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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X} Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2004
[ ] 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, Stamford, Connecticut 06905
(Address of principal executive offices) (Zip Code)
203-323-8668
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, par value $0.01 per share Boston Stock Exchange
Redeemable Common Stock Warrants Boston Stock Exchange
issued in 2000
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Redeemable Common Stock Warrants issued in 2000
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form.
The issuer's revenues for its most recent fiscal year were: $0. The aggregate
market value of the voting common stock held by non-affiliates of the issuer,
based on the closing sales price of $3.20 per share, was $49,253,648 as of
February 28, 2005.
At February 28, 2005, the registrant had outstanding 15,391,765 shares of par
value $0.01 Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2005 Annual Meeting of Incorporated into Part III of
Stockholders. (A definitive proxy statement this Form 10-KSB
will be filed with the Securities and Exchange
Commission within 120 days after the close of
the fiscal year covered by this Form 10-KSB.)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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PART I
Item 1. Description of Business.
General
We were incorporated under Delaware law in 1988. We are a development stage
company, and we have developed the Delcath system to isolate the liver from the
general circulatory system and to administer chemotherapy and other therapeutic
agents directly to the liver. Since our inception, we have raised approximately
$24.3 million in funds (net of fundraising expenses), and we have invested
approximately $15.3 million of those funds in research and development costs
associated with development and testing of the Delcath system.
The Delcath system is not currently approved for marketing by the United States
Food and Drug Administration, and it cannot be marketed in the United States
without FDA pre-market approval. We are in the process of conducting Phase III
clinical trials designed to secure marketing approval in the United States and
possibly in foreign markets for use of the Delcath system with a particular
chemotherapy agent, doxorubicin, currently being tested in the treatment of
malignant melanoma that has spread to the liver. We also plan to continue our
Phase II clinical trial for the use of the Delcath system with another
chemotherapy agent, melphalan, which is also currently used against a variety of
cancers that originate in or have spread to the liver. Additionally, we plan to
conduct pre-clinical and clinical trials on the use of the Delcath system with
other chemotherapy agents used to treat liver cancer.
Strategy
Our objectives are to establish the use of the Delcath system as the standard
technique for delivering chemotherapy agents to the liver and to expand the
Delcath technology so that it may be used in the treatment of other liver
diseases and of cancers in other parts of the body. Our strategy includes the
following:
o Completing clinical trials to obtain FDA pre-market approval for use
of the Delcath system with doxorubicin to treat malignant melanoma
that has spread to the liver. Our highest priority is completing the
Phase III clinical trials, data preparation, statistical analysis and
regulatory documents associated with an application for pre-market
approval of commercial sale of the Delcath system in the United States
for use in administering doxorubicin in the treatment of melanoma that
has spread to the liver.
o Obtaining approval to market the Delcath system in the United States
for the treatment of other forms of liver cancer using other
chemotherapy agents and treatment of hepatitis using anti-viral drugs.
In August 2001, we commenced a Phase I clinical trial at the National
Cancer Institute using melphalan, a chemotherapy agent, which we have
now completed. Following clinical protocol approvals in 2004 for Phase
II trials, we are currently recruiting and treating patients within
this protocol. In addition to researching the use of other
chemotherapy agents with the Delcath system to treat cancer, we plan
to research the use of other compounds with the Delcath system to
treat other diseases, such as hepatitis. Our timing to begin these
studies will depend on our ability to raise additional funds for these
purposes and to establish strategic alliances with pharmaceutical
manufacturers or other strategic partners in conjunction with our
research into other therapeutic compounds. Additional FDA pre-market
approvals will be required to market the Delcath system for these
uses.
o Introducing the Delcath system into foreign markets. We will seek to
establish strategic relationships with domestic and foreign firms that
have a recognized presence or experience in foreign markets that we
intend to target. Our strategy is to focus on markets that have a high
incidence of liver cancer and the means to provide and pay for cancer
treatments. According to the World Health Organization, many Asian and
European countries, including China, Japan, Greece, Hong Kong, the
Philippines, France, Germany, Italy and Spain, have a higher incidence
of liver cancer than the United States. Additionally, Australia has
been cited as having the highest incidence of skin cancer in the
world. Given that our current Phase III clinical trials are to treat
malignant melanoma that has spread to the liver, upon obtaining FDA
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pre-marketing approval, we intend to obtain Australian approval in
order to target the Australian market. We also intend to seek to enter
into arrangements with strategic partners who have experience with
obtaining regulatory approval and marketing medical devices in those
markets and are willing to bear the cost of those activities.
The Cancer Treatment Market
The American Cancer Society projects that about 1,373,000 new cases of cancer
will be diagnosed in 2005. According to the American Cancer Society's "Cancer
Facts and Figures 2005," cancer remains the second leading cause of death in the
United States exceeded only by heart disease. While researchers continue to
develop innovative new treatments for some forms of this disease, surgical
resection, chemotherapy, radiation and hormone therapy continue to be the most
commonly used treatments.
The financial burden of cancer is great for patients, their families and
society. In the year 2004, the National Institutes of Health, in the American
Cancer Society's "Cancer Facts & Figures 2005," estimates the overall costs of
cancer to be $189.8 billion, including $69.4 billion in direct medical costs,
$16.9 billion for indirect morbidity costs attributable to lost productivity due
to illness and $103.5 billion for indirect mortality costs attributable to lost
productivity due to premature death.
The Liver Cancer Market
Liver cancer is one of the most prevalent and lethal forms of cancer throughout
the world. There are two forms of liver cancer: primary and metastatic. Primary
liver cancer originates in the liver. Metastatic, or secondary, liver cancer
results from the spread of cancer from other places in the body to the liver.
With our Phase III clinical trials, we are developing data on metastatic
melanoma which has spread to the liver. According to the American Cancer
Society's "Cancer Facts & Figures 2005," the five-year survival rate for liver
cancer patients is approximately 7%, compared to the 64% for all other forms of
cancer combined. Delcath believes that the five-year survival rate for
metastatic cancer in the liver is the same. In the liver, tumors can be
surgically removed only when they are located in one of the liver's two lobes.
However, since symptoms of liver cancer often do not appear until the disease
has advanced, less than 20% of primary and metastatic liver tumors can be
surgically removed at the time of diagnosis. A significant number of patients
treated for primary and metastatic liver cancer will also experience a
recurrence of their disease.
Metastatic liver cancer is characterized by microscopic pieces of other forms of
cancer that detach from the primary site and travel via the blood stream and
lymphatic system into the liver, where they grow into new tumors. This growth
often continues even after removal of the primary cancer or cancerous organ.
When cancer cells enter the liver and develop into tumors, they tend to grow
very quickly. In many cases, the patient dies not from the primary cancer, but
from the tumors in the liver; the liver becomes the "life limiting organ."
People cannot survive without a liver capable of performing its critical
biologic functions: facilitating the conversion of food into energy and
filtering toxic agents from the blood. The liver is one of the three most common
sites to which cancer may spread. Due to numerous factors, including the absence
of viable treatment options, metastatic liver cancer often causes death.
According to the American Cancer Society in its "Cancer Facts & Figures 2005,"
liver cancer is the sixth most common form of cancer worldwide. It is projected
that there will be 667,000 new cases of liver cancer throughout the world. The
incidence of liver cancer has been steadily increasing in the United States over
the past two decades. The American Cancer Society has projected that in the
United States there will be approximately 17,550 newly diagnosed cases of liver
cancer and 59,580 new cases of malignant melanoma in 2005.
Primary liver cancer is particularly prevalent in Southern Europe, Asia and
developing countries, where the primary risk factors for the disease are
present. These risk factors include: hepatitis-B, hepatitis-C, relatively high
levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to
industrial pollutants.
Current Liver Cancer Treatments
The prognosis for primary and secondary liver cancer patients is poor. Although
limited treatment options are currently available for liver cancer, they are
typically ineffective, are generally associated with significant side-effects
and can even cause death. Traditional treatment options, discussed in more
detail below, include surgery, chemotherapy, cryosurgery, percutaneous ethanol
injection and radiation.
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Surgery
While surgery is considered the "gold standard" treatment option to address
liver tumors, more than 80% of liver tumors are unresectable, which means they
do not qualify for surgical removal. This is most often due to the following:
o Operative risk: limited liver function or poor patient health
threatens survival as a result of the surgery; or
o Technical feasibility: the proximity of a cancerous tumor to a
critical organ or artery or the size, location on the liver or number
of tumors makes surgery not feasible.
For the patients who qualify for surgery, there are significant complications
related to the procedure. Recurrence of tumors is common, and in that event,
surgery typically cannot be repeated.
We believe that delivery of drugs with the Delcath system may enable surgical
removal in some of the cases which are currently inoperable by reducing the size
and number of tumors sufficiently to make resection feasible. Shrinking a tumor
using chemotherapy and then removing the tumor is a procedure known as adjuvant
therapy. After resection, chemotherapy can be administered through the Delcath
system with the objective of destroying micro metastases in the liver that may
remain undetected, thus preventing or delaying any recurrence of tumor growth.
Chemotherapy
The most prevalent form of liver cancer treatment is intravenous chemotherapy.
The effectiveness of this treatment, however, is limited by its side effects.
Generally, the higher the dosage of chemotherapy administered, the greater its
ability to kill cancer cells. However, due to the toxic nature of chemotherapy
agents, the higher the dosage administered, the greater damage chemotherapy
agents cause to healthy tissues. As a result, the dosage of chemotherapy
required to kill cancer cells can be lethal to patients.
The side effects caused by doxorubicin, the drug we are seeking to have approved
for use in the Delcath system, are representative of the side-effects associated
with many chemotherapy agents. Doxorubicin causes irreversible heart tissue
damage. Depending on dosage levels, the damage caused by doxorubicin can be
serious and lead to congestive heart failure. Doxorubicin can also cause severe
mucositis leading to ulceration of the mouth and digestive organs, damage to a
patient's immune system through destruction of bone marrow cells, as well as
acute nausea, severe vomiting, dermatological problems and hair loss. The use of
doxorubicin can be fatal even when it is administered with careful patient
monitoring.
The limited effectiveness of intravenous chemotherapy treatment and its
debilitating, often life-threatening, side-effects makes the decision to undergo
chemotherapy treatment difficult. In some instances, in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy, despite
its side effects. In other cases, recognizing the inevitable result of liver
cancer, the physician and patient choose only to manage the patient's discomfort
from cancer with pain killers while foregoing treatment.
To address this trade-off between the efficacy of intravenous chemotherapy
treatment and its dire side effects, physicians have experimented with
techniques to isolate the liver from the general circulatory system and to
achieve a targeted delivery of chemotherapy agents to the liver. In the 1980's,
a physician developed a procedure in which he surgically diverted the blood flow
from the liver while infusing high dosages of chemotherapy agents into the
liver. A filtration circuit reduced drug concentrations before returning the
diverted blood to the patient. The treatment, however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times, long hospital stays and very high costs. Other physicians have
experimented with the delivery of chemotherapy agents to the liver by catheter,
attempting to use one or more catheters to remove chemotherapy agents before
they enter the general circulatory system. We are unaware of any system,
however, which contains the patented attributes of the Delcath design.
3
Cryosurgery
Cryosurgery is the destruction of cancer cells using sub-zero temperatures in an
open surgical procedure. During cryosurgery, multiple stainless steel probes are
placed into the center of the tumor and liquid nitrogen is circulated through
the end of the device, creating an ice ball. Cryosurgery involves a cycle of
treatments in which the tumor is frozen, allowed to thaw and then refrozen.
While cryosurgery is considered to be relatively effective, we believe adoption
of this procedure has been limited because:
o It is not an option for patients who cannot tolerate an open surgical
procedure;
o It involves significant complications which are similar to other open
surgical procedures, as well as liver fracture and hemorrhaging caused
by the cycle of freezing and thawing;
o It is associated with mortality rates estimated to be between one and
five percent; and
o It is expensive compared to other alternatives.
Percutaneous Ethanol Injection
Percutaneous ethanol injection, or PEI, involves the injection of alcohol into
the center of the tumor. The alcohol causes cells to dry out and cellular
proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary liver cancer,
it is generally considered ineffective on large tumors as well as metastatic
tumors. Patients are required to receive multiple treatments, making this option
unattractive for many patients. Complications include pain and alcohol
introduction to bile ducts and major blood vessels. In addition, this procedure
can cause cancer cells to be deposited along the needle track when the needle is
withdrawn.
Radiation Therapy
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation therapy
is not considered an effective means of treating liver cancer and is rarely used
for this purpose. Radiation is often used as an adjunct to other treatments for
liver cancer.
Implanted Infusion Pumps
Implanted infusion pumps can be used to better target the delivery of
chemotherapy agents to the tumor. Arrow International markets an implantable
pump typically used to treat colorectal cancer which has metastasized to the
liver. This pump, however, lacks a means of preventing the entry of chemotherapy
agents into the patient's general circulation after it passes through the liver.
This technique does not enable physicians to prescribe higher doses of
chemotherapy.
Other Methods of Treatment
Still other liver cancer treatments include liver transplants, embolization,
removal of tumors through the use of radio frequency waves and the use of
biological response modulators, monoclonal antibodies and liposomes. The
effectiveness of these treatments is limited, many have dose limiting
side-effects and none is widely used.
Treatment with the Delcath System
The Delcath system is designed to address the critical shortcomings of
conventional intravenous chemotherapy delivery. The Delcath system isolates the
liver from the general circulatory system during liver cancer treatments with
chemotherapy agents and then returns the blood exiting the liver to the general
circulatory system only after the chemotherapy agent has been substantially
removed by filtration outside the body. We believe that the protection from the
side-effects of chemotherapy to other parts of the body that is provided by the
Delcath system allows for higher chemotherapy doses to the liver than can be
administered by conventional intravenous delivery. By filtering out a
substantial portion of the chemotherapy agent before the blood is returned to
the blood stream, other organs of
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the body receive less exposure than the liver to the chemotherapy agent.
Therefore, these organs are less likely to suffer from the harmful side-effects
of chemotherapy, including the cumulative harmful effect that doxorubicin has on
the heart muscle.
The Delcath system kit includes the following disposable components that we
purchase from third-party suppliers:
o Infusion catheter -- a thin-walled arterial infusion catheter used to
deliver chemotherapy to the liver;
o Double balloon catheter -- a multi-passageway catheter used to isolate
and divert the drug-laden blood exiting the liver;
o Extracorporeal filtration circuit -- a blood tubing circuit
incorporating the disposable components used with a blood pump to push
the isolated blood through the system's filters and guide the cleansed
blood back to the patient;
o Filters -- activated carbon blood filters used to remove most of the
chemotherapy agent from the isolated blood after it has flowed through
the liver and before it returns to the patient's general circulation;
and
o Return catheter -- a thin-walled blood sheath used to deliver the
filtered blood from the extracorporeal filtration circuit back into
one of the major veins returning blood to the right atrium of the
heart.
The double balloon catheter has one large passageway and three smaller
passageways. Each of two low-pressure balloons is inflated through one of the
three smaller passageways. Blood flows out of the liver through the large
passageway to the filtration system. A separate access port attaches to the
large passageway and is designed for sampling fluid or flushing the system. The
third smaller passageway allows blood exiting the legs and kidneys to bypass the
liver and return to the heart.
The Delcath system involves a series of three catheter insertions, each of which
is made through the skin. During test procedures, patients are treated with
intravenous sedation and local anesthesia at catheter insertion sites. In some
cases general anesthesia has been used. An infusion catheter is inserted into
the artery through which blood normally flows to the liver. A second catheter --
the Delcath double balloon catheter -- is inserted through the inferior vena
cava, a major vessel of the heart . The balloons on the double balloon catheter
are then inflated. This procedure prevents the normal flow of blood from the
liver to the heart through the inferior vena cava because the inferior vena cava
has been blocked. A chemotherapy agent is then infused into the liver through
the infusion catheter. The infused blood is prevented from flowing to the heart,
but leaves the liver through perforations on the double balloon catheter and
flows through this catheter out of the body where the infused blood is pumped
through activated charcoal filters to remove most of the chemotherapy agent. The
filtered blood is returned to the patient through the jugular vein which leads
to the superior vena cava, another major vessel of the heart, thus restoring the
cleansed blood to normal circulation. Infusion is administered over a period of
thirty minutes. Filtration occurs during infusion and for thirty minutes
afterward. The catheters are removed and manual pressure is maintained on the
catheter puncture sites for approximately fifteen minutes. The entire procedure
takes approximately two to three hours to administer.
During our clinical trials, patients remain in the hospital overnight for
observation after undergoing treatment with the Delcath system. Once physicians
become familiar with using the Delcath system, we expect the procedure to be
performed on an outpatient basis, with the patient resuming normal activities
the day after the procedure is performed. We expect a patient to undergo an
average of four treatments, one every three weeks. A new Delcath system kit is
used for each treatment.
Integral to our research and development efforts is our program of clinical
research with prominent researchers and physicians that is being conducted
presently at The National Cancer Institute, the Sydney Melanoma Unit and was
previously conducted at Yale University, M.D. Anderson Cancer Center and other
prominent medical institutions.
5
Our Clinical Trials
We intend to continue to conduct Phase III clinical trials designed to
demonstrate to the FDA that administering doxorubicin with the Delcath system to
treat malignant melanoma that has spread to the liver results in patient
survival times that are longer than those obtained from administering
chemotherapy agents intravenously. Phase III clinical trials are a prerequisite
for FDA approval of Delcath's pre-market application. During these trials,
administration of doxorubicin through the Delcath system must be proven to be
safe and effective for the treatment of liver cancer. The FDA requires us to
demonstrate that delivering doxorubicin using the Delcath system results in
patient survival times that are longer than those obtained from administering
chemotherapy agents intravenously.
We expect the Phase III clinical trials to be conducted at several medical
centers worldwide. The trial protocol, which has been approved by the FDA, calls
for enrolling a minimum of 122 test subjects who will be treated for malignant
melanoma that has spread to the liver. Half of these test subjects will be
treated with doxorubicin administered using the Delcath system and the other
half, the control group, will be treated with another chemotherapy agent
delivered intravenously in accord with a protocol approved by FDA. Trials will
commence upon the approval of a budget by the respective institutions. However,
our timetable is subject to uncertainty and we cannot assure you that we can
meet our planned schedule. We do not know whether all of the medical centers
identified will be available to conduct clinical trials when we are in a
position to have them commence or that we will be ready to commence the trials
within any particular time period.
We have commenced Phase III clinical trials at the Sydney Melanoma Unit in
Australia and are recruiting suitable patients. The Sydney Melanoma Unit is the
clinical unit of the Department of Surgery of the University of Sydney. It is
the largest treatment center for malignant melanoma in the world and conducts a
wide range of basic and clinical research relating to melanoma. The Unit has a
worldwide reputation for the quality of its patient care, research and treatment
programs. Kendle Ltd. has been hired as the contract research organization
("CRO") to conduct these trials. Similarly, we intend to hire a CRO to conduct
trials at an appropriate domestic research facility. The CRO represents the
clinical trial sponsor. They ensure that the principal investigator follows the
established protocol and collects the clinical data. The CRO and principal
investigators conducting the clinical trials are not our employees. As a result,
we have limited control over their activities and can expect that only limited
amounts of their time will be dedicated to our clinical trials. They may fail to
meet their contractual obligations or fail to meet regulatory standards in the
performance of their obligations, and we may not be able to prevent or correct
their failures. Failure of the CRO to perform as expected or required, including
failure of the principal investigators to enroll a sufficient number of patients
for our trials, could result in the failure of the clinical trials and the
failure to obtain FDA pre-market approval. We believe that we will acquire
sufficient data to seek FDA pre-market approval of the Delcath system within
twelve to eighteen months after the last patient is enrolled.
We do not know how long the FDA may take to evaluate our submission, and they
may require that additional trials be conducted or they may not grant approval.
The FDA pre-market approval we are currently seeking is limited to
administration of doxorubicin with the Delcath system to treat patients
suffering from metastatic melanoma which has spread to the liver. If we are
granted this approval, we plan to seek additional FDA pre-market approvals for
using the Delcath system with other chemotherapy agents for treatment of other
liver cancers and with anti-viral drugs for treatment of other diseases, such as
hepatitis. In many instances, the process of applying for and obtaining
regulatory approvals involves rigorous pre-clinical and clinical testing. The
time, resources and funds required for completing necessary testing and
obtaining approvals is significant, and FDA pre-marketing approval may never be
obtained for some medical devices or drug delivery systems. If we fail to raise
the additional capital required or enter into strategic partnerships to finance
this testing or if we fail to obtain the required approvals, our potential
growth and the expansion of our business would likely be limited.
Prior to starting the Phase III trials, we conducted Phase I and II clinical
trials at three United States medical centers under investigational device and
investigational new drug exemptions granted by the FDA. The trials were designed
to demonstrate the system's "functionality," or its ability to administer to and
extract from the liver approved and marketed chemotherapy agents. Forty-four
patients participated in the trials. Twenty-one of these test subjects had
primary liver cancer or melanoma which had spread to the liver and were treated
with doxorubicin. The remaining twenty-three test subjects suffered from other
forms of liver cancer and/or were treated with another chemotherapy agent, 5-FU.
These trials demonstrated that the Delcath system was capable of extracting
approximately 70% to 85%
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of the chemotherapy agent administered to the liver. Therefore, the Delcath
system permits the delivery of higher dosages of chemotherapy agents to the
cancer site while at the same time minimizing damage to healthy tissue.
We believe the results of the clinical trials we have conducted indicate that
the Delcath system delivered:
o more chemotherapy agent to the tumor site; and
o less chemotherapy agent to the general circulation than delivered by
administration of the same dose by intravenous means.
In addition, clinicians involved in the Phase I and Phase II clinical trials
observed:
o reduction in tumor size; and
o the safety of the system at higher dosage levels of chemotherapy than
those used in conventional intravenous chemotherapy delivery.
Further, though not demonstrated in a statistically significant manner because
of the limited number of patients tested, clinicians observed survival times of
patients treated with the Delcath system which exceeded those that would
generally be expected in patients receiving chemotherapy treatment through
conventional intravenous means of delivery.
Based on the results of our Phase I and Phase II clinical trials, we submitted
to the FDA our application for pre-marketing approval of the Delcath system as a
medical device. In response to our application, the FDA classified the Delcath
system as a drug delivery system which requires us to obtain approval of new
labeling for the drug being used in the clinical trials. The application to
change the labeling must be filed by a drug manufacturer holding an existing new
drug application or an abbreviated new drug application. We have reached a
preliminary verbal understanding with a drug manufacturer holding an existing
license for doxorubicin to submit an application to the FDA supporting the new
labeling based on data from the Phase III clinical trial. The pre-market
approval and drug relabeling applications must demonstrate the clinical utility
of a particular drug when administered through the Delcath system. To do so, we
must demonstrate, in a statistically meaningful manner, that administering
chemotherapy agents with the Delcath system results in survival times of
patients that are longer than those obtained from administering chemotherapy
agents intravenously.
Our Clinical Trial and Agreement with The National Cancer Institute
In 2001, the Company announced that The National Institutes of Health/The
National Cancer Institute approved a Phase I clinical study protocol for
administering escalating doses of another chemotherapy agent, melphalan, through
the Delcath system to patients with metastatic and unresectable cancer of the
liver.
The Phase I clinical trial conducted at The National Cancer Institute ("NCI")
has been completed. H. Richard Alexander, MD, chief of the Surgical Metabolism
Section at NCI drafted a Phase II study protocol on the basis of toxicity
profiles and tumor responses observed in Phase I and patients are currently
being enrolled and treated within the Phase II study protocol. The scope of the
Phase II study is to demonstrate a Delcath system-based treatment protocol for
the regional therapy of the liver using escalating doses of melphalan delivered
through the utilization of the Delcath system. This protocol focuses on specific
patient populations, including patients with primary liver cancers and selected
cancers that have metastasized to the liver. These clinical trials are subject
to the terms and conditions of the Cooperative Research and Development
Agreement (the "CRADA") between us and NCI. The Phase II study will involve
patients with specific histologies (diseases) who have unresectable cancers
confined to the liver using the maximum tolerated dose of melphalan administered
using the Delcath system. The patients will be treated with up to four series of
infusions based upon toxicity and response to treatment. The Company is
analyzing current data in preparation for a meeting with the FDA to discuss an
additional Phase II protocol and to discuss the possibility of obtaining
accelerated approval for the FDA to proceed to Phase III.
The CRADA commits NCI to perform the research necessary under the Phase I and
Phase II protocols approved by the FDA with Delcath acting as the sponsor, and
NCI providing the principal investigator. Delcath will provide funding to NCI in
the amount of $918,750 payable in quarterly installments over the five-year term
of the agreement beginning in the second quarter of 2001 unless the CRADA is
terminated early. The CRADA can be terminated at
7
any time by either party. In the event of an early termination, we would be
responsible for unfunded costs incurred prior to the termination date and all
reasonable termination costs. The term of the CRADA is intended to allow for
what the parties expect to be the potential maximum amount of time necessary to
complete and evaluate Phase I and Phase II trials. An amendment to the CRADA
would be necessary if the parties decide to initiate additional clinical trials
using another chemotherapy agent. If the results of the Phase I and Phase II
trials are successful, we will probably need additional capital to pay for the
expenses associated with a Phase III clinical trial.
Research for Hepatitis Treatment
Another disease that attacks the liver is viral hepatitis. The incidence of
viral hepatitis in the United States and worldwide is increasing. The long-range
effects of some forms of hepatitis can include massive death of liver cells,
chronic active hepatitis, cirrhosis and hepatoma. The current treatment for
viral hepatitis is limited and includes long-term injections of interferon
alpha, which is similar to chemotherapy in its toxicity and dosage limitations.
We plan to seek a strategic partner to conduct clinical trials to determine the
feasibility of using the Delcath system to administer anti-viral drugs,
including interferon alpha, in the treatment of viral hepatitis. We have not
entered into any arrangements, understandings or agreements with potential
strategic partners.
Sales and Marketing
We intend to focus our marketing efforts on the over fifty NCI designated Cancer
Centers in the United States recognized by NCI, beginning with the hospitals
participating in the Phase III clinical trials, as well as key foreign
institutions including the Sydney Melanoma Unit. We will focus these efforts on
two distinct groups of medical specialists in these comprehensive cancer
centers:
o oncologists who have primary responsibility for the patient; and
o interventional radiologists who are members of the hospital staff and
work with catheter-based systems.
Upon diagnosis of cancer, a patient is usually referred to a medical oncologist.
This physician generally provides palliative treatments (non-curative) and
refers the patient to a surgical oncologist if surgery appears to be an option.
Both medical and surgical oncologists will be included in our target market.
Generally, oncologists do not position catheters. This is done either by an
interventional radiologist or a surgeon.
We plan to hire a marketing director at such time as we receive an indication
from the FDA that approval of the Delcath system is forthcoming and then hire a
sales manager and four sales representatives to market the system in the United
States.
In addition, if we can establish foreign testing and marketing relationships, we
plan to utilize one or more corporate partners to market products outside the
United States. We believe distribution or corporate partnering arrangements will
be cost effective, will be implemented more quickly than a direct sales force
established by us in such countries and will enable us to capitalize on local
marketing expertise in the countries we target.
Since we plan to sell the Delcath system to a large number of hospitals and
physician practices, we do not expect to be dependent upon one or a few
customers.
Market acceptance of the Delcath system will depend upon:
o the ability of our clinical trials to demonstrate against the control
group a statistically measurable increase in life expectancy for the
kinds of cancers treated at a cost effective price;
o our ability to educate physicians on the use of the system and its
benefits compared to other treatment alternatives; and
o our ability to convince healthcare payors that use of the Delcath
system results in reduced treatment costs of patients.
8
This will require substantial efforts and expenditures.
Third-Party Reimbursement
Because the Delcath system is characterized by the FDA as an experimental
device, its use is not now reimbursable in the United States. We will not seek
to have third-party payors, such as Medicare, Medicaid and private health
insurance plans, reimburse the cost of the Delcath system until after its use is
approved by the FDA.
We believe that the Delcath system will provide significant cost savings in that
it should reduce treatment and hospitalization costs associated with the
side-effects of chemotherapy. Our planned wholesale price to the hospital for
the Delcath system kit is approximately $4,000. A patient is expected to undergo
an average of four treatments with the Delcath system, each requiring a new
system kit. Each treatment with the Delcath system, including the cost of the
treatment kit, has an estimated cost of approximately $12,000, resulting in a
total estimated treatment cost of approximately $48,000. This compares to a
total estimated cost of conventional aggressive chemotherapy treatment of
approximately $160,000 to $180,000, which includes the hospitalization and
treatment costs associated with the side-effects of the systemic delivery of
chemotherapy agents.
Manufacturing
We plan to utilize contract manufacturers to manufacture the components of the
Delcath system. In order to maintain quality control, we plan to perform final
assembly and packaging in our own facility. If we undertake these operations,
our facility will be required to comply with the FDA's good manufacturing
practice and quality system requirements. If we sell the Delcath system in some
foreign markets, our facility will also need ISO 9000 approval from the European
Union which is a required approval that European manufacturers must obtain from
the International Organization for Standardization.
The Delcath system kit is being manufactured domestically by the OEM division of
B. Braun Medical, Inc. of Germany. B. Braun is also supplying the other
catheters and accessories and assembling the Delcath system kit. The Delcath
system kit components must be manufactured and sterilized in accordance with
manufacturing and performance specifications that are on file with the FDA. B.
Braun has demonstrated that the components it manufactures meet these
specifications. B. Braun's manufacturing facility is ISO 9000 approved, which
will allow the use of the system in European markets. B. Braun has experience in
obtaining regulatory approval for medical products in European markets and has
indicated informally that it will assist us in this process. We have not entered
into a written agreement with B. Braun to manufacture the system either for the
clinical trials or for commercial sale.
Medtronic USA, Inc. manufactures the components of the blood filtration circuit
located outside of the body, including the medical tubing through which a
patient's blood flows and various connectors, as well as the blood filtration
pump head. Medtronic is a manufacturer of components used for extracorporeal
blood circulation during cardiac surgery. The components manufactured by
Medtronic have been cleared by the FDA for other applications and can,
therefore, be sourced off the shelf. These components, however, must comply with
manufacturing and performance specifications for the Delcath system that are on
file with the FDA. Medtronic has demonstrated that the components it
manufactures meet these specifications. Medtronic's manufacturing facility is
also ISO 9000 approved and, thus, the components it manufactures may be used in
European markets.
To date, we have purchased the activated charcoal filters used in the Delcath
system from Asahi Medical Products of Japan. Asahi has discontinued
manufacturing these filters. We have an inventory of filters from Asahi which we
expect will be sufficient to meet our needs for at least the next twelve months.
However, as part of our application process with the FDA, we obtained approval
to utilize filters from any manufacturer that falls within certain performance
parameters and meets the specifications on file with the FDA. Therefore, we are
currently testing an alternative filter from a domestic manufacturer that we
believe is capable of providing us with the quality of filters that are required
to meet the specifications on file with the FDA in the quantity that we will
require to conduct future clinical trials and to market the Delcath system
commercially.
9
Competition
The healthcare industry is characterized by extensive research efforts, rapid
technological progress and intense competition from numerous organizations,
including biotechnology firms and academic institutions. Competition in the
cancer treatment industry, and specifically the markets for systems and devices
to improve the outcome of chemotherapy treatment for cancer, is intense. We
believe that the primary competitive factors for products addressing cancer
include safety, efficacy, ease of use, reliability and price. We also believe
that physician relationships, especially relationships with leaders in the
interventional radiology and oncology communities, are important competitive
factors.
The Delcath system competes with all forms of liver cancer treatments that are
alternatives to resection including radiation, intravenous chemotherapy and
chemotherapy through implanted infusion pumps, liver transplants, embolization,
cryosurgery, radiowave ablation and the use of biological response modulators,
monoclonal antibodies and liposomes. Many of Delcath's competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources. In addition, some of our competitors have
considerable experience in conducting clinical trials and other regulatory
approval procedures. Our competitors may develop more effective or more
affordable products or treatment methods, or achieve earlier product development
or patent protection, in which case our chances to achieve meaningful revenues
or profitability will be substantially reduced.
Many large pharmaceutical companies and research institutions are developing
systems and devices to improve the outcome of chemotherapy treatment for cancer.
Arrow International currently markets an implantable infusion pump, which has
been successful in facilitating regional drug delivery. However, Arrow's pump
lacks a means of preventing the entry of these agents into the patient's general
circulation after they pass through the liver. Other companies, including Merck
& Co., Inc., are developing various chemotherapy agents with reduced toxicity,
while other companies are developing products to reduce the toxicity and
side-effects of chemotherapy treatment. In addition, gene therapy, vaccines and
other minimally invasive procedures are currently being developed as
alternatives to chemotherapy.
Government Regulation
General. The manufacture and sale of medical devices and drugs are subject to
extensive governmental regulation in the United States and in other countries.
The Delcath system is regulated in the United States as a drug delivery system
by the FDA under the Federal Food, Drug and Cosmetic Act. As such, it requires
approval by the FDA of a pre-market application prior to commercial
distribution.
Doxorubicin, the drug that we are initially seeking to have approved for
delivery by the Delcath system, is a widely used chemotherapy agent that has
been approved by the FDA. Melphalan, the drug that is being administered through
the Delcath system in the NCI-sponsored study, is a chemotherapy agent that has
also been approved by the FDA. Like all approved drugs, the approved labeling
includes indications for use, method of action, dosing, side-effects and
contraindications. Because the Delcath system delivers both drugs through a mode
of administration and at a dose strength that differs from those currently
approved, approval for revised labeling of doxorubicin and melphalan products
permitting their use with the Delcath system must be obtained. The application
to change the labeling must be filed by a drug manufacturer holding an existing
new drug application or an abbreviated new drug application. We are currently in
discussions with a drug manufacturer who holds an existing license for
doxorubicin for the manufacturer to submit an application supporting the new
labeling, assuming data from the Phase III clinical trial is favorable. We are
also currently in discussions with the drug manufacturers that hold a new drug
application or an abbreviated new drug application for melphalan and plan
actively to solicit one of them to file an application for new labeling with the
FDA.
Under the Federal Food, Drug and Cosmetic Act, the FDA regulates the
pre-clinical and clinical testing, design, manufacture, labeling, distribution,
sales, marketing, post-marketing reporting, advertising and promotion of medical
devices and drugs in the United States. Noncompliance with applicable
requirements could result in different sanctions such as:
o suspension or withdrawal of clearances or approvals;
o total or partial suspension of production, distribution, sales and
marketing;
10
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products; and
o criminal prosecution of a company and its officers and employees.
Our contract manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and disposal of hazardous or potentially
hazardous substances.
Medical Devices. The Delcath system is a Class III medical device. Class III
medical devices are those which are subject to the most stringent regulatory
controls because insufficient information exists to assure safety and efficacy
solely through general or special controls such as labeling requirements,
mandatory performance standards and post-market surveillance. As such, FDA
pre-market approval is required for Class III medical devices. It is subject to
the most stringent controls applied by the FDA to assure reasonable safety and
effectiveness. An application for pre-market approval must be supported by data
concerning the device and its components, including the manufacturing and
labeling of the device and the results of animal and laboratory testing and
human clinical trials. The conduct of Phase III clinical trials is subject to
regulations and to continuing oversight by institutional review boards at
hospitals and research centers that sponsor the trials and by the FDA. These
regulations include required reporting of adverse events from use of the device
during the trials. Before commencing clinical trials, we obtained an
investigational device exemption providing for the initiation of clinical
trials. We also obtained approval of our investigational plan, including the
proposed protocols and informed consent statement that patients sign before
undergoing treatment with the Delcath system, by the institutional review boards
at the sites where the trials were conducted. Under the Federal Food, Drug, and
Cosmetic Act, clinical studies for "significant risk" Class III devices require
obtaining such approval by institutional review boards and the filing with the
FDA of an investigational device exemption at least thirty days before
initiation of the studies.
Given the short life expectancy of patients suffering from metastatic melanoma
of the liver, we believe the FDA will review our pre-market application
expeditiously. However, approval of the Delcath system may take longer if the
FDA requests substantial additional information or clarification, or if any
major amendments to the application are filed. In addition, the FDA may refer
this matter to an advisory committee of experts to obtain views about the
Delcath system. This process is referred to as a "panel review," and could delay
the approval of the Delcath system. The FDA will usually inspect the applicant's
manufacturing facility to ensure compliance with quality systems regulations
prior to approval of an application. The FDA also may conduct bio-research
monitoring inspections of the clinical trial sites and the applicant to ensure
data integrity and that the studies were conducted in compliance with the
applicable FDA regulations, including good clinical practice regulations.
If the FDA's evaluations of the application, clinical study sites and
manufacturing facilities are favorable, the FDA will issue either an approval
letter or an "approvable letter" containing a number of conditions that must be
met in order to secure approval of an application. If and when those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
order approving the application, authorizing commercial marketing of the device
under specified conditions of use. If the FDA's evaluation of the application,
the clinical study sites or the manufacturing facilities is not favorable, the
FDA will deny approval of the application or issue a "not approvable letter."
The FDA may also determine that additional pre-clinical testing or human
clinical trials are necessary before approval, or that post-approval studies
must be conducted.
The FDA's regulations require agency approval of an application supplement for
changes to a device if they affect the safety and effectiveness of the device,
including new indications for use; labeling changes; the use of a different
facility or establishment to manufacture, process or package the device; changes
in vendors supplying components for the device; changes in manufacturing methods
or quality control systems; and changes in performance or design specifications.
Changes in manufacturing procedures or methods may be implemented and the device
distributed thirty days after the FDA is provided with notice of these changes
unless the FDA advises the pre-market approval
11
application holder within thirty days of receipt of the notice that the notice
is inadequate or that pre-approval of an application supplement is required.
Approved medical devices remain subject to extensive regulation. Advertising and
promotional activities are subject to regulation by the FDA and by the Federal
Trade Commission. Other applicable requirements include the FDA's medical device
reporting regulations, which require that we provide information to the FDA on
deaths or serious injuries that may have been caused or contributed to by the
use of marketed devices, as well as product malfunctions that would likely cause
or contribute to a death or serious injury if the malfunction were to recur. If
safety or efficacy problems occur after the product reaches the market, the FDA
may take steps to prevent or limit further marketing of the product.
Additionally, the FDA actively enforces regulations prohibiting marketing or
promoting of devices or drugs for indications or uses that have not been cleared
or approved by the FDA. Further, the Food, Drug and Cosmetic Act authorizes the
FDA to impose post-market surveillance requirements with respect to a Class III
device which is reasonably likely to have a serious adverse health consequence
or which is intended to be implanted in the human body for more than one year or
to be a life sustaining or life supporting device used outside a hospital or
ambulatory treatment center.
The Food, Drug and Cosmetic Act regulates a device manufacturer's design
control, quality control and manufacturing procedures by requiring the
manufacturer to demonstrate and maintain compliance with quality systems
regulations including good manufacturing practices and other requirements. These
regulations require, among other things, that:
o design controls, covering initial design and design changes be in
place;
o the manufacturing process be regulated, controlled and documented by
the use of written procedures; and
o the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every
aspect of the process.
The FDA monitors compliance with quality systems regulations, including good
manufacturing practice requirements, by conducting periodic inspections of
manufacturing facilities. If violations of the applicable regulations are found
during FDA inspections, the FDA will notify the manufacturer of such violations
and the FDA, administratively or through court enforcement action, can prohibit
further manufacturing, distribution, sales and marketing of the device until the
violations are cured. If violations are not cured within a reasonable length of
time after the FDA provides notification of such violations, the FDA is
authorized to withdraw approval of the pre-marketing approval application.
Investigational devices that require FDA pre-marketing approval in the United
States but have not received such approval may be exported to countries
belonging to the European Union, European Economic Area and some other specified
countries, provided that the device is intended for investigational use in
accordance with the laws of the importing country, has been manufactured in
accordance with the FDA's good manufacturing practices or ISO standards, is
labeled on the outside of the shipping carton "for export only," is not sold or
offered for sale in the United States and complies with the specifications of
the foreign purchaser. The export of an investigational device for
investigational use to any other country requires prior authorization from the
FDA. An investigational device may be exported for commercial use only as
described below, under "Foreign Regulation."
Drugs. A manufacturer of a chemotherapy agent must obtain an amendment of a
supplemental new drug application for a chemotherapy product providing for its
use with the Delcath system before the system may be marketed in the United
States to deliver that agent to the liver or any other site. The FDA-approved
labeling for both doxorubicin and melphalan does not provide for its delivery
with the Delcath system. We must partner with the holders of an approved drug
application for doxorubicin and melphalan to make this change to the labeling of
both agents. We are in discussions with drug companies for this purpose, but we
have no assurance that we will reach agreement with these companies or that the
FDA will approve the application. If this approval is obtained, it would not
have a negative effect on the manufacturers of either doxorubicin or melphalan.
Rather, the drug manufacturer would have the opportunity to expand the use of
the drugs as a result of changing their label to include the Delcath labeling.
12
Phase III clinical trial protocols using doxorubicin have been approved by the
FDA under our investigational new drug application. FDA regulations also require
that prior to initiating the trials the sponsor of the trials obtain
institutional review board approval from each investigational site that will
conduct the trials. We have received institutional review board approval at the
Sydney Melanoma Unit and are seeking the approval of institutional review boards
at several other medical centers by assembling and providing them with
information with respect to the trials.
The FDA requires that, in order to obtain approval to re-label doxorubicin for
delivery using the Delcath system, we demonstrate that delivering doxorubicin
using the system results in patient survival times that are longer than those
obtained from administering chemotherapy agents intravenously.
The approved Phase III clinical trial protocols are designed to obtain approval
of both new drug labeling and a pre-marketing approval application providing for
the use of doxorubicin with the Delcath system. The trial protocols were
approved by both the FDA division that approves new drugs and the division that
reviews applications to market new devices. All of the data generated in the
trials will be submitted to both of these FDA divisions. The foregoing facts
will also apply if our clinical trial using melphalan is successful in Phases I,
II and III.
If we successfully complete the clinical trials with both agents, we believe the
manufacturers of doxorubicin and melphalan will submit to the FDA an application
to deliver the agent to the liver through the Delcath system. Under the Food,
Drug and Cosmetic Act, the Delcath system cannot be marketed until the new drug
application, or supplemental new drug application and the pre-marketing approval
application are approved, and then only in conformity with any conditions of use
set forth in the approved labeling.
Foreign Regulation. In order for any foreign strategic partner to market our
products in Asia, Europe, Latin America and other foreign jurisdictions, they
must obtain required regulatory approvals or clearances and otherwise comply
with extensive regulations regarding safety and manufacturing processes and
quality. These regulations, including the requirements for approvals or
clearances to market, may differ from the FDA regulatory scheme. In addition,
there may be foreign regulatory barriers other than pre-marketing approval or
clearance.
In April 1996, legislation was enacted that permits a medical device which
requires FDA pre-marketing approval but which has not received such approval to
be exported to any country for commercial use, provided that the device:
o complies with the laws of that country;
o has valid marketing authorization or the equivalent from the
appropriate authority in any of a list of industrialized countries
including Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa and countries in the European Economic Union; and
o meets other regulatory requirements regarding labeling, compliance
with the FDA's good manufacturing practices or ISO manufacturing
standards, and notification to the FDA.
In order for us to market and sell the Delcath system in the European Community,
we must obtain a CE mark, which is the official marking required by the European
Community for all electric and electronic equipment that will be sold anywhere
in the European Union, except for limited use as a clinical trial device.
Supplemental device approvals also might be required to market and sell the
Delcath system.
Patents, Trade Secrets and Proprietary Rights
Our success depends in large part on our ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care industry has traditionally placed considerable
emphasis on obtaining patent and trade secret protection for significant new
technologies, products and processes. We hold the following six United States
patents, as well as three corresponding foreign patents in Canada, Europe and
Japan that we believe are or may be material to our business:
13
Summary Description of Patents Patent No. Expiration Date
---------- ---------------
Isolated perfusion method for cancer treatment U.S. #5,069,662 October 21, 2008
Isolated perfusion device -- catheter for use in isolated perfusion
in cancer treatment U.S. #5,411,479 April 20, 2013
Device and method for isolated pelvic perfusion U.S. #5,817,046 July 14, 2017
Catheter design to allow blood flow from renal veins and limbs
to bypass occluded segment of IVC U.S. #5,893,841 August 30, 2016
Catheter with slideable balloon to adjust isolated segment U.S. #5,919,163 July 14, 2017
Isolated perfusion method for kidney cancer U.S. #6,186,146 January 13, 2017
We plan to enforce our intellectual property rights vigorously. In addition, we
will conduct searches and other activity relating to the protection of existing
patents and the filing of new applications.
In addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We rely, in part, on confidentiality
agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological
expertise. These agreements may not provide meaningful protection of our
proprietary technologies or other intellectual property if unauthorized use or
disclosure occurs.
Employees
As of February 28, 2005 we had 4 full-time employees. We intend to recruit
additional personnel in connection with the research, development, manufacturing
and marketing of our products. None of our employees is represented by a union
and we believe relationships with our employees are good.
In addition to our full-time employees, we engage the services of medical,
scientific, and financial consultants.
Item 2. Description of Property.
We currently occupy approximately 3,600 square feet of office space at 1100
Summer Street, Stamford, Connecticut, on a month-to-month basis. We have
occupied these facilities since 1992, and the space is adequate for our current
needs. If we require different or additional space in the future, we believe
that satisfactory space will be available at commercially reasonable rates in or
near our current facility, although it is possible that additional facilities
and equipment will not be available on reasonable or acceptable terms, if at
all. We believe that our properties are adequately covered by insurance.
We believe that our facilities and equipment are in good condition and are
suitable for our operations as presently conducted and for our foreseeable
future operations.
We do not invest in real estate, interests in real estate, real estate mortgages
or securities of or interests in persons primarily engaged in real estate
activities.
Item 3. Legal Proceedings.
We are not a party to any litigation other than routine litigation incidental to
our business. We believe that the outcome of any such routine litigation cannot
reasonably be expected to have a material adverse effect on our business or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Small
Business Issuer Purchase of Equity Securities.
Our common shares trade on the NASDAQ Small Cap market under the symbol "DCTH"
and on the Boston Stock Exchange under the symbol "DCT." The redeemable common
stock purchase warrants we issued in 2000 are listed on the Nasdaq Small Cap
market and the Boston Stock Exchange under the symbols "DCTHW" and "DCT/U,"
respectively.
The following table sets forth the per share range of high and low sales prices
of our Common Stock for the periods indicated as reported on the Nasdaq Small
Cap Market:
Common Stock Price Range
------------------------
2004
High Low
Quarter ended March 31, 2004 $4.37 $0.92
Quarter ended June 30, 2004 3.43 1.75
Quarter ended September 30, 2004 2.32 1.46
Quarter ended December 31, 2004 3.12 1.86
2003
High Low
Quarter ended March 31, 2003 $1.79 $0.94
Quarter ended June 30, 2003 2.35 0.56
Quarter ended September 30, 2003 1.55 1.00
Quarter ended December 31, 2003 1.39 0.86
As of March 10, 2005, there were approximately 81 stockholders of record of our
Common Stock and approximately 3,873 additional beneficial owners of our Common
Stock.
Dividend Policy
We have never paid cash dividends on our Common Stock and anticipate that we
will continue to retain our earnings, if any, to finance the growth of our
business.
15
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2004 with
respect to our compensation plans under which our equity securities are
authorized for issuance.
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options, outstanding options, for future issuance
warrants and rights warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
Equity compensation plans approved
by security holders 1,017,020 $1.28 3,000,000(1)
Equity compensation plans
not approved by security holders -- -- --
------------------------- ------------------------ -----------------------
Total 1,017,020 $1.28 3,000,000(1)
(1) These shares are the number of shares that are reserved under our 2004 Stock
Incentive Plan. Since we have stated that we do not expect to grant any
additional awards under our equity compensation plans other than the 2004 Stock
Incentive Plan, the shares that would otherwise be available for future issuance
under such other plans are not included in this number .
During the fourth quarter of 2004, no purchases were made by or on behalf of us
or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act of 1934, of any shares of our Common Stock.
On December 7, 2004, the Company sold 236,966 shares of its Common Stock and
94,787 warrants to purchase shares of its common stock. The sale of these
securities was made in a transaction exempt from registration under Rule 506
under the Securities Act of 1933, as amended, to a single purchaser who
qualified as an "accredited investor" with the meaning of Rule 501 thereunder.
The aggregate offering price of the securities sold was $500,000. The Company
did not pay any underwriting discount or commission with respect to this
transaction.
The warrants issued to the purchaser have an exercise price per share of $3.26,
subject to adjustment under certain circumstances and have a term expiring on
December 7, 2009. The Company has filed a Registration Statement on Form S-3
covering, among other things, the resale of the shares sold in this offering and
of the shares that might be issued upon exercise of the warrants. Commencing one
year after the effective date of the registration statement, the Company has the
right to redeem all or a portion of the warrants if certain conditions are met,
including that the average per share market value of the Company's common stock
for the twenty trading days immediately prior to the notice of redemption has
been more than $4.89.
All other sales of equity securities by the Company during 2004 that were not
registered under the Securities Act have been previously reported by the Company
in a Quarterly Report on form 10-QSB or a Current Report on Form 8-K.
Item 6. Management's Discussion and Analysis or Plan of Operation.
(a) Plan of Operation
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 pursuit of patents worldwide, as described in Item 1 under
"Patents, Trade Secrets and Proprietary Rights." We expect to
16
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, 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 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 and following the 2004 presentation and adoption of a Phase II clinical
trial protocol, patients are being enrolled and treated.
During 2004, we commenced a Phase III clinical trial study at the Sydney
Melanoma Unit to proceed with study of the Delcath drug delivery system for
inoperable cancer in the liver using doxorubicin. We are currently identifying,
recruiting and treating patients and are in discussions with other sites
worldwide.
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 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.
Liquidity and Capital Resources
Our available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures at least through 2006. 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.
Future Capital Needs; Additional Future Funding
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 consistent 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 2006. There can be no assurance that such working capital will be
available on acceptable terms, if at all.
Forward Looking Statements
Certain statements in this Form 10-KSB, including statements of our and
management's expectations, intentions, plans, objectives and beliefs, including
those contained in or implied by "Management's Discussion and Analysis or Plan
of Operation," are "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, that are subject to certain events,
risks and uncertainties that may be outside our control. These forward-looking
statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. They include
statements of our future plans and objectives for our future operations and
17
statements of future economic performance, information regarding our expansion
and possible results from expansion, our expected growth, our capital budget and
future capital requirements, the availability of funds and our ability to meet
future capital needs, the realization of our deferred tax assets, and the
assumptions described in this report underlying such forward-looking statements.
Actual results and developments could differ materially from those expressed in
or implied by such statements due to a number of factors, including without
limitation, those described in the context of such forward-looking statements,
our expansion strategy, our ability to achieve operating efficiencies, industry
pricing and technology trends, evolving industry standards, domestic and
international regulatory matters, general economic and business conditions, the
strength and financial resources of our competitors, our ability to find and
retain skilled personnel, the political and economic climate in which we conduct
operations, the risks discussed in Item 1 above under "Description of Business"
and other risk factors described from time to time in our other documents and
reports filed with the Securities and Exchange Commission (the "Commission"). We
do not assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. We advise you to review any additional
disclosures we make in our Form 10-QSB, Form 8-K and Form 10-KSB reports filed
with the Commission.
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. The
notes to financial statements included in Item 7 contain a summary of the
significant accounting policies and methods used in the preparation of Delcath's
financial statements. The Company is still in the development stage and has no
revenues, trade receivables, inventories, or significant fixed or intangible
assets and therefore has very limited opportunities to choose among accounting
policies or methods. In many cases, the Company must use an accounting policy or
method because it is the only policy or method permitted under accounting
principles generally accepted in the United States of America.
Additionally, the Company devotes substantial resources to clinical trials and
other research and development activities relating to obtaining FDA and other
approvals for the Delcath system, the cost of which is required to be charged to
expense as incurred. This further limits the Company's choice of accounting
policies and methods. Similarly, management believes there are very limited
circumstances in which the Company's financial statement estimates are
significant or critical.
The Company considers the valuation allowance for the deferred tax assets to be
a significant accounting estimate. In applying SFAS No. 109, "Accounting for
Income Taxes," management estimates future taxable income from operations and
tax planning strategies in determining if it is more likely than not that the
Company will realize the benefits of its deferred tax assets.
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Not applicable.
(c) Off-balance sheet arrangements.
We do not have any off-balance arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 7. Financial Statements.
Please refer to pages F-1 through F-18
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2004
Statements of Operations for the years ended December 31, 2004 and 2003 and
cumulative from inception (August 5, 1988) to December 31, 2004
18
Statements of Stockholders' Equity for the years ended December 31, 2004 and
2003 and cumulative from inception (August 5, 1988) to December 31, 2004
Statements of Cash Flows for the years ended December 31, 2004 and 2003 and
cumulative from inception (August 5, 1988) to December 31, 2004
Notes to Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures.
Based on an evaluation of our disclosure controls and procedures performed by
our Chief Executive Officer and our Chief Financial Officer as of the end of the
period covered by this report, our Chief Executive Officer and our Chief
Financial Officer concluded that the Company's disclosure controls and
procedures have been effective.
As used herein, "disclosure controls and procedures" means controls and other
procedures of ours that are designed to ensure that information required to be
disclosed by us in the reports we file or submit 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 us in the reports we file or submit under the Securities Exchange
Act is accumulated and communicated to our management, including our principal
executive officer or officers and our 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 our internal control or in other factors that could significantly
affect these controls, and there were no corrective actions with regard to
significant deficiencies and material weaknesses.
The information required by Item 307 of Regulation S-B as amended effective
August 14, 2003 is not required to be included in this annual report.
The information required by Item 308 of Regulation S-B as amended effective
August 14, 2003 is not required to be included in annual report.
We have not yet become subject to the requirement to include an annual report of
management on our internal control over financial reporting in our annual
reports under Section 13 or 15(d) of the Securities Exchange Act.
Item 8B. Other Information.
There was no information that we were required to disclose in a Current Report
on Form 8-K during the fourth quarter of the year ended December 31, 2004 that
we have not previously reported.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information required by Items 401, 405 and 406 of Regulation S-B is
incorporated by reference into this Form 10-KSB by reference to the Company's
definitive proxy statement (the "Definitive Proxy Statement") for its 2005
Annual Meeting of Stockholders.
Item 10. Executive Compensation
The information required by Item 402 of Regulation S-B is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.
19
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by Item 201(d) of Regulation S-B is included in this
Form 10-KSB under Item 5. The information required by Item 403 of Regulation S-B
is incorporated into this Form 10-KSB by reference to the Definitive Proxy
Statement.
Item 12. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-B, if any, is incorporated
into this form 10-KSB by reference to the Definitive Proxy Statement.
Item 13. Exhibits
(a) Exhibits
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Delcath
Systems, Inc., as amended to June 16, 2004. (incorporated by
reference to Exhibit 3(i) to Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2004 (Commission File
No. 001-16133)).
3.2 Amended and Restated By-Laws of Delcath Systems, Inc.
(incorporated by reference to Exhibit 3.2 to Amendment No. 1 to
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-39470)).
4.1 Rights Agreement, dated October 30, 2001, by and between Delcath
Systems, Inc. and American Stock Transfer & Trust Company, as
Rights Agent (incorporated by reference to Exhibit 4.7 to
Registrant's Form 8-A dated November 12, 2001 (Commission File
No. 001-16133)).
4.2 Form of Warrant Agreement by and between Delcath Systems, Inc.
and Whale Securities Co., L.P. (incorporated by reference to
Exhibit 4.2 to Amendment No. 5 to Registrant's Registration
Statement on Form SB-2 (Registration No. 333-39470)).
4.3 Form of Warrant Agent Agreement by and among Delcath Systems,
Inc., Whale Securities Co., L.P., and American Stock Transfer &
Trust Company, as warrant agent (incorporated by reference to
Exhibit 4.3 to Amendment No. 5 to Registrant's Registration
Statement on Form SB-2 (Registration No. 333-39470)).
4.4 Form of Underwriter's Unit Warrant Agreement between Delcath
Systems, Inc. and Roan/Meyers Associates L.P. (incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-101661)).
4.5 Specimen 2003 Warrant (incorporated by reference to Exhibit 4.2
to Amendment No. 1 to Registrant's Registration Statement on Form
SB-2 (Registration No. 333-101661)).
4.6 Form of Warrant Agent Agreement by and between Delcath Systems,
Inc. and American Stock Transfer & Trust Company, as warrant
agent, with respect to the 2003 Warrants (incorporated by
reference to Exhibit 4.8 to Amendment No. 3 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-101661)).
4.7 Form of Warrant to Purchase Shares of Common Stock issued
pursuant to the Common Stock Purchase Agreement dated as of March
19, 2004 (incorporated by reference to Exhibit 4 to Registrant's
Current Report on Form 8-K dated March 19, 2004 (Commission File
No,. 001-16133)).
4.8 Form of Series A Warrant to Purchase Shares of Common Stock dated
as of November 24, 2004 (incorporated by reference to Exhibit 4.1
to
20
Exhibit No. Description
Registrant's Current Report on Form 8-K dated November 24, 2004
(Commission File No. 001-16133)).
4.9 Form of Series B Warrant to Purchase Shares of Common Stock dated
as of November 24, 2004 (incorporated by reference to Exhibit 4.2
to Registrant's Current Report on Form 8-K dated November 24,
2004 (Commission File No. 001-16133)).
4.10 Form of Series C Warrant to Purchase Shares of Common Stock dated
as of November 24, 2004 (incorporated by reference to Exhibit 4.3
to Registrant's Current Report on Form 8-K dated November 24,
2004 (Commission File No. 001-16133)).
4.11 Form of Series D Warrant to Purchase Shares of Common Stock dated
as of December 7, 2004 (incorporated by reference to Exhibit 4.10
to Registrant's Registration Statement on Form S-3 (Registration
No. 333-121681)).
10.1 1992 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.2 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
10.2 1992 Non-Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Registrant's Registration Statement on Form
SB-2 (Registration No. 333-39470)).
10.3 2000 Stock Option Plan (incorporated by reference to Exhibit 10.3
to Registrant's Registration Statement on Form SB-2 (Registration
No. 333-39470)).
10.4 2001 Stock Option Plan (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2001 (Commission File No.
001-16133)).
10.5 2004 Stock Incentive Plan (incorporated by reference to Appendix
B to Registrant's definitive Proxy Statement dated April 29, 2004
(Commission File No. 001-16133)).
10.6 Employment Agreement, effective as of October 1, 2003, by and
among Delcath Systems, Inc. and M. S. Koly (incorporated by
reference to Exhibit 10.5 to Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2003 (Commission File No.
001-16133)).
10.7 Employment Agreement, effective as of October 1, 2003, by and
among Delcath Systems, Inc. and Samuel Herschkowitz (incorporated
by reference to Exhibit 10.6 to Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 2003 (Commission File
No. 001-16133)).
10.8 Common Stock Purchase Agreement dated as of March 19, 2004 by and
among Delcath Systems, Inc. and the Purchasers Listed on Exhibit
A thereto (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated March 19, 2004
(Commission File No. 001-16133)).
10.9 Registration Rights Agreement dated as of March 19, 2004 by and
among Delcath Systems, Inc. and the Purchasers Listed on Schedule
I thereto (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated March 19, 2004
(Commission File No. 001-16133)).
10.10 Common Stock Purchase Agreement dated as of November 24, 2004 by
and among Delcath Systems, Inc. and the Purchasers Listed on
Exhibit A thereto (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 24, 2004
(Commission File No. 001-16133)).
10.11 Registration Rights Agreement dated as of November 24, 2004 by
and among Delcath Systems, Inc. and the Purchasers Listed on
Schedule I
21
Exhibit No. Description
thereto (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated November 24, 2004
(Commission File No. 001-16133)).
10.12 Common Stock Purchase Agreement dated as of December 7, 2004 by
and among Delcath Systems, Inc. and the Purchasers Listed on
Exhibit A thereto (incorporated by reference to Exhibit 10.5 to
Registrant's Registration Statement on Form S-3 (Registration No.
333-121681)).
10.13 Registration Rights Agreement dated as of December 7, 2004 by
and among Delcath Systems, Inc. and the Purchasers Listed on
Schedule I thereto (incorporated by reference to Exhibit 10.6 to
Registrant's Registration Statement on Form S-3 (Registration No.
333-121681)).
14 Code of Business Conduct (incorporated by reference to Exhibit 14
to Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2003 (Commission File No. 001-16133)).
23 Consent of Eisner LLP.
24 Power of Attorney (included on the signature page hereto).
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 32.1 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 32.2 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Item 14. Principal Accountant Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.
22
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELCATH SYSTEMS, INC.
Registrant
/s/ M. S. Koly
-------------------------
M. S. Koly, President
March 21, 2005
Each person whose signature appears below appoints M. S. Koly as his
attorney-in-fact, with full power of substitution and resubstitution to sign any
and all amendments to this report on Form 10-KSB of Delcath Systems, Inc. and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ M. S. KOLY President, Chief Executive Officer, March 21, 2005
- ------------------------------- Treasurer
M. S. Koly and Director (Principal Executive Officer)
/s/ PAUL M. FEINSTEIN
- ------------------------------- Chief Financial Officer March 21, 2005
Paul M. Feinstein (Principal Financial Officer and
Principal Accounting Officer)
/s/ SAMUEL HERSCHKOWITZ Chairman of the Board March 21, 2005
- -------------------------------
Samuel Herschkowitz, M.D.
/s/ MARK A. CORIGLIANO Director March 21, 2005
- -------------------------------
Mark A. Corigliano
/s/ DANIEL ISDANER Director March 21, 2005
- -------------------------------
Daniel Isdaner
/s/ VICTOR NEVINS Director March 21, 2005
- -------------------------------
Victor Nevins
23
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet as of December 31, 2004 F-3
Statements of Operations for the years ended December 31,
2004 and 2003 and cumulative from inception
(August 5, 1988) to December 31, 2004 F-4
Statements of Stockholders' Equity for the years ended
December 31, 2004 and 2003 and cumulative from
inception (August 5, 1988) to December 31, 2004 F-5
Statements of Cash Flows for the years ended December 31,
2004 and 2003 and cumulative from inception
(August 5, 1988) to December 31, 2004 F-6
Notes to Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
Delcath Systems, Inc.:
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage company) as of December 31, 2004, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2004 and for the period from August 5, 1988
(inception) to December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Delcath Systems, Inc. (a
development stage company) as of December 31, 2004, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2004 and for the period from August 5, 1988 (inception) to December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
Eisner LLP
New York, NY
February 25, 2005
F-2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
2004
-------------------
Assets
Current assets:
Cash and cash equivalents $ 202,335
Certificates of deposit 7,055,129
Interest receivable 32,886
Prepaid insurance 47,816
-------------------
Total current assets 7,338,166
Furniture and fixtures, net 13,606
-------------------
Total assets $ 7,351,772
===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 564,626
-------------------
Total current liabilities 564,626
-------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding --
Common stock, $.01 par value; 70,000,000 shares authorized;
15,243,185 shares issued and 15,215,085 outstanding 152,151
Additional paid-in capital 29,605,543
Deficit accumulated during development stage (22,970,548)
-------------------
Total stockholders' equity 6,787,146
-------------------
Total liabilities and stockholders'
equity $ 7,351,772
===================
See accompanying notes to financial statements.
F-3
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
Cumulative
from inception
(August 5, 1988)
Year ended December 31, to
----------------------------------
2004 2003 December 31, 2004
---------------------------------- --------------------------
Costs and expenses:
General and administrative expenses $ 1,059,815 $ 707,737 $ 7,070,861
Research and development costs 2,306,733 1,598,615 15,316,229
---------------------------------- --------------------------
Total costs and expenses 3,366,548 2,306,352 22,387,090
---------------------------------- --------------------------
Operating loss (3,366,548) (2,306,352) (22,387,090)
Other income (expense):
Interest income 100,216 55,941 1,086,620
Interest expense -- -- (171,473)
---------------------------------- --------------------------
Net loss $ (3,266,332)$ (2,250,411)$ (21,471,943)
================ ================ ==========================
Common share data:
Basic and diluted loss per share $ (0.28)$ (0.30)
================ ================
Weighted average number of basic
and diluted common shares
outstanding 11,543,256 7,453,349
================ ================
See accompanying notes to financial statements.
F-4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Years ended December 31, 2004 and 2003 and
cumulative from inception (August 5, 1988) to December 31, 2004
Common stock $.01 par value
----------------------------------------------------------------------------------
Issued In treasury Outstanding
--------------------------- -------------------------- --------------------------
No. of No. of No. of
shares Amount shares Amount shares Amount
------------- --------- ----------- ----------------------- -----------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 621,089 $ 6,211 -- $ -- 621,089 $ 6,211
Sale of preferred stock,
August 22, 1988 -- -- -- -- -- --
Shares returned as of March 8, 1990 -- -- (414,059) (4,141) (414,059) (4,141)
Sale of stock, October 2, 1990 -- -- 17,252 173 17,252 173
Sale of stock, January 23, 1991 -- -- 46,522 465 46,522 465
Sale of stock, August 30, 1991 -- -- 1,353 14 1,353 14
Sale of stock, December 31, 1992 -- -- 103,515 1,035 103,515 1,035
Sale of stock, July 15, 1994 -- -- 103,239 1,032 103,239 1,032
Sale of stock, December 19, 1996 -- -- 39,512 395 39,512 395
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 58,491 585 98,388 984 156,879 1,569
Sale of stock, December 31, 1997 53,483 535 -- -- 53,483 535
Exercise of stock options 13,802 138 3,450 35 17,252 173
Shares issued as compensation 2,345 23 828 8 3,173 31
Shares issued in connection with
exercise of warrants 21,568 216 -- -- 21,568 216
Sale of stock, January 16, 1998 34,505 345 -- -- 34,505 345
Sale of stock, September 24, 1998 3,450 35 -- -- 3,450 35
Shares returned, April 17, 1998 (3,450) (35) -- -- (3,450) (35)
Exercise of stock options 8,626 86 -- -- 8,626 86
Sale of stock, June 30, 1999 46,987 470 -- -- 46,987 470
Shares issued in connection with
exercise of warrants 2,300 23 -- -- 2,300 23
Sale of stock, April 14, 2000 230,873 2,309 -- -- 230,873 2,309
Dividends paid on preferred stock 690,910 6,909 -- -- 690,910 6,909
Conversion of preferred stock 833,873 8,339 -- -- 833,873 8,339
Sale of stock, October 19, 2000 1,200,000 12,000 -- -- 1,200,000 12,000
Shares issued as compensation
for stock sale 85,000 850 -- -- 85,000 850
Stock options issued as
compensation -- -- -- -- -- --
Sum of fractional common shares
cancelled after year 2000
stock splits (36) (1) -- -- (36) (1)
Stock warrants issued as
compensation -- -- -- -- -- --
Sale of stock on April 3, 2002 243,181 2,432 -- -- 243,181 2,432
Repurchases of stock, November (28,100) (281) (28,100) (281)
and December 2002
Amortization since inception of
compensatory stock options -- -- -- -- -- --
Forfeiture since inception of stock
options -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 2002 -- -- -- -- -- --
------------- --------- ------------ --------- ------------ ---------
Balance at December 31, 2002 4,146,997 $ 41,470 (28,100) $ (281) 4,118,897 $ 41,189
Sale of stock May 20, 2003 including
underwriter's exercise of
overallotment option 3,895,155 38,952 -- -- 3,895,155 38,952
Proceeds from sale of unit option -- -- -- -- -- --
Exercise of 2003 Warrants 1,730,580 17,305 0 0 1,730,580 17,305
Net loss for year ended
December 31, 2003
------------- --------- ------------ --------- ------------ ---------
Balance at December 31, 2003 9,772,732 97,727 (28,100) (281) 9,744,632 97,446
Sale of stock, March, 2004 1,197,032 11,970 -- -- 1,197,032 11,970
Sale of stock, April, 2004 290,457 2,905 -- -- 290,457 2,905
Exercise of 2002 Warrants 20,265 203 -- -- 20,265 203
Stock options issued as compensation -- -- -- -- -- --
Exercise of 2003 Warrants 2,160,163 21,602 -- -- 2,160,163 21,602
Sale of stock, November, 2004 1,069,520 10,695 -- -- 1,069,520 10,695
Sale of stock, December, 2004 236,966 2,370 -- -- 236,966 2,370
Exercise of 2003 Representative's
Unit Warrants 282,025 2,820 -- -- 282,025 2,820
Exercise of Representative's Common
Stock Warrants 152,025 1,520 -- -- 152,025 1,520
Exercise of stock options 62,000 620 -- -- 62,000 620
Net loss for year ended
December 31, 2004
------------- --------- ------------ --------- ------------ ---------
15,243,185 $ 152,432 (28,100) $ (281) 15,215,085 $ 152,151
============= ========= ============ ========= ============ =========
Class A Class B
Preferred Stock preferred stock preferred stock
--------------------------------------------- --------------------------
$.01 par value $.01 par value $.01 par value
--------------------------------------------- --------------------------
No. of No. of No. of
shares Amount shares Amount shares Amount
------------------------------ ----------------------- ------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 -- $ -- -- $ -- -- $ --
Sale of preferred stock,
August 22, 1988 -- -- 2,000,000 20,000 -- --
Shares returned as of March 8, 1990 -- -- -- -- -- --
Sale of stock, October 2, 1990 -- -- -- -- -- --
Sale of stock, January 23, 1991 -- -- -- -- 416,675 4,167
Sale of stock, August 30, 1991 -- -- -- -- -- --
Sale of stock, December 31, 1992 -- -- -- -- -- --
Sale of stock, July 15, 1994 -- -- -- -- -- --
Sale of stock, December 19, 1996 -- -- -- -- -- --
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 -- -- -- -- -- --
Sale of stock, December 31, 1997 -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Shares issued as compensation -- -- -- -- -- --
Shares issued in connection with
exercise of warrants -- -- -- -- -- --
Sale of stock, January 16, 1998 -- -- -- -- -- --
Sale of stock, September 24, 1998 -- -- -- -- -- --
Shares returned, April 17, 1998 -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Sale of stock, June 30, 1999 -- -- -- -- -- --
Shares issued in connection with
exercise of warrants -- -- -- -- -- --
Sale of stock, April 14, 2000 -- -- -- -- -- --
Dividends paid on preferred stock -- -- -- -- -- --
Conversion of preferred stock -- -- (2,000,000) (20,000) (416,675) (4,167)
Sale of stock, October 19, 2000 -- -- -- -- -- --
Shares issued as compensation
for stock sale -- -- -- -- -- --
Stock options issued as
compensation -- -- -- -- -- --
Sum of fractional common shares
cancelled after year 2000
stock splits -- -- -- -- -- --
Stock warrants issued as
compensation -- -- -- -- -- --
Sale of stock on April 3, 2002 -- -- -- -- -- --
Repurchases of stock, November -- -- -- -- -- --
and December 2002
Amortization since inception of
compensatory stock options -- -- -- -- -- --
Forfeiture since inception of stock
options -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 2002 -- -- -- -- -- --
------ --------------------- ---------- ------------ ----------
Balance at December 31, 2002 0 $ 0 0 $ 0 0 $ 0 $
Sale of stock May 20, 2003 including
underwriter's exercise of
overallotment option -- -- -- -- -- --
Proceeds from sale of unit option -- -- -- -- -- --
Exercise of 2003 Warrants 0 0 0 0 0 0
Net loss for year ended
December 31, 2003
------ --------------------- ---------- ------------ ----------
Balance at December 31, 2003 0 $ 0 0 $ 0 0 $ 0
Sale of stock, March, 2004 -- -- -- -- -- --
Sale of stock, April, 2004 -- -- -- -- -- --
Exercise of 2002 Warrants -- -- -- -- -- --
Stock options issued as compensation -- -- -- -- -- --
Exercise of 2003 Warrants -- -- -- -- -- --
Sale of stock, November, 2004 -- -- -- -- -- --
Sale of stock, December, 2004 -- -- -- -- -- --
Exercise of 2003 Representative's
Unit Warrants -- -- -- -- -- --
Exercise of Representative's Common
Stock Warrants -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Net loss for year ended
December 31, 2004
------ ----------- -------- ---------- ------------ ----------
0 $ 0 0 $ 0 0 $ 0
====== =========== ======== ========== ============ ==========
Deficit
accumulated
Additional during
paid-in development
capital stage Total
-------------- ---------------- ----------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 $ (5,211) $ -- $ 1,000
Sale of preferred stock
August 22, 1988 480,000 -- 500,000
Shares returned as of March 8, 1990 4,141 -- --
Sale of stock, October 2, 1990 24,827 -- 25,000
Sale of stock, January 23, 1991 1,401,690 -- 1,406,322
Sale of stock, August 30, 1991 9,987 -- 10,001
Sale of stock, December 31, 1992 1,013,969 -- 1,015,004
Sale of stock, July 15, 1994 1,120,968 -- 1,122,000
Sale of stock, December 19, 1996 999,605 -- 1,000,000
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 1,703,395 -- 1,704,964
Sale of stock, December 31, 1997 774,465 -- 775,000
Exercise of stock options 30,827 -- 31,000
Shares issued as compensation 34,454 -- 34,485
Shares issued in connection with
exercise of warrants 234,182 -- 234,398
Sale of stock, January 16, 1998 499,655 -- 500,000
Sale of stock, September 24, 1998 56,965 -- 57,000
Shares returned, April 17, 1998 (4,965) -- (5,000)
Exercise of stock options 67,414 -- 67,500
Sale of stock, June 30, 1999 775,722 -- 776,192
Shares issued in connection with
exercise of warrants 24,975 -- 24,998
Sale of stock, April 14, 2000 499,516 -- 501,825
Dividends paid on preferred stock 992,161 (1,498,605) (499,535)
Conversion of preferred stock 15,828 -- --
Sale of stock, October 19, 2000 5,359,468 -- 5,371,468
Shares issued as compensation
for stock sale (850) -- --
Stock options issued as
compensation 3,800 -- 3,800
Sum of fractional common shares
cancelled after year 2000
stock splits 1 -- --
Stock warrants issued as
compensation 198,000 -- 198,000
Sale of stock on April 3, 2002 265,068 -- 267,500
Repurchases of stock, November (50,822) -- (51,103)
and December 2002
Amortization since inception of
compensatory stock options 3,760,951 -- 3,760,951
Forfeiture since inception of stock
options (1,240,780) -- (1,240,780)
Deficit accumulated from inception
to December 31, 2002 -- (15,955,200) (15,955,200)
-------------- ---------------- ----------------
Balance at December 31, 2002 19,049,406 $ (17,453,805) $ 1,636,790
Sale of stock May 20, 2003 including
underwriter's exercise of
overallotment option 1,453,696 -- 1,492,648
Proceeds from sale of unit option 68 -- 68
Exercise of 2003 Warrants 1,273,895 0 1,291,200
Net loss for year ended
December 31, 2003 (2,250,411) (2,250,411)
-------------- ---------------- ----------------
Balance at December 31, 2003 21,777,065 (19,704,216) 2,170,295
Sale of stock, March, 2004 2,660,625 -- 2,672,595
Sale of stock, April, 2004 635,130 -- 638,035
Exercise of 2002 Warrants 26,547 -- 26,750
Stock options issued as compensation 5,222 -- 5,222
Exercise of 2003 Warrants 1,652,524 -- 1,674,126
Sale of stock, November, 2004 1,829,305 -- 1,840,000
Sale of stock, December, 2004 497,630 -- 500,000
Exercise of 2003 Representative's
Unit Warrants 284,383 -- 287,203
Exercise of Representative's Common
Stock Warrants 193,072 -- 194,592
Exercise of stock options 44,040 -- 44,660
Net loss for year ended
December 31, 2004 (3,266,332) (3,266,332)
-------------- ---------------- ----------------
29,605,543 $ (22,970,548) $ 6,787,146
============== ================ ================
F-5
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
from inception
Year ended December 31, (August 5, 1988)
------------------------------- to
2004 2003 December 31, 2004
--------------- -------------- --------------------------
Cash flows from operating activities:
Net loss $(3,266,332) $ (2,250,411) $ (21,471,943)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense 5,222 -- 2,525,392
Stock and warrant compensation expense
issued for consulting services -- -- 236,286
Depreciation expense 5,526 4,990 31,692
Amortization of organization costs -- -- 42,165
Rent expense attributable to lease deposit 24,000 -- --
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (316) 49,083 (47,816)
Increase in interest receivable (18,611) (8,865) (32,883)
Increase in accounts payable
and accrued expenses 304,425 85,030 564,625
--------------- -------------- --------------------------
Net cash used in operating activities (2,946,086) (2,120,173) (18,152,482)
--------------- -------------- --------------------------
Cash flows from investing activities:
Purchase of furniture and fixtures (5,347) (5,029) (45,300)
Purchase of short-term investments (6,052,383) (2,017,321) (10,969,704)
Proceeds from maturities of short-term
investments 1,014,575 370,000 3,914,575
Organization costs -- -- (42,165)
--------------- -------------- --------------------------
Net cash used in investing activities (5,043,155) (1,652,350) (7,142,594)
--------------- -------------- --------------------------
Cash flows from financing activities:
Net proceeds from sale of stock and exercise
of stock options and warrants 7,877,961 3,022,487 24,343,085
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 7,877,961 3,022,487 5,497,411
--------------- -------------- --------------------------
(Decrease) increase in cash and cash equivalents (111,280) (750,035) 202,335
Cash and cash equivalents at beginning of period 313,615 1,063,650 --
--------------- -------------- --------------------------
Cash and cash equivalents at end of period $ 202,335 $ 313,615 $ 202,335
=============== ============== ==========================
Cash paid for interest $ -- $ -- $ 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
=============== ============== ==========================
See accompanying notes to financial statements.
F-6
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
(1) Description of Business and Summary of Significant Accounting Policies
(a) 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. 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 status (Investigational
New Drug) for its product by the FDA (Food and Drug Administration).
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.
(b) Basis of Financial Statement Presentation
The accounting and financial reporting policies of the Company conform
to accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with
such accounting principles requires management to make assumptions and
estimates that impact the amounts reported in those statements. Such
assumptions and estimates are subject to change in the future as
additional information becomes available or as circumstances are
modified. Actual results could differ from these estimates.
(c) Furniture and Fixtures
Furniture and fixtures are recorded at cost and are being depreciated
on a straight line basis over the estimated useful lives of the assets
of five years. Accumulated depreciation amounted to $31,692 at
December 31, 2004.
(d) Income Taxes
The Company accounts for income taxes following the asset and
liability method in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under such
method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The Company's income tax
returns are prepared on the cash basis of accounting. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years that the asset is expected to
be recovered or the liability settled.
F-7
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
(e) Stock Option Plan
The Company has historically accounted for its employee stock
option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant only if the
current fair market value of the underlying stock exceeds the
exercise price. Fair market values of the Company's Common Stock
at the dates options were granted, prior to the Company's stock
becoming publicly traded, were based on third party sales of
stock at or around the dates options were granted, or in the
absence of such transactions, based on a determination by the
board of directors based on current available information. Such
cost is then recognized over the period the recipient is required
to perform services to earn such compensation. If a stock option
does not become vested because an employee fails to fulfill an
obligation, the estimate of compensation expense recorded in
previous periods is adjusted by decreasing compensation expense
in the period of forfeiture.
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which
permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure in
accordance with the provisions of SFAS No. 123.
Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant dates consistent
with the methodology of SFAS No. 123, the Company's net loss and
net loss per share for the years ended December 31, 2004 and 2003
would have been increased to the pro forma amounts indicated as
follows:
2004 2003
Net loss $ (3,266,332) $ (2,250,411)
Stock-based employee compensation
expense included in net loss,
net of related tax effects 0 0
Stock-based employee compensation expense
determined under the fair value based
method, net of related tax effects (93,793) (82,568)
------------- -----------
Pro forma net loss $ (3,360,125) $ (2,332,979)
============= =============
Loss per share (basic and diluted):
As reported $ (0.28) $ (0.30)
Pro forma (0.29) (0.31)
F-8
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
The per share weighted average fair value of stock options
granted during 2003 was $.32, estimated on the date of grant
using the Black-Scholes option-pricing model with the
weighted-average assumption of a risk free interest rate of 3.49%
and volatility of 29%, with no dividend yield and an expected
life of five years. No options were granted in 2004.
(f) Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share", which requires presentation of both basic and diluted
earnings per share (EPS) on the face of the Statements of
Operations. Basic EPS excludes dilution and is computed using the
weighted average number of common shares outstanding during the
period. The diluted EPS calculation assumes all dilutive stock
options or contracts to issue Common Stock were exercised or
converted into Common Stock at the beginning of the period.
For the years ended December 31, 2004 and 2003, the following
potential common shares were excluded from the computation of
diluted EPS because their effects would be antidilutive:
2004 2003
---- ----
Shares issuable upon exercise of options 1,017,020 1,520,678
Shares issuable upon exercise of warrants 4,417,748 4,628,970
--------- ---------
5,434,768 6,149,648
========= =========
In addition, Common Stock purchase rights issuable only in the
event that a non-affiliated person or group acquires 15% of the
Company's then outstanding Common Stock have been excluded from
the computation.
(g) 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.
(h) Cash Equivalents
The Company considers highly liquid debt instruments with
maturities of three months or less at date of acquisition to be
cash equivalents.
(i) Stock Splits
All share and per share amounts give retroactive effect to stock
splits effected by the Company.
F-9
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
(2) Stockholders' Equity
(a) Stock Issuances
BGH Medical Products, Inc. (name later changed to Delcath Systems,
Inc.), a Delaware corporation (BGH - Delaware), was formed on August
5, 1988. As of August 22, 1988, BGH Medical Products, Inc., a
Connecticut corporation (BGH - Conn.), was merged into BGH -Delaware,
the surviving corporation. As of the merger date, the authorized
capital stock of BGH - Conn. consisted of 5,000 shares of common
stock, par value $.01 per share, of which 1,000 shares were issued and
outstanding. Upon the merger, each BGH - Conn. Common Share
outstanding was converted into 621.089 BGH - Delaware Common Shares.
As a result of the conversion, BGH - Delaware issued 621,089 shares of
Common Stock at $.01 par value. The aggregate amount of the par value
of all Common Shares issued as a result of the exchange, $6,211, was
credited as the Common Stock capital of BGH - Delaware, and the
difference in respect of the capital account deficiency was charged to
additional paid-in capital.
On August 22, 1988, BGH - Delaware then sold in a private placement
2,000,000 shares of Class A Preferred Stock, with a par value of $.01,
to two affiliated venture capital funds for an aggregate amount of
$500,000 in cash.
On March 8, 1990, 414,059 shares of Common Stock were returned to the
Company by certain stockholders as treasury stock due to relevant
technology milestones not being fully achieved within the specified
time period, in accordance with provisions of a stockholders'
agreement.
Effective May 7, 1990, the Company changed its name to Delcath
Systems, Inc.
On October 2, 1990, the Company sold 17,252 shares of Common Treasury
Stock, $.01 par value, for an aggregate amount of $25,000.
On January 23, 1991, the Company offered in a private placement shares
of Common Stock and/or Class B Preferred Stock at $7.39 and $2.55 per
share respectively for an aggregate maximum amount of $2,000,000.
Under the terms of the private placement, 46,522 shares of Common
Treasury Stock and 416,675 shares of Class B Preferred Stock were
sold, yielding net proceeds to the Company of $1,406,322. The Common
Stock and Class B Preferred Stock sold each has a par value of $.01,
resulting in an increase in additional paid-in capital of $1,401,690
The two affiliated venture capital funds that owned the Class A
Preferred Shares purchased 117,650 of the Class B Preferred Shares
sold in the private placement.
On August 30, 1991, the Company sold an additional 1,353 shares of
Common Treasury Stock at $7.39 per share, yielding proceeds to the
Company of $10,001. The shares have a par value of $.01, resulting in
an additional paid-in capital amount of $9,987.
In a December 1992 private placement, the Company sold 103,515 shares
of Common Stock held in its treasury at $10.14 per share for a total
placement of $1,050,000 ($1,015,004 after expenses). The shares issued
have a par value of $.01, resulting in an additional paid-in capital
F-10
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
amount of $1,048,965 ($1,013,969 after expenses). The two affiliated
venture capital funds that owned the Class A Preferred Shares
purchased 27,604 of the Common Treasury Shares sold.
Effective January 1, 1994, the Company issued 1,725 shares of Common
Treasury Stock at $1.45 per share for a total price of $2,500 upon the
exercise of stock options by an employee of the Company.
During the first quarter of 1994, the Company increased its authorized
number of Common Shares from 5,000,000 to 15,000,000.
On July 15, 1994, the Company sold through a private placement
offering, units at a price of $51,000 per unit. Each unit consisted of
4,693 Common Shares and 469 Warrants, each of which entitled the
holder to purchase one share of Common Stock for $10.87. In connection
therewith, the Company sold twenty-two (22) units (103,239 Common
Shares and 10,324 Warrants expiring August 30, 1997) for total
proceeds of $1,122,000. The two affiliated venture capital funds that
owned the Class A Preferred Shares purchased six (6) of the units
sold. During August 1997, the holders of Warrants exercised 8,916
Warrants to purchase 8,916 Common Shares at $10.87 each for total
proceeds of $96,900. The remaining Warrants expired unexercised.
Effective January 1, 1995, the Company issued 1,725 shares of Common
Treasury Stock at $1.45 per share for a total price of $2,500 upon the
exercise of stock options by an employee of the Company.
Effective January 1, 1996, the Company issued 828 shares of Common
Stock, valued at $10.87 per share for a total of $9,000, as
compensation for consulting services.
On December 19, 1996, the Company sold through a private transaction
39,512 shares of Common Stock for total proceeds of $1,000,000. In
connection with the offering, the purchaser obtained sole distribution
rights for the Company's products in Japan, Korea, China, Taiwan, and
Hong Kong through December 31, 2004. No value was attributed to the
distribution rights. In addition, under certain conditions, the
purchaser would have been required to buy certain products from the
Company.
On April 26, 1996, the Company entered into short-term borrowing
agreements with 26 investors under which it borrowed $1,704,964
bearing interest at 10.25% per annum. Under the terms of the
agreements, on December 22, 1996, the short-term borrowings were
converted into 156,879 shares of Common Stock, based on a conversion
price of $10.87 per share, and 78,438 Warrants, expiring April 25,
1999, entitling the holders to purchase 78,438 additional shares of
Common Stock at $10.87 per share. The two affiliated venture capital
funds discussed above provided $250,000 of the short-term loan,
converting that debt into approximately 23,003 shares of Common Stock
and 11,502 Warrants. From April 26, 1996 through December 22, 1996,
interest of $114,948 accrued on the borrowings. Such interest was paid
in January 1997. During September 1997, the holders of Warrants
exercised 1,150 Warrants to purchase 1,150 Common Shares at $10.87
each for total proceeds of $12,499. During December 1997, the two
affiliated venture capital funds exercised their 11,502 Warrants to
purchase 11,502 Common Shares at $10.87 each for total proceeds of
$124,999. During April 1999, the holders of Warrants
F-11
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
exercised 2,300 Warrants to purchase 2,300 Common Shares at $10.87
each for total proceeds of $24,998. The remaining Warrants expired
unexercised.
In 1997, the Company issued 2,345 shares of Common Stock, valued at
$10.87 per share based on a 1996 agreement, for a total cost of
$25,485, as compensation for consulting services.
From September 1997 through December 31, 1997, the Company received
$775,000 and issued 53,483 shares of Common Stock. During January
1998, the Company received an additional $500,000 and issued another
34,505 shares of Common Stock. In April 1998, under the terms of
restricted stock sale agreements, the Company issued to the purchasers
of the 87,988 shares of Common Stock 11,732 three-year Warrants
entitling the holders to purchase 11,732 Common Shares at $10.87 per
share. These Warrants expired unexercised in April 2001.
In December 1997, the holder of non-incentive stock options exercised
13,802 options to purchase 13,802 restricted Common Shares at $1.88
each for total proceeds of $26,000.
In April 1998, a venture capital firm exercised 8,626 non-incentive
stock options to purchase 8,626 restricted Common Shares at $7.83 each
for total proceeds of $67,500.
In April 1998, in connection with the settlement of a dispute with a
former director, the Company cancelled 3,450 shares of Common Stock
previously held by the former director in return for $1.45 per share,
the price originally paid by the former director.
In September 1998, the Company sold 3,450 shares of restricted Common
Stock to an individual for $16.52 per share, yielding proceeds to the
Company of $57,000.
In June 1999, the Company sold 46,987 shares of Common Stock to
individual investors for $16.52 per share and Warrants entitling the
holders to purchase 5,218 Common Shares at $14.87 per share (which
warrants expired on April 30, 2002), yielding proceeds to the Company
of $776,192.
In April 2000, the Company sold 230,873 Common Shares at $2.17 per
share to existing stockholders in a rights offering yielding proceeds
to the Company of $501,825.
The Company completed an initial public offering ("IPO") on October
19, 2000 of 1,200,000 units for $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.
In connection with the initial public offering, the Company received
$7,200,000 before offering costs ($5,371,468 after expenses). The
Company also issued to the underwriter Warrants to purchase 120,000
units for $6.60 per unit, each unit consisting of one Common Share and
one redeemable Warrant to purchase one share of Common Stock at a
price of $10.50 until October 18, 2005. The Company also issued 85,000
shares of Common Stock valued at $510,000 for legal services provided
in connection with the offering.
Also, in connection with the initial public offering, the holders of
the 2,000,000 outstanding shares of the Company's Class A Preferred
Stock and the 416,675 outstanding shares of the
F-12
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
Company's Class B Preferred Stock agreed to convert their shares into
Common Stock prior to the closing of the offering. Upon the conversion
of the Company's Class A Preferred Stock and the Company's Class B
Preferred Stock into 833,873 shares of Common Stock, the holders of
the Class A and Class B shares received an aggregate of $499,535 in
cash and 690,910 shares of Common Stock valued at $999,070 in payment
of declared dividends.
In December 2000, the Company issued 1,720 Common Stock options at an
exercise price of $3.31, fair valued at $2.21 per option for a total
of $3,800, and 1,720 Warrants to purchase Common Stock at an exercise
price of $6.00, fair valued at $0 per Warrant, as compensation for
consulting services. Both the options and Warrants expire December 1,
2005.
The Company issued the following common stock warrants in 2001 for
consulting services:
(1) 150,000 fully vested warrants to purchase 150,000 units at $7.00
per unit, through January 4, 2005, each unit consisting of one
fully-paid and non-assessable share of common stock, and one Common
Stock Purchase Warrant entitling the holder to purchase one share of
Common Stock for $6.60 per share. None of these warrants has been
exercised as of December 31, 2004. Such warrants, valued at $175,000,
were recognized as an expense in the first quarter of 2001.
(2) 150,000 warrants to purchase up to 150,000 shares of Common Stock,
through April 30, 2005, for $6.60 per share. 25,000 of such warrants
vested in 2001 and the remaining 125,000 warrants would have vested if
the share price of the Company's Common Stock exceeded certain share
price levels above the IPO price by May 2002. As of May 2002, none of
the thresholds had been met, and the 125,000 remaining warrants did
not vest and were forfeited. None of the 25,000 vested warrants had
been exercised as of December 31, 2004. The 25,000 vested,
non-contingent warrants have been valued at $23,000, and were
recognized as an expense in the first quarter of 2001. The expenses,
as noted in (1) and (2) above, recognized with these two warrant
issues are non-cash expenses.
The values of the above warrants were $1.17 per warrant for warrants
described in (1) above, and $ .90 per warrant for the 25,000 warrants
that vested immediately described in (2) above, and were estimated on
the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions, respectively: risk free
interest rates of 4.95% and 5.9%, volatility of 26.7% and 22.9%,
expected lives of four years and four and one half years, with no
dividend yield for either issue.
In 2001, the Company cancelled a total of 36 shares of Common Stock
which represented the total of fractional shares resulting from stock
splits during September and October 2000 in connection with the
Company's initial public offering.
On October 30, 2001, the Company entered into a Rights Agreement with
American Stock Transfer & Trust Company (the "Rights Agreement") in
connection with the implementation of the Company's stockholder rights
plan (the "Rights Plan"). The purposes of the Rights Plan are to
deter, and protect the Company's shareholders from, certain coercive
and otherwise unfair takeover tactics and to enable the Board of
Directors to represent effectively the interests of shareholders in
the event of a takeover attempt. The Rights Plan does not deter
negotiated
F-13
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
mergers or business combinations that the Board of Directors
determines to be in the best interests of the Company and its
shareholders. To implement the Rights Plan, the Board of Directors
declared a dividend of one Common Stock purchase right (a "Right") for
each share of Common Stock of the Company, par value $0.01 per share
(the "Common Stock") outstanding at the close of business on November
14, 2001 (the "Record Date") or issued by the Company on or after such
date and prior to the earlier of the Distribution Date, the Redemption
Date or the Final Expiration Date (as such terms are defined in the
Rights Agreement). The rights expire October 30, 2011. Each Right
entitles the registered holder to purchase from the Company one share
of Common Stock, at a price of $5.00 per share, subject to adjustment
(the "Purchase Price") in the event that a person or group announces
that it has acquired, or intends to acquire, 15% or more of the
Company's outstanding Common Stock.
On April 3, 2002, the Company received $267,500 by completing a
private placement of 243,181 shares of its Common Stock and warrants
to purchase up to 20,265 shares of Common Stock at an exercise price
of $1.32 per share that expire on April 3, 2005.
On January 31, 2003, the stockholders approved an amendment to the
Company's certificate of incorporation to increase the authorized
number of shares of Common Stock from 15 million to 35 million.
On May 20, 2003, the Company completed the sale of 677,419 units of
its securities at a selling price of $3.10 per unit. Each unit
consisted of five shares of common stock and five warrants (the "2003
Warrants") each to purchase one share of common stock. The 2003
Warrants are exercisable at $0.775, and they expire on May 20, 2008. A
total of 3,387,095 shares of common stock and 2003 Warrants each were
issued, and the Company received gross proceeds of $2,099,999. In
addition, the Company granted the underwriters an option to purchase
at $3.10 per unit up to an aggregate of an additional 15% of the total
units sold in the public offering. On June 10, 2003 the underwriters
exercised their option for the full allotment of additional units, and
the Company issued 508,060 shares of its common stock and 2003
Warrants each, and received gross proceeds of $314,997. The Company
received $68 for granting the underwriters an option to purchase until
May 14, 2008, 67,741 units at 165% of the offering price. As a result
of the foregoing, the Company received $2,415,064 of proceeds
($1,492,716 after underwriting fees and other expenses).
As of December 31, 2003, the Company had received $1,291,200 of net
proceeds from the exercise of 2003 Warrants for which it issued
1,730,580 shares of its common stock.
Costs of $238,571 incurred through December 31, 2002 in connection
with the May 2003 sale of units, which had been deferred at December
31, 2002, were charged to additional paid-in capital upon completion
of the sale in 2003.
In March 2004 proceeds of $26,750 were received ($1.32 per share) as
20,265 warrants the Company issued in a private placement in 2002 were
exercised.
In March 2004 the Company completed the sale of 1,197,032 shares of
its common stock and the issuance of warrants to purchase 299,258
common shares at $3.01 per share in a private
F-14
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
placement to institutional and accredited investors. The Company
received net proceeds of $2,672,595 in this transaction and agreed to
register the shares of common stock and the shares issuable upon
exercise of the warrants under the Securites Act of 1933.
In April 2004 the Company completed an additional private placement of
290,457 shares of common stock and an aggregate of 72,614 warrants to
purchase shares of its common stock, under the same terms and
conditions as those sold in March 2004 for which it received net
proceeds of $638,035.
On June 15, 2004, the stockholders approved an amendment to the
Company's certificate of incorporation to increase the authorized
number of shares of Common Stock from 35 million to 70 million.
In November 2004 the Company completed the sale of 1,069,520 shares of
its common stock at $1.87 per share and the issuance of warrants to
purchase 1,996,635 common shares in a private placement to
institutional and accredited investors. The Company received net
proceeds of $1,840,000 in this transaction and agreed to register the
shares of common stock and the shares issuable upon exercise of the
warrants under the Securites Act of 1933.
In December 2004 the Company completed the sale of 236,966 shares of
its common stock at $2.11 per share and the issuance of warrants to
purchase 94,787 common shares in a private placement to institutional
and accredited investors. The Company received net proceeds of
$500,000 in this transaction and agreed to register the shares of
common stock and the shares issuable upon exercise of the warrants
under the Securites Act of 1933.
During 2004 the Company received net proceeds of $1,674,126 ($0.775
per share) as 2,160,163 of the 2003 Warrants were exercised and for
which it has issued shares of its common stock. 1,893,658 warrants
were exercised following a notice of redemption issued on October 1,
2004 in accordance with the terms of the warrant and as all such
warrants have now been redeemed, trading therein has ceased.
During 2004 the Company received net proceeds of $287,203 ($1.022 per
share) upon the exercise of 56,405 of the Representative Unit Purchase
Warrants that were issued to underwriters as part of the 2003 public
offering. This resulted in the issuance of 282,025 shares of common
stock together with a similar amount of Representative's Common Stock
Warrants. 152,025 Representative's Common Stock Warrants were
exercised ($1.28 per share) with a similar amount of common stock
being issued and receipt of net proceeds of $194,592.
The Company received a net amount of $44,660 upon the exercise of
62,000 in stock options during the last quarter. 60,000 options were
exercised at a price of $0.71 per share and 2,000 were exercised at a
price of $1.03 per share.
F-15
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
(b) Common Stock Repurchases
Pursuant to a stock repurchase plan approved in 2002 by the Company's
Board of Directors, the Company repurchased 28,100 shares of common
stock for $51,103 during 2002. The Company has been authorized by the
Board of Directors to purchase up to seven percent of its then
outstanding common stock (290,289).
(c) Stock Option Plans
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 may be granted. 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 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 Company and expire over varying terms,
but not more than five years from the date of grant. Stock option
activity for the period January 1, 2003 through December 31, 2004 is
as follows:
The Plans
Weighted
Average
Exercise
Shares Price
Outstanding at
December 31, 2002 1,145,678 $2.43
Granted during 2003 475,000 1.03
Forfeited during 2003 (86,500) .96
Expired during 2003 (13,500) 1.23
---------
Outstanding at
December 31, 2003 1,520,678 $2.09
Expired during 2004 (441,664) 4.14
Exercised during 2004 (62,000) .72
--------
Outstanding at
December 31, 2004 1,017,020 $1.28
========= ======
F-16
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
The following summarizes information about shares subject to option at
December 31, 2004:
Options outstanding Options exercisable
------------------- -------------------
Weighted
Weighted average Weighted
Number Range of average remaining Number average
outstanding exercise prices exercise price life in years exercisable exercise price
----------------- ------------------- ------------------ ---------------- ----------- ----------------
100,000 $ .60 1.92 100,000
160,000 .71 2.75 130,000
120,000 .85 2.00 120,000
473,000 1.03 3.67 223,500
164,020 3.31 0.95 164,020
------- -------
1,017,020 $ .60 - $3.31 $1.28 2.72 737,520 $1.30
========+ ============= ===== ==== ======= =====
At December 31, 2003, options for 935,678 shares were exercisable at a
weighted average exercise price of $2.79 per share.
(3) Income Taxes
As of December 31, 2004, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$17,702,000. A portion of that amount, $13,420,000, is subject to an
annual limitation of approximately $123,000 as a result of a change in
the Company's ownership through May 2003, as defined by federal income
tax regulations (Section 382). The balance of $4,282,000 is available
to offset future federal taxable income, if any, through 2024. The
available net operating loss carryforwards after applying the annual
limitation under Section 382 resulted in a deferred tax asset of
approximately $2,295,000 at December 31, 2004 ($1,280,000 at December
31, 2003). Management does not expect the Company to have taxable
income in the near future and established a 100% valuation allowance
against the deferred tax asset created by the available net operating
loss carryforwards at December 31, 2004 and 2003. The valuation
allowance increased $1,015,000 during the year ended December 31,
2004, and decreased $3,100,000 during the year ended December 31,
2003.
(4) Related Party Transactions
The Company sublet office space from a corporation controlled by an
officer of the Company whose lease with the landlord expired in August
1997. Thereafter, the Company's occupancy of the premises continued
pursuant to an informal arrangement, under which the Company remitted
monthly rental payments directly to the landlord. The informal
arrangement was replaced as of January 1, 2002 with a lease agreement
between the Company and the landlord which expired on December 22,
2003. In connection with its occupancy, the Company paid the affiliate
$24,000 which the affiliate then paid to the landlord as a deposit on
the lease. Since the Company has occupied its office space on a
month-to-month basis since December 22, 2003, and has not
F-17
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2004 and 2003
executed a new lease agreement for the premises, it believes recovery
of the lease deposit is uncertain and has charged the aforementioned
$24,000 to rent expense in December 2004.
During the year ended December 31, 2004, the Company incurred $61,720
for consulting services to the affiliate of an officer referred to
above.
(5) Rents
The Company currently occupies its office space on a month-to-month
basis. Rent expense totaled $111,376 and $87,376 for the years ended
December 31, 2004 and 2003, respectively.
(6) Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for derivative contracts entered into or modified after June
30, 2003. The Company does not currently have any derivative
instruments. This new standard did not have an impact on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This new standard requires an issuer to classify certain
financial instruments as liabilities or, in some instances, assets.
SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003. This new standard did not have an impact
on the Company's financial statements.
FASB Statement 123 (Revision 2004), "Share -Based Payment," was issued
in December 2004 and is effective for the Company on January 1, 2006.
The new statement requires all share-based payments to employees to be
recognized in the financial statements based on their fair values. The
Company currently accounts for its share-based payments to employees
under the intrinsic value method of accounting set forth in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Additionally, the Company complies with the stock-based
employer compensation disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123." The Company plans to adopt
the new statement in its financial statements as of January 1, 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets (an amendment of APB Opinion No. 29)." This new
standard requires an issuer to measure and recognize nonmonetary
exchanges which are anticipated to have an impact on future cash
flows. SFAS No. 153 will be effective for the Company in the fourth
quarter of 2005 and is not expected to have any impact on the
Company's financial statements.
F-18
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference into the Registration
Statement on Form S-3 (Registration No. 333-114600) and the Registration
Statement on Form S-8 (Registration No. 333-119898) of our report dated February
25, 2005 on our audits of the financial statements of Delcath Systems, Inc. as
of December 31, 2004 and for each of the years in the two-year period ended
December 31, 2004 and for the period from August 5, 1988 (inception) to December
31, 2004, which report appears in the December 31, 2004 annual report on Form
10-KSB of Delcath Systems, Inc.. We also consent to the reference to our firm
under the caption "Experts" included in the Registration Statement on Form S-3
referred to above.
/s/ EISNER LLP
- ----------------------------
Eisner LLP
New York, NY
March 21, 2005
EXHIBIT 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14
I, M. S. Koly, certify that:
1. I have reviewed this annual report on Form 10-KSB of DELCATH SYSTEMS,
INC.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to
2
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: March 21, 2005
/s/ M. S. KOLY
-------------------------------
M. S. Koly Chief
Executive Officer
(Principal
executive officer)
EXHIBIT 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14
I, Paul M. Feinstein, certify that:
1. I have reviewed this annual report on Form 10-KSB of DELCATH SYSTEMS,
INC.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to
2
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: March 21, 2005
/s/ PAUL M. FEINSTEIN
-------------------------------
Paul M. Feinstein
Chief Financial Officer
(Principal financial officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of DELCATH SYSTEMS, INC. (the
"Company") on Form 10-KSB for the year ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, M. S.
Koly, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ M. S. KOLY
-------------------------------
M. S. Koly Chief
Executive Officer
March 21, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of DELCATH SYSTEMS, INC. (the
"Company") on Form 10-KSB for the year ended December 31, 20034as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Paul M.
Feinstein, the Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ PAUL M. FEINSTEIN
-------------------------------
Paul M. Feinstein
Chief Financial Officer
March 21, 2005