UNITED STATES
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, 2006
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
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
--------------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1100 Summer Street, 3rd Floor, Stamford, CT 06905
----------------------------------------------------
(Address of Principal Executive Offices)
(203) 323-8668
--------------------------------------------------------
(Issuer's Telephone Number)
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of November 6, 2006, 20,660,763 shares of the Issuer's common stock, $0.01
par value, were issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DELCATH SYSTEMS, INC.
Index
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheet - September 30, 2006 3
Condensed Statements of Operations for the Three and Nine Months
Ended September 30, 2006 and 2005 and Cumulative from
Inception (August 5, 1988) to September 30, 2006 4
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2006 and 2005 and Cumulative from Inception
(August 5, 1988) to September 30, 2006 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 10
Item 3. Controls and Procedures 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits 13
Signatures 14
Delcath Systems, Inc.
(A Development Stage Company)
Condensed Balance Sheet
(Unaudited)
September 30, 2006
September 30,
Assets 2006
---------------------
Current assets:
Cash and cash equivalents $ 7,113,000
Cash held in trust 3,016,247
Certificates of deposit 2,378,454
Prepaid insurance 26,417
---------------------
Total current assets 12,534,118
Furniture and fixtures, net 4,551
---------------------
Total assets $ 12,538,669
=====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,775,310
---------------------
Total current liabilities 1,775,310
---------------------
Contingencies (Note 6) -
Stockholders' equity
Common stock, $0.01 par value, 70,000,000
shares authorized 205,367
Additional paid-in capital 43,831,534
Deficit accumulated during development stage (33,273,542)
---------------------
Total stockholders' equity 10,763,359
---------------------
Total liabilities and stockholders'
equity $ 12,538,669
=====================
See accompanying notes to condensed financial statements
3
Delcath Systems, Inc.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)
Cumulative
From Inception
Three Months Ended Nine Months Ended (August 5, 1988)
September 30, September 30, to
2006 2005 2006 2005 September 30, 2006
--------------------------- ------------------------------- --------------------
Costs and expenses:
General and administrative expenses $ 4,400,910 $ 309,820 $ 6,053,427 $ 1,017,223 $ 14,492,632
Research and development costs 466,207 395,332 1,868,064 1,329,499 18,927,544
----------- --------------- ------------- -------------- ----------------
Total costs and expenses 4,867,117 705,152 7,921,491 2,346,722 33,420,176
----------- --------------- ------------- -------------- ----------------
Operating loss (4,867,117) (705,152) (7,921,491) (2,346,722) (33,420,176)
Other income (expense):
Interest income 178,599 61,399 483,116 162,558 1,816,712
Interest expense - - - - (171,473)
----------- -------------- ------------- --------------- ----------------
Net loss $ (4,688,518) $ (643,753) $ (7,438,375) $ (2,184,164) (31,774,937)
=========== ============== ============= =============== ================
Common share data:
Basic and diluted loss
per share $ (0.23) $ (0.04) $ (0.38) $ (0.14)
=========== ============== ============= ==============
Weighted average number
of shares of common
stock outstanding 20,131,471 16,143,367 19,658,719 15,667,028
=========== ============== ============= ===============
See accompanying notes to condensed financial statements
4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
Cumulative
Nine Months Ended from inception
September 30, (August 5, 1988)
2006 2005 to September 30, 2006
------------------------------ --------------------
Cash flows from operating activities:
Net loss $ (7,438,375) $ (2,184,164) $ (31,774,937)
Adjustments to reconcile net
loss to net cash used in operating
activities
Stock option compensation expense 505,282 8,270 3,038,944
Stock and warrant compensation expense
issued for consulting services - 103,425 339,711
Depreciation expense 3,003 4,544 40,747
Amortization of organization costs - - 42,165
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 500 45,646 (26,417)
Decrease (increase) in interest receivable 91,574 (102,918) 0
Increase (decrease) in accounts
payable and accrued expenses 1,445,240 (342,407) 1,775,310
------------------------------ --------------------
Net cash used in operating activities (5,392,776) (2,467,604) (26,564,477)
------------------------------ --------------------
Cash flows from investing activities:
Purchase of furniture and fixtures - - (45,298)
Purchase of short-term investments (5,394,701) (3,047,077) (27,462,195)
Proceeds from maturities of short-term
investments 11,097,790 3,055,129 22,067,494
Organization costs - - (42,165)
------------------------------ --------------------
Net cash provided by (used in)
investing activities 5,703,089 8,052 (5,482,164)
------------------------------ --------------------
Cash flows from financing activities:
Net proceeds from sale of stock and
exercise of stock options and warrants 5,098,556 3,119,651 38,005,315
Repurchases of outstanding common stock - - (51,103)
Dividends paid - - (499,535)
Proceeds from short-term borrowings - - 1,704,964
------------------------------ --------------------
Net cash provided by
financing activities 5,098,556 3,119,651 39,159,641
------------------------------ --------------------
Increase in cash and cash equivalents 5,408,869 660,099 7,113,000
Cash and cash equivalents at beginning of
period 1,704,131 202,335 -
------------------------------ --------------------
Cash and cash equivalents at end of period $ 7,113,000 $ 862,434 $ 7,113,000
============================== ====================
Cash paid for interest $ - $ - $ 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
============================== ====================
See accompanying notes to condensed financial statements
5
Delcath Systems, Inc.
(A Development Stage Company)
Notes to Condensed 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 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 IDE
(Investigational Device Exemption) and an IND (Investigational New Drug) for its
product by the United States Food and Drug Administration (the "FDA"). The
Company is seeking to complete clinical trials in order to obtain separate FDA
pre-market approvals for the use of its delivery system using doxorubicin and
melphalan, chemotherapeutic agents, 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 (consisting of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 2006 and
2005 and cumulative from inception (August 5, 1988) to September 30, 2006.
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, 2005, which are
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005 as filed with the Securities and Exchange Commission. " Note
3: Costs and Expenses
Research and Development Costs
Research and development costs include the costs of materials, personnel,
outside services and applicable indirect costs incurred in development of the
Company's proprietary drug delivery system. All such costs are charged to
expense when incurred. Research and development costs and expenses includes
$338,539 and $-0- of stock option compensation expense for the nine-months ended
September 30, 2006 and 2005, respectively. (See Note 5).
General and Administrative Expenses
General and administrative expenses include the Company's general and
administrative operating expenses. Included in these expenses are $166,743 and
$-0- of stock option compensation expense for the nine-months ended September
30, 2006 and 2005, respectively. (See Note 5). Also included in general and
administrative expenses are approximately $3.9 million of legal and other costs
incurred in connection with the consent solicitation during the quarter ended
September 30, 2006.
6.
Note 4: Stockholders' Equity
During the nine months ended September 30, 2006, the Company received net
proceeds of $6,388 ($1.022 per share) upon the exercise of 1,250 of the
Representative Unit Purchase Warrants that were issued to underwriters as part
of the Company's public offering In 2003. In addition, 6,250 Representative's
Common Stock Warrants were exercised and net proceeds of $8,000 ($1.28 per
share) were received with an additional 6,250 shares of common stock being
issued.
The Company received a net amount of $204,900 upon the exercise of stock options
for 80,000 shares during the nine months ended September 30, 2006. Of those
options, 10,000 were exercised at a price of $1.03 per share and 70,000 were
exercised at a price of $2.78.
During the nine months ended September 30, 2006, the Company received net
proceeds of $4,879,268 as 143,308 of the March 2004 Warrants were exercised,
927,115 of the November 2004 Warrants were exercised, 94,787 of the December
2004 warrants were exercised, and 429,218 of the November 2005 Warrants were
exercised for which it has issued shares of its common stock.
The following table sets forth changes in stockholders' equity during the nine
months ended September 30, 2006:
Common Stock, $0.01 Par Value
Issued and Outstanding Deficit Accumulated
------------------------------ Additional During
No. of shares Amount Paid in Capital Development Stage Total
------------- ------ -------------- ----------------- -------
Balance at December 31, 2005 18,849,653 $188,497 $38,244,566 $(25,835,167) $12,597,896
Issuance of common stock in
connection with the exercise of
2003 Representative's Unit
Purchase Warrants 6,250 63 6,325 -- 6,388
Issuance of common stock in
connection with the exercise of
Representative's Common Stock
Warrants 6,250 63 7,937 -- 8,000
Issuance of common stock in
connection with the exercise of
stock options 80,000 800 204,100 -- 204,900
Issuance of common stock in
connection with the exercise of
2004 and 2005 Warrants 1,594,428 15,944 4,863,324 -- 4,879,268
Vesting of stock options -- -- 505,282 -- 505,282
Net loss for nine months ended
September 30, 2006 (7,438,375) (7,438,375)
---------- ----------- ----------- ------------- ------------
Balance at September 30, 2006 20,536,581 $205,367 $43,831,534 $(33,273,542) $10,763,359
========== =========== =========== ============= ============
Note 5: Stock Option Plan
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
(SFAS 123R). This Statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), and supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and its
related implementation guidance. SFAS 123R establishes accounting for equity
instruments exchanged for employee services. Under
7.
the provisions of SFAS 123R, share-based compensation is measured at the grant
date, based upon the fair value of the award, and is recognized as an expense
over the option holders' requisite service period (generally the vesting period
of the equity grant). Prior to January 1, 2006, the Company accounted for
share-based compensation to employees in accordance with APB 25, as permitted by
SFAS No. 123, and, accordingly, did not recognize compensation expense for the
issuance of options with an exercise price equal to or greater than the market
price at the date of grant. The Company also followed the disclosure
requirements of SFAS 123 as amended by SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". Effective January 1, 2006, the
Company adopted the modified prospective approach and accordingly, prior period
amounts have not been restated. Under this approach, the Company is required to
record compensation cost for all share-based payments granted after the date of
adoption based on the grant date fair value, estimated in accordance with the
provisions of SFAS 123R, and for the unvested portion of all share-based
payments previously granted that remain outstanding based on the grant date fair
value, estimated in accordance with the original provisions of SFAS 123. The
Company will expense its share-based compensation for share-based payments
granted after January 1, 2006 under the ratable method, which treats each
vesting tranche as if it were an individual grant. Adoption of this standard did
not have a significant impact on the Company's financial condition or results of
operations.
The Company periodically grants stock options for a fixed number of shares of
common stock to its employees, directors and non-employee contractors, with an
exercise price greater than or equal to the fair market value of our common
stock at the date of the grant. The Company estimates the fair value of stock
options using a Black-Scholes valuation model. Key inputs used to estimate the
fair value of stock options include the exercise price of the award, the
expected post-vesting option life, the expected volatility of our stock over the
option's expected term, the risk-free interest rate over the option's expected
term, and our expected annual dividend yield. Estimates of fair value are not
intended to predict actual future events or the value ultimately realized by
persons who receive equity awards. There have been no share-based payments
granted in 2006.
The required adoption of SFAS No. 123R as of January 1, 2006 is expected to
significantly increase compensation expense for future grants. The actual impact
on future years will be dependent on a number of factors, including our stock
price and the level of future grants and awards. In addition, costs related to
accounting and valuation services of stock options currently outstanding in
accordance with SFAS No. 123R would have been cost prohibitive to the Company if
the Company had not adopted certain measures. Based on these considerations and
after discussion of applicable accounting literature, the Compensation Committee
of the Board of Directors approved accelerating the vesting of all unvested
stock options effective January 1, 2006. Unvested options having exercise prices
of $2.78 and $3.59 per share, representing the right to purchase a total of
approximately 1 million shares, became exercisable as a result of the vesting
acceleration. All other terms and conditions in the original grants remain
unchanged. The acceleration of vesting resulted in the recognition of a non cash
compensation expense of $505,282 on January 1, 2006 which is included in costs
and expenses in the statements of operations.
Prior to January 1, 2006, the Company accounted for stock-based compensation
plans in accordance with the provisions of APB 25, as permitted by SFAS No. 123,
and, accordingly, did not recognize compensation expense for the issuance of
options with an exercise price equal to or greater than the market price at the
date of grant. There were no share-based grants during the nine-month period
ended September 30, 2005. Following the methodology of SFAS No. 123 regarding
compensation costs based on the fair value for all employee stock option grants,
the net loss and net loss per share for the nine months ended September 30, 2005
would have been increased to the pro forma amounts indicated as follows:
Net loss, as reported $ (2,184,164)
Stock-based employee compensation
expense included in net loss, net
of related tax effects 0
8.
Stock-based employee
compensation determined under
the fair value based method,
net of related tax effects (80,097)
-----------
Pro forma net loss $ (2,264,261)
===========
As reported $ (0.14)
Pro forma (0.14)
The Company established an Incentive Stock Option Plan, a Non-Incentive Stock
Option Plan, the 2000 Stock Option Plan, the 2001 Stock Option Plan and the 2004
Stock Incentive Plan (collectively, the "Plans") under which stock options,
stock appreciation rights, restricted stock, and stock grants may be awarded. A
stock option grant allows the holder of the option to purchase a share of the
Company's Common Stock in the future at a stated price. The Plans are
administered by the Compensation and Stock Option Committee of the Board of
Directors which determines the individuals to whom the options shall be granted
as well as the terms and conditions of each option grant, the option price and
the duration of each option.
The Company's Incentive and Non-Incentive Stock Option Plans were approved and
became effective on November 1, 1992. During 2000, 2001 and 2004, respectively,
the 2000 and 2001 Stock Option Plans and the 2004 Stock Incentive Plan, became
effective. Options granted under the Plans vest as determined by the
Compensation and Stock Option Committee and expire over varying terms, but not
more than five years from the date of grant. All outstanding options are fully
vested. Stock option activity for the nine-month period ended September 30, 2006
is as follows:
The Plans
----------------------------------------------------------==----
Exercise Weighted Weighted
Price Average Average
Stock Per Exercise Remaining Life
Options Share Price (Years)
------- ----- ----- -------
Outstanding at December 31, 2005 1,385,800 $0.71 - $3.59 $2.51 4.17
Granted 0
Expired 10,000 $2.78 - $3.59 $3.39
Exercised 80,000 $1.03 - $2.78 $2.56
-------------
Outstanding at September 30, 2006 1,295,800 $0.71 - $3.59 $2.81 3.40
============
Note 6: Contingencies
The Company has had in effect since 2003 a plan that was approved by the
Compensation and Stock Option Committee providing for payments to certain of its
directors and officers in the event of a change in control (as defined) of
Delcath occurs. A trust was formed the beneficiaries of which are the persons
entitled to receive payments under this plan but no assets were transferred to
the trust at that time. During the quarter ended September 30, 2006, the trust
was partially funded with approximately $3 million. The assets of the trust are
subject to the claims of the Company's general creditors in the event of the
Company's insolvency.
9.
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 our current or future
drug-delivery system and uncertainties regarding our ability to obtain financial
and other resources for any research, development and commercialization
activities. These factors, and others, are discussed from time to time in our
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 pursuit of patents worldwide. 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. While 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.
During 2001, the Company initiated a Phase I clinical study at The National
Cancer Institute of the Delcath system for isolated liver perfusion using the
chemotherapeutic agent, melphalan. The Phase I trial marked an expansion in the
potential labeled usage beyond doxorubicin, the chemotherapeutic agent used in
our initial clinical trials. Enrollment of new patients in the Phase I trial was
completed in 2003.
During 2004, we commenced a Phase III clinical trial study of the Delcath drug
delivery system for inoperable cancer in the liver using doxorubicin. We are
currently recruiting sites worldwide.
During 2005, we commenced a Phase II multiple histology study of the Delcath
drug delivery system for cancers related to the colon, breast, and lymph nodes
using melphalan and patients are being enrolled and treated.
In 2006, we started enrolling and treating patients in a Phase III protocol for
the study of the Delcath drug delivery system for inoperable cancer in the liver
using melphalan.
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 melphalan and doxorubicin with the Delcath system and
Phase II 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, and the development of additional products and components. We
will also 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.
10.
Liquidity and Capital Resources
We expect our available funds to be sufficient for our anticipated needs for
working capital and capital expenditures through 2007 provided no studies using
new agents or treating new organs are initiated or a substantial increase in
sites for the Phase III human clinical trials occurs. The Company is not
projecting any capital expenditures that will significantly affect the Company's
liquidity during the next 12 months. The Company is projecting the hiring of one
additional employee.
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 its ever achieving profitability. The Company believes its capital
resources are adequate to fund operations for at least the next twelve months
but anticipates that it will require additional working capital after 2007 or
earlier if new studies or trials are initiated or, again, if a substantial
increase in sites for the Phase III human clinical trials occurs. There can be
no assurance that such working capital will be available on acceptable terms, if
at all.
During the nine months ended September 30, 2006, the Company had exercises of
previously issued options and warrants. Please see Note 4 to the September 30,
2006 Condensed Financial Statements included in Part I of this filing and
incorporated herein by reference for a complete description of share issuances
together with receipt of proceeds. We plan to use the net proceeds to fund, in
part, the Phase III clinical trial using doxorubicin and the Phase III clinical
trial at The National Cancer Institute using melphalan.
Application of Critical Accounting Policies
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Note 1 to the Company's financial statements contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2005 as filed with
the Securities and Exchange Commission. The Company has not adopted any
significant new accounting policies or modified the application of existing
policies during the nine months ended September 30, 2006.
(b) Management's Discussion and Analysis of Financial Condition and Results
of Operations
Not Applicable.
(c) Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
Item 3. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and its Chief Financial
Officer as of the end of the period covered by this report, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure
11.
controls and procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer or officers and its
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
During the quarter ended September 30, 2006, the Company commenced two new
lawsuits.
On August 4, 2006, the Company instituted a lawsuit against Robert Ladd, Laddcap
Value Associates LLC and Laddcap Value Partners LP (collectively, the "Ladd
Defendants") in the U.S. District Court for the District of Columbia. The
lawsuit alleged that the Ladd Defendants had made a series of material
misstatements and omissions in violation of the Securities Exchange Act of 1934
in its 13D filings, Valuation Proxy Solicitation and Schedule 14A Preliminary
Proxy Statement for their proposed consent solicitation seeking to replace the
Company's Board of Directors. The principal relief sought by the Company was an
order: (a) enjoining the Ladd Defendants proposed consent solicitation until
after a trial can be held on the merits; (b) mandating that the Ladd Defendants
publicly correct their misstatements and omissions following a trial on the
merits; and (c) prohibiting the Ladd Defendants from making any further
misstatements and omissions.
On October 8, 2006, the Company entered into a Settlement Agreement resolving
all issues outstanding with the Ladd Defendants. The agreement provides for the
immediate appointment of Mr. Robert B. Ladd, 48, Principal of Laddcap Value
Partners, to the Delcath Board of Directors and one additional independent
director to be mutually agreed upon by Laddcap and the Company. The Company
issued 100,000 shares of common stock to Laddcap as partial reimbursement for
its expenses associated with the Consent Solicitation. As part of the agreement,
Laddcap is also permitted to increase its ownership in Delcath up to a maximum
of 14.9% of Delcath's total outstanding common stock by purchasing additional
shares of Delcath common stock directly and only from Delcath for a cash price
equal to the 10 trading day average of the closing price of Delcath stock prior
to the time that an additional purchase is made.
In conjunction with the resolution, Delcath has agreed to terminate its lawsuit
against the Ladd Defendants relating to its claims under Sections 13(d) and
14(a) of the Securities Exchange Act of 1934 and Laddcap has agreed to end its
attempt to remove the Delcath Board of Directors.
In addition, on August 4, 2006, the Company instituted a lawsuit against
Jonathan Foltz by filing a complaint in the State of Connecticut Superior Court
for the Judicial District of Stamford/Norwalk at Stamford. The complaint alleges
that Mr. Foltz, the former Director of Operations of Delcath, has
misappropriated various Delcath trade secrets and other proprietary information
and has wrongly shared such protected information with
12.
other parties and has also used the information for his own personal gain. The
complaint alleges that Mr. Foltz violated the Uniform Trade Secrets Act and the
Unfair Trade Practices Act of Connecticut. The relief sought by the Company
includes a temporary and permanent injunction, money damages, including punitive
damages, and attorney's fees.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 21, 2006, the Company issued an aggregate of 52,711 shares of its Common
Stock upon exercise of then outstanding Warrants to Purchase Shares of Common
Stock dated November 27, 2005. The Company received an aggregate of $206,100
upon such exercises. On July 27, 2006, the Company issued an aggregate of 94,787
shares of its Common Stock upon exercise of then outstanding Warrants to
Purchase Shares of Common Stock dated December 8, 2004. The Company received an
aggregate of $309,006 upon such exercises. In August 2006, the Company issued an
aggregate of 577,542 shares of its Common Stock upon exercise of then
outstanding Warrants to Purchase Shares of Common Stock dated November 24, 2004.
The Company received an aggregate of $1,606,567 upon such exercises. The Company
claims an exemption from registration of the offer and sale of the shares of
Common Stock issued upon exercise of these Warrants under Rule 506 under the
Securities Act of 1933 on the basis that each of the purchasers is an accredited
investor.
No underwriter was involved in the exercise of these Warrants, and the Company
paid no underwriting discount or commission in connection therewith. Proceeds
from the sale of securities will be used to fund current and future operations.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended September 30, 2006, the Ladd Defendants commenced a
solicitation of consents from the Company's stockholders seeking to remove all
of the Company's directors and replacing them with nominees selected by the Ladd
Defendants. The consent solicitation was terminated when the Company and the
Ladd Defendants entered into a Settlement Agreement described herein under
"Legal Proceedings." In addition, see the second paragraph of Note 3 to the
Notes to Condensed Financial Statements included in Part I.
Item 5. Other Information
The information included in Item 2 of this report is incorporated by reference
into this Item 5.
There has been no material change to the procedures by which security holders
may recommend nominees for election to the Company's Board of Directors from the
procedures described in the Company's proxy statement for its 2006 Annual
Meeting of Stockholders.
Item 6. EXHIBITS
31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14.
31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 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.
13.
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.
(Registrant)
November 14, 2006 /s/ PAUL M. FEINSTEIN
------------------------------------
Paul M. Feinstein
Chief Financial Officer (on behalf of
the registrant and as the principal
financial and accounting officer of the
registrant)
14.