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Delcath Systems Inc. Reports Operating Results (10-Q)

October 23, 2009 | About:
10qk

10qk

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Delcath Systems Inc. (DCTH) filed Quarterly Report for the period ended 2009-10-21.

Delcath Systems Inc. has developed a system the Delcath system to isolate the liver from the general circulatory system and to administer chemotherapy and other therapeutic agents directly to the liver. Delcath Systems Inc. has a market cap of $144.2 million; its shares were traded at around $5.95 .

Highlight of Business Operations:

On September 1, 2009, the Company entered into a lease with option to purchase (the “Lease”) with Fitzgerald Brothers Beverages, Inc. (the “Landlord”), for the real property and free standing building thereon, containing approximately 10,320 square feet located at 566 Queensbury Avenue, Kingsbury, NY (the “Facility”). The Facility will house the Company s manufacturing operations. The term of the Lease commenced on September 1, 2009. Base rent on the Lease is $51,600 per year, payable in equal monthly installments of $4,300 on the first day of each month. The Company has an option to purchase the Facility upon delivery of written notice to the Landlord at least 120 days prior to expiration of the Lease term. The purchase price for the Facility is $400,000 if the Company acquires the Facility by September 1, 2010, $425,000 if the Company acquires the Facility by September 1, 2011, and $440,000 if the Company acquires the Facility by September 1, 2012.

We had a net loss of $16,359,010 for the nine months ended September 30, 2009. This compares to a net loss of $4,355,877 for the same period of 2008. The increase of $12,003,133 in net loss is related to a $9,104,305 increase in derivative instrument expense related to the Warrants, as well as a $3,053,895 increase in total costs and expenses.

In June 2009, the Company completed the sale of 869,565 shares of its common stock and the issuance of warrants to purchase 1,043,478 common shares (the 2009 Warrants) pursuant to a subscription agreement with a single investor. The Company received gross proceeds of $2,999,999, with net cash proceeds after related expenses from this transaction of approximately $2.67 million. Of those proceeds, the Company allocated an estimated fair value of $2,190,979 to the 2009 Warrants (see below), resulting in net proceeds of $467,559. The fair value of the 2009 Warrants on June 15, 2009 was determined by using the Black-Scholes model assuming a risk free interest rate of 2.75%, volatility of 72.93% and an expected life equal to the contractual life of the warrants (June 2014). The 2009 Warrants are exercisable at $3.99 per share and have a five-year term. The shares and warrants were issued pursuant to an effective registration statement on Form S-3 (333-143280, as amended by 333-159857).

In June 2009, the Company completed the sale of 869,565 shares of its common stock and the issuance of warrants to purchase 1,043,478 common shares (the 2009 Warrants) in a subscription agreement with a single investor. The Company received gross proceeds of $2,999,999, with net cash proceeds after related expenses from this transaction of approximately $2.67 million. Of those proceeds, the Company allocated an estimated fair value of $2,190,979 to the 2009 Warrants, resulting in net proceeds of $467,559. The fair value of the 2009 Warrants on June 15, 2009 was determined by using the Black-Scholes model assuming a risk free interest rate of 2.75%, volatility of 72.93% and an expected life equal to the contractual life of the 2009 Warrants (June 2014). The 2009 Warrants are exercisable at $3.99 per share and have a five-year term.

In September 2007, the Company completed the sale of 3,833,108 shares of its common stock and the issuance of warrants to purchase 1,916,554 common shares (the 2007 Warrants) in a private placement to institutional and accredited investors. The Company received net proceeds of $13,303,267 in this transaction. The Company allocated $4,269,000 of the total proceeds to the 2007 Warrants. The 2007 Warrants were initially exercisable at $4.53 per share beginning six months after the issuance thereof and on or prior to the fifth anniversary of the issuance thereof. As required by the 2007 Warrant agreement, both the exercise price and number of warrants were adjusted following the Company s June 9, 2009 sale of common stock. The 2007 Warrants are currently exercisable at $3.44 per share with 2,523,834 warrants outstanding.

The $2,190,979 in proceeds allocated to the 2009 Warrants and the $4,269,000 in proceeds allocated to the 2007 Warrants are classified as liabilities. The terms of the 2007 Warrants and the 2009 Warrants provide for potential adjustment in the exercise price and are therefore considered to be derivative instrument liabilities that are subject to mark-to-market adjustment each period. As a result, for the nine month period ended September 30, 2009, the Company recorded pre-tax derivative instrument expense of $8,296,958. The resulting derivative instrument liability totaled $10,936,255 at September 30, 2009. Management expects that the warrants will either be exercised or expire worthless, at which point the then existing derivative liability will be credited to stockholders equity. The fair value of the Warrants at September 30, 2009 was determined by using the Black-Scholes model assuming a risk free interest rate

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