SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 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)
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 May 9, 2002, there were 4,146,997 shares of the Issuer's Common Stock,
$.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 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
Item 1. Financial Statements (Unaudited)
Balance Sheet - March 31, 2002 3
Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 and Cumulative from Inception
(August 5, 1988) to March 31, 2002 4
Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 and Cumulative from Inception
(August 5, 1988) to March 31, 2002 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 7
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
(Unaudited)
March 31,
Assets 2002
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Current assets:
Cash and cash equivalents ................................. $ 1,224,921
Certificate of deposit .................................... 1,552,232
Interest receivable ....................................... 18,326
Prepaid insurance ......................................... 47,667
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Total current assets ................... 2,843,146
Furniture and fixtures, net .................................... 18,162
Due from affiliate ............................................. 24,000
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Total assets ........................... $ 2,885,308
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..................... $ 232,808
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Total current liabilities .............. 232,808
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Stockholders' equity (note 2):
Preferred stock, $.01 par value: 10,000,000 shares
authorized; no shares issued and outstanding ........... --
Common stock, $.01 par value; 15,000,000 shares authorized;
3,903,816 shares issued and outstanding ................ 39,038
Additional paid-in capital ................................ 18,835,160
Deficit accumulated during development stage .............. (16,221,698)
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Total stockholders' equity ................ 2,652,500
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Total liabilities and stockholders' equity $ 2,885,308
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See accompanying notes to financial statements.
3
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
Cumulative
from inception
(August 5, 1988)
Three months ended to
3/31/2002 3/31/2001 March 31, 2002
--------- --------- --------------
Costs and expenses:
Legal, consulting and accounting fees $ 322,016 $ 422,294 $ 6,347,271
Compensation and related expenses ... 165,174 122,978 5,990,047
Other operating expenses ............ 111,607 123,076 3,078,631
----------- ----------- ---------------
Total costs and expenses .......... 598,797 668,348 15,415,949
----------- ----------- ---------------
Operating loss .................... (598,797) (668,348) (15,415,949)
Interest income ..................... 23,858 76,771 864,329
Interest expense .................... -- (12,632) (171,473)
----------- ----------- ---------------
Net loss ........................ $ (574,939) $ (604,209) $(14,723,093)
=========== =========== ===============
Common share data:
Basic and diluted loss per share $ (0.15) $ (0.15)
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Weighted average number of basic
and diluted common shares
outstanding .............. 3,903,816 3,903,852
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See accompanying notes to financial statements.
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative
from inception
(August 5, 1988)
Three months ended to
3/31/2002 3/31/2001 March 31, 2002
--------- --------- --------------
Cash flows from operating activities:
Net loss......................................... $ (574,939) $ (604,209) (14,723,093)
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 ........................ 1,734 1,140 16,498
Amortization of organization costs .......... -- -- 42,165
Decrease (increase) in prepaid expenses ..... 22,000 25,835 (47,667)
(Increase) decrease in interest receivable .. (17,270) 23,802 (18,326)
Due from affiliate .......................... -- -- (24,000)
Increase (decrease) in accounts
payable and accrued expenses .............. 56,728 (574,921) 232,808
------------ ------------ -----------
Net cash used in operating activities ... (511,747) (930,353) (11,765,159)
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Cash flows from investing activities:
Purchase of furniture and fixtures .............. (6,400) (7,792) (34,660)
Purchase of short-term investments .............. (1,552,232) -- (2,582,232)
Proceeds from maturities of short-term
investments ................................... -- -- 1,030,000
Organization costs .............................. -- -- (42,165)
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Net cash used in investing activities ... (1,558,632) (7,792) (1,629,057)
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Cash flows from financing activities:
Net proceeds from sale of stock and exercise
of stock options and warrants ................. -- -- 13,413,708
Dividends paid .................................. -- -- (499,535)
Proceeds from short-term borrowings ............. -- -- 1,704,964
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Net cash provided by financing activities -- -- 14,619,137
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(Decrease) increase in cash and cash
equivalents ........................ (2,070,379) (938,145) 1,224,921
Cash and cash equivalents at beginning of period .... 3,295,300 5,803,577 --
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Cash and cash equivalents at end of period .......... $ 1,224,921 $ 4,865,432 $ 1,224,921
============ ============ ===========
Cash paid for interest .............................. $ -- $ 1,294 $ 171,473
============ ============ ===========
Supplemental 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
============ ============ ===========
See accompanying notes to financial statements.
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
chemotherapeutic 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 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 March 31, 2002 and 2001 and cumulative from inception
(August 5, 1988) to March 31, 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 as filed with the
Securities and Exchange Commission on March 12, 2002 and April 5, 2002,
respectively.
Note 3: Development Expenses
The Company considers that substantially all of its efforts are directed toward
development of its propriety drug delivery system, and to activities in support
of such development. Such development expenses for the three months ended March
31, 2002 amounted to $444,967.
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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 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
Since our founding in 1988 by a team of physicians, we have been a development
stage company engaged primarily in developing and testing the Delcath system for
the treatment of liver cancer. A substantial portion of our historical expenses
have been for the development of our medical device and the clinical trials of
our product, and the vigorous pursuit of patents worldwide, which now total ten.
We expect to continue to incur significant losses from costs for product
development, clinical studies, securing patents, regulatory activities,
manufacturing and establishment of a sales and marketing organization without
any significant revenues. A detailed description of the cash used to fund
historical operations is in the financial statements and the notes thereto.
Without an FDA-approved product and commercial sales, we will continue to be
dependent upon existing cash and the sale of equity or debt to fund future
activities 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 chemotherapeutic agent, melphalan. The Phase I trial
at the National Cancer Institute ("NCI") marks an expansion in the potential
labeled usage beyond doxorubicin, the chemotherapeutic 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 quarter 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.
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
7
committed to pre-clinical and clinical trials for the use of other chemotherapy
agents with the Delcath system for the treatment of liver cancer, and the
development of additional products and components.
In January 2002, we announced that the New York University School of Medicine
plans to proceed with the FDA approved Phase III study 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 plans to proceed with a Phase
III study 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, the studies 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. Our cash and cash equivalents and short
term investments balance at March 31, 2002 was $2,777,153.
Our future liquidity and capital requirements will depend on numerous factors,
including the progress of our research and product development programs,
including clinical studies; the timing and costs of making various United States
and foreign regulatory filings, obtaining approvals and complying with
regulations; the timing and effectiveness of product commercialization
activities, including marketing arrangements overseas; the timing and costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property rights; and the effect of competing technological and market
developments.
The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a loss for its entire history and there can be no
assurance of it ever achieving consistent profitability. The Company had working
capital at March 31, 2002 of $2,610,338. The Company expects 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,
the Company may need additional capital in the future to fully implement its
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) - (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 March 31, 2002,
approximately $2,680,000 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.
8
Actual through
March 31, 2002
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Research and development:
Phase III clinical trials using the Delcath system with doxorubicin $1,673,000
Phase I clinical trials using the Delcath system with melphalan $ 278,000
Research and development stage clinical trials for other chemotherapy $ 78,000
agents
Repayment of indebtedness $ 270,000
Working capital and general corporate purposes $ 381,000
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Total $2,680,000
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The Company did not file any Current Report on Form 8-K during the
quarter ended March 31, 2002.
9
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: May 15, 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)
10