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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
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 December 1, 2000, 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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<PAGE>
DELCATH SYSTEMS, INC.
INDEX
PAGE
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - September 30, 2000 3
Statements of Operations -
Three Months and Nine Months Ended September 30, 2000 and 1999
and Cumulative from Inception (August 5, 1988)
to September 30, 2000 4
Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 and
Cumulative from Inception (August 5, 1988)
to September 30, 2000 5
Notes to Financial Statements 6
Item 2. Plan of Operation 7
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELCATH SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
September 30, 2000
ASSETS
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Current assets:
Cash and cash equivalents $ 453,344
Interest receivable 993
Prepaid rent 21,845
Prepaid insurance 14,583
Deferred IPO costs 516,545
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Total current assets 1,007,310
Furniture and fixtures, net 6,000
Due from affiliate 24,000
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Total assets $ 1,037,310
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 363,710
Short term borrowings 230,000
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Total current liabilities 593,710
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Stockholders' equity
Class A preferred stock 20,000
Class B preferred stock 4,167
Common stock 10,941
Additional paid-in capital 12,266,752
Deficit accumulated during development stage (11,858,260)
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Total stockholders' equity 443,600
------------
Total liabilities and stockholders'
equity $ 1,037,310
============
See notes to financial statements
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<PAGE>
DELCATH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
CUMULATIVE
FROM INCEPTION
(AUGUST 5, 1988)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, TO
2000 1999 2000 1999 SEPTEMBER 30, 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Legal consulting and
accounting fees $ 51,344 $ 122,243 $ 224,270 $ 511,496 $ 4,741,439
Stock option
compensation expense
(reversal) -- -- -- (456,185) 2,520,170
Compensation and related
expenses 54,437 37,709 159,202 161,442 2,647,372
Other operating expenses 50,365 49,237 177,481 198,618 2,368,757
------------ ------------ ------------ ------------ ------------
Total costs and
expenses 156,146 209,189 560,953 415,371 12,277,738
------------ ------------ ------------ ------------ ------------
Operating loss (156,146) (209,189) (560,953) (415,371) (12,277,738)
Interest income 5,889 10,992 18,925 34,689 556,621
Interest expense (4,270) -- (4,270) (17,925) (137,143)
------------ ------------ ------------ ------------ ------------
Net loss $ (154,527) $ (198,197) $ (546,298) $ (398,607) $(11,858,260)
============ ============ ============ ============ ============
Common Share data:
Basic and diluted loss
per share $ (0.14) $ (0.23) $ (0.54) $ (0.48)
============ ============ ============ ============
Weighted average number
of shares of common
stock outstanding 1,094,070 863,197 1,017,112 836,327
</TABLE>
See notes to financial statements
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<PAGE>
DELCATH SYSTEMS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE><CAPTION>
CUMULATIVE
FROM INCEPTION
NINE MONTHS ENDED SEPTEMBER 30, (AUGUST 5, 1988)
2000 1999 TO SEPTEMBER 30, 2000
------------ ----------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss $ (546,298) $ (398,607) $(11,858,260)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense (reversal) -- (456,185) 2,520,171
Stock compensation expense -- -- 34,485
Depreciation expense 2,250 2,250 9,000
Amortization of organization costs -- -- 42,165
(Increase) in prepaid expenses (32,261) (5,383) (36,428)
(Increase) decrease in interest receivable 2,333 4,009 (993)
Due from affiliate -- -- (24,000)
(Decrease) increase in accounts --
payable and accrued expenses 250,962 (61,215) 363,710
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Net cash used in operating activities (323,014) (915,131) (8,950,150)
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Cash flows from investing activities:
Purchase of furniture and fixtures -- -- (15,000)
Purchase of short-term investments -- -- (1,030,000)
Proceeds from maturities of short-term investments -- -- 1,030,000
Organization costs -- -- (42,165)
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Net cash (used in) investing activities -- -- (57,165)
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Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants 501,825 801,190 8,042,240
Deferred IPO costs (516,545) -- (516,545)
Proceeds from short-term borrowings 230,000 -- 1,934,964
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Net cash provided by financing activities 215,280 801,190 9,460,659
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Increase (decrease) in cash and cash equivalents (107,734) (113,941) 453,344
Cash and cash equivalents at beginning of period 561,078 852,313
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Cash and cash equivalents at end of period 453,344 738,372 453,344
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Supplemental cash flow activities:
Conversion of debt to common stock $ -- $ -- $ 1,704,964
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Cash paid for interest $ -- $ -- $ 114,948
====================================================
</TABLE>
See notes to financial statements
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<PAGE>
DELCATH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Description of Business
Delcath Systems, Inc. (the "Company") is a development stage company which 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 United States 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, 2000 and 1999.
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 for the year ended December 31, 1999, which are contained in the
Company's Form SB-2 Registration Statement, which was declared effective by the
Securities and Exchange Commission on October 19, 2000.
Costs incurred in connection with the initial public offering of the Company
("Deferred IPO costs") were deferred and offset against the proceeds of the
initial public offering that closed in October 2000 (see Note 4).
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding during the period.
Note 3: Short Term Borrowings
In August and September 2000, the Company borrowed $230,000 for which the
Company issued $230,000 principal amount of promissory notes, which bear
interest at an annual rate of 22% and are due on May 27, 2001. Of these notes,
$50,000 principal amount was to M.S. Koly, Chief Executive Officer, President
and a director of Delcath, and $40,000 principal amount was issued to the mother
of Samuel Herschkowitz, our Chairman of the Board and Chief Technology Officer
in August and September 2000.
Note 4: Initial Public Offering
The Company completed an initial public offering underwritten by Whale
Securities Co., L.P. on October 19, 2000 of 1,200,000 units, each unit
consisting of one share of common stock and one redeemable warrant to purchase
one share of common stock at a price of $6.60 until October 18, 2005. The units
were sold at a price of $6.00 per unit. In connection with the initial public
offering, the Company received $7,200,000 before offering costs.
Note 5: 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.
In connection with the initial public offering, the holders of the 2,000,000
shares outstanding of the Company's Class A Preferred Stock and 416,675 shares
outstanding of the Company's Class B Preferred Stock agreed to convert their
shares into common stock prior to the closing of the offering, provided they
received payment of accumulated dividends. Upon the conversion of the Company's
Class A Preferred Stock and the Company's Class B Preferred Stock into
approximately 833,874 shares of Common Stock, the holders of the Class A and
Class B shares also received an aggregate of $499,535 in cash and 690,910 shares
of Common Stock in payment of the accrued dividends.
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<PAGE>
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
$2,049,980 and $572,581 for the years ended December 31, 1998 and 1999 and
$546,298 for the nine months ended September 30, 2000. Cumulative losses from
inception through September 30, 2000 were $11,858,260. 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.
We incurred non-cash compensation expense in connection with the grants of
options to purchase common stock to founders, employees, and directors because
those options had a weighted average exercise price below the fair value of the
common stock at the dates of the grants. This compensation expense from
inception on August 5, 1988, through September 30, 2000 totaled $2,520,170.
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.
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. While there can be no assurance regarding the start of
these trials, the Company anticipates the physicians will start recruiting
patients in the first quarter of 2001.
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
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<PAGE>
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 the initial public offering, the Company financed its
operations primarily through private placements of our common and preferred
stock. Through September 30, 2000, the Company raised $9,816,686 through the
sale of shares of its Class A Preferred Stock, Class B Preferred Stock and
Common Stock. In August and September 2000, we also borrowed $230,000 for which
we issued $230,000 principal amount of promissory notes, which bear interest at
an annual rate of 22% and are due on May 27, 2001. Of these notes, $50,000
principal amount was to M.S. Koly, Chief Executive Officer, President and a
director of Delcath, and $40,000 principal amount was issued to the mother of
Samuel Herschkowitz, our Chairman of the Board and Chief Technology Officer. The
Company expects to pay approximately $267,400 (including interest) to the
holders of these notes in May 2001. Cash used to fund operations from inception
through September 30, 2000 was $8,950,150. Our cash and cash equivalents totaled
$453,344 at September 30, 2000, a decrease of $107,734 from December 31, 1999.
In October 2000, the Company completed an initial public offering wherein the
Company received $7.2 million before offering costs and paid cash relating to
dividends on preferred shares of approximately $499,535.
Over the next 12 months, the Company expects to continue to incur expenses
related to the research and development of our technology, including Phase III
clinical trials using doxorubicin 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 trials
during the first quarter of 2001.
The Company expects to incur significant additional operating losses over each
of the next several years and expects cumulative losses to increase
significantly as the Company continues to expand its research and development,
clinical trials and marketing efforts. During the next 12 months, we expect to
purchase approximately $50,000 in computer, laboratory and testing equipment. We
also expect to hire approximately five additional employees in the areas of
research and development, regulatory and clinical management, marketing and
administrative functions at an estimated annual expense of $325,000. 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, based primarily on the approximately $5.3 million
provided by our initial public offering, net of offering expenses, that its
current cash balances will be sufficient to fund the Company's operations and
capital requirements through the end of the year 2001. 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. Our available funds
may not be sufficient to fund our clinical trials with respect to the use of the
Delcath system with doxorubicin to treat liver cancer. We also may not be able
to obtain additional financing if needed.
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<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a)-(c) Not applicable.
(d) The Company's Form SB-2 Registration Statement, Commission file no.
333-39470, for its initial public offering of 1,200,000 units at $6.00 per unit,
each unit consisting of one share of common stock and one redeemable warrant to
purchase one share of common stock at a price of $6.60 until October 18, 2005,
was declared effective by the Commission on October 19, 2000. The managing
underwriter for the initial public offering was Whale Securities Co., L.P. All
securities were offered for the account of the registrant. The offering closed
on October 24, 2000 with the sale of 1,200,000 units for $7,200,000. (The
underwriter's over-allotment option to purchase 180,000 units was not
exercised.) The following securities were registered in connection with the
offering: 1,380,000 units at an aggregate offering price of $8,280,000, of which
1,200,000 units were sold for an aggregate sales price of $7,200,000 and
1,380,000 shares of common stock underlying the common stock purchase warrants
included in the units at an aggregate offering price of $9,108,000, of which
none of the shares has been sold as the warrants first become exercisable
October 21, 2001 (unless earlier consented to by the managing underwriter). The
Company also registered underwriter's warrants to purchase 120,000 units, which
were issued to the underwriter for $100, and 120,000 units underlying the
underwriter's warrant for an aggregate offering price of $864,000, and 120,000
shares of common stock underlying the warrants issuable upon exercise of the
underwriter's warrant for an aggregate offering price of $792,000, neither of
which has yet been sold as the underwriter's warrant has not yet been exercised.
Inasmuch as the effective date of the initial public offering occurred after the
period covered by this report, information on the use of proceeds of the initial
public offering will be included in the Company's next periodic report, its Form
10-KSB for the fiscal year ended December 31, 2000.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits. The following exhibit is filed herewith:
27. Financial Data Schedule.
(b) No reports were filed on Form 8-K during the quarter for which this report
is filed, as the registrant first became subject to the reporting requirements
after September 30, 2000.
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: December 4, 2000 /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)
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