controller
