================================================================================
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, 2005
[_} 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.
(Name of Small Business Issuer 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)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
- --------------------------------------- -----------------------------
Common Stock, par value $0.01 per share NASDAQ Small Cap
Boston Stock Exchange
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant'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 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
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 $4.50 per share, was $86,807,997
as of February 28, 2006.
At March 16, 2006, the registrant had outstanding 19,290,666 shares of par value
$0.01 Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated into Part III of this Form 10-KSB.
Proxy Statement for 2006 Annual Meeting of Stockholders. (A definitive proxy
statement 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]
================================================================================
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 in order to administer chemotherapy and other
therapeutic agents directly to the liver. Since our inception, we have raised
approximately $32.9 million in funds (net of fundraising expenses), and we have
invested approximately $17.1 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 (FDA), and it cannot be marketed in the United
States without FDA pre-market approval. We are in the process of conducting two
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 the
chemotherapy agents, melphalan and 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 one
of these chemotherapy agents, melphalan, against primary liver cancer and a
variety of cancers that 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 melphalan or doxorubicin to treat malignant
melanoma that has spread to the liver. Our highest priority is
completing Phase III clinical trials with either or both of these
agents, 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 melphalan or 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 additional cancers in the liver, such as primary
liver cancers and colorectal cancers that have spread to the liver
using melphalan, doxorubicin and other chemotherapy agents and
treatment of hepatitis using anti-viral drugs. In 2004, we commenced
Phase II studies of three cancers in the liver other than melanoma and
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 may depend on our
ability to raise additional funds for these purposes and will likely
depend on our ability 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, Australia, France, Germany, Italy and Spain, have a
higher incidence of liver cancer than the United States. We intend to
seek to enter into
1
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 1,400,000 new cases of cancer
will be diagnosed in 2006. According to the American Cancer Society's "Cancer
Facts and Figures 2006," 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 2005, the National Institutes of Health, in the American
Cancer Society's "Cancer Facts & Figures 2006," estimates the overall costs of
cancer to be $209.9 billion, including $74.0 billion in direct medical costs,
$17.5 billion for indirect morbidity costs attributable to lost productivity due
to illness and $118.4 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 clinical trials, we are treating patients suffering from primary liver
cancer and metastatic cancers in the liver including metastatic melanoma which
has spread to the liver. According to the American Cancer Society's "Cancer
Facts & Figures 2006," the five-year survival rate for liver cancer patients is
approximately 9%, compared to the 65% 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 10% of
primary and metastatic liver tumors can be surgically removed at the time of
diagnosis. A significant number of patients surgically 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 World Health Organization, primary liver cancer is the third
most common form of cancer worldwide. It is estimated that there were 662,000
deaths from liver cancer throughout the world in 2005. 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 18,510 newly diagnosed cases of primary liver cancer
in 2006 and it is estimated that there will be approximately 220,000 newly
diagnosed cases of metastatic cancers in the liver during the same period.
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.
2
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.
Surgery
While surgery is considered the "gold standard" treatment option to address
liver tumors, more than 90% 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. Chemotherapy can also be administered through the Delcath system after
resection 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 melphalan and doxorubicin, the drugs in our current
clinical trials, are representative of the side-effects associated with many
chemotherapy agents. Melphalan and doxorubicin can 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. Doxorubicin can also
cause irreversible heart tissue damage. Depending on dosage levels, the damage
caused by doxorubicin can be serious and lead to congestive heart failure. The
use of melphalan and doxorubicin can be fatal even when they are 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 in Germany developed a major
3
surgical procedure in which he surgically clamped the arteries and veins and
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 results
were impressive but the treatment 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.
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
4
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 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.
o Series of introducers and related accessories to properly place the
infusion catheter and double balloon catheter.
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 procedure involves a series of three catheter insertions, each of
which is made through the skin. During clinical 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
5
normally flows to the liver. A second catheter -- the Delcath double balloon
catheter -- is inserted through the inferior vena cava, a major vessel leading
back to 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.
Our Clinical Trials
In 2005, Delcath requested a meeting with the FDA to request approval to move
directly from the completed Phase I study of melphalan at NCI to a Phase III
trial of patients with melanoma metastatic to the liver. The FDA granted Fast
Track review status to the protocol which allowed Delcath to submit the study
under the provision of a Special Protocol Assessment ("SPA"). The FDA granted a
SPA for this trial in March 2006. Under the Special Protocol and Assessment
Agreement that we entered into with the FDA, a patient treated in the clinical
trial as part of the control group who thereafter experiences tumor progression
can, with his physician's approval, be crossed over and treated using the
Delcath system. The protocol covered by the SPA Agreement call for the treatment
of 92 patients, equally randomized to either the Delcath treatment or "Best
Available Care" as determined by the Principal Investigator. The primary
efficacy endpoint for the trial is progression free survival which is defined as
the length of time a patient is both alive and free from any significant
increase in the tumor (free from progression). Control patients whose tumors
grow will have completed their portion of the trial and at the Principal
Investigator's judgment will then be permitted to receive the Delcath treatment.
Patients are currently being treated at NCI and additional sites are expected to
be added to the trial.
We intend to continue Phase III clinical trials with melphalan and doxorubicin
designed to demonstrate to the FDA that administering these agents with the
Delcath system to treat malignant melanoma that has spread to the liver results
in better patient treatment outcomes 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 either melphalan or 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 either melphalan or doxorubicin
using the Delcath system results in tumor responses that are better than those
obtained from administering chemotherapy agents intravenously.
We expect the Phase III clinical trials using doxorubicin to be conducted at
several medical centers worldwide. We have terminated the trial at the first
site, the Sydney Melanoma Unit, following the evaluation of seven patients and
the recruitment of four patients due to the slow pace of enrollment and the
unwillingness of the medical oncologist to comply fully with the protocol. 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
6
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.
The FDA pre-market approval we are currently seeking is limited to
administration of either melphalan or 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 these and 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-market
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 several centers in the United States and overseas under
investigational device and investigational new drug exemptions granted by the
FDA. The trials were designed to demonstrate the system's safety and
"functionality," or its ability to administer to and extract from the liver
approved and marketed chemotherapy agents. Test subjects had primary liver
cancer or cancer which had spread to the liver. Subjects were treated with
melphalan, doxorubicin or with another chemotherapy agent, 5-FU. These trials
demonstrated that the Delcath system was capable of extracting approximately 70%
to 85% 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 the safe administration of higher dosage levels of chemotherapy than
those used in conventional intravenous chemotherapy delivery, and
o reduction in tumor size.
Further, though not demonstrated in a statistically significant manner because
of the limited number of patients tested, clinicians observed responses
including 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 using
doxorubicin and 5-FU, 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 clinical trials are designed to provide the data to
support this labeling change.
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.
7
The Phase I clinical trial conducted at The National Cancer Institute ("NCI")
has been completed and has been followed by a Phase II study treating patients
with primary liver cancers, adenocarcinomas and neuroendocrine cancers that have
metastasized to the liver and a Phase III study treating patients with melanoma
metastatic to the liver. The Phase II and Phase III clinical trials are subject
to the terms and conditions of the Cooperative Research and Development
Agreement (the "CRADA") between us and NCI.
The CRADA commits NCI to perform the research necessary under the Phase II and
Phase III protocols approved by the NCI IRB 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 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. Delcath will need to negotiate a new CRADA agreement with NCI
in 2006.
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. 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.
8
Market acceptance of the Delcath system will depend upon:
o the ability of our clinical trials to demonstrate a measurable tumor
reduction in patients whose tumors would not be expected to shrink
from systemic chemotherapy;
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.
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, resulting in projected revenue of $16,000 per patient.
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.
The Company currently relies on a single supplier for the activated charcoal
filters used in the Delcath system. These activated charcoal filters are
marketed in the U. S. for blood detoxification, but their use within the Delcath
system is considered experimental under Delcath's Investigational Device
Exemption (IDE) approved by the FDA.
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 are developing
various chemotherapy agents with reduced toxicity and products to reduce the
toxicity and side-effects of existing chemotherapy agents. 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.
Melphalan and doxorubicin, the drugs that we are initially seeking to have
approved for delivery by the Delcath system, are widely used chemotherapy agents
that have 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 melphalan and doxorubicin permitting
their use with the Delcath system must be obtained. The clinical trials are
designed to provide the data to support this labeling change.
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;
o fines;
o injunctions;
o civil penalties;
10
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 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
11
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 or 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 melphalan and doxorubicin does not provide for their delivery
with the Delcath system. It may be necessary to partner with the holders of an
approved drug application for melphalan and doxorubicin 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
melphalan or doxorubicin. 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.
Phase III clinical trial protocols using melphalan and 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 ("IRB") approval from each
investigational site that will conduct the trials. We have received IRB approval
from NCI, conditional IRB approval at several sites and are seeking the approval
of institutional review boards at additional medical centers by assembling and
providing them with information with respect to the respective trials.
12
The approved Phase III clinical trial protocols are designed to obtain approval
of both new drug labeling and a pre-market approval application providing for
the use of melphalan or 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.
If we successfully complete the clinical trials with both agents, we believe the
manufacturers of melphalan and doxorubicin 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-market 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 in the respective country. 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-market approval or clearance.
In April 1996, legislation was enacted that permits a medical device which
requires FDA pre-market 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 foreign jurisdictions,
we must obtain required regulatory approvals or clearances and otherwise comply
with extensive regulations.
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 eight United States
patents, as well as four corresponding foreign patents in Canada, Europe and
Japan that we believe are or may be material to our business:
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
Catheter flow and lateral movement controller U.S. #5,897,533 September 2, 2017
Method for treating glandular diseases and malignancies Awaiting number from Patent Office
13
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, 2006 we had 6 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 material 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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common shares trade on the NASDAQ Small Cap market under the symbol "DCTH"
and on the Boston Stock Exchange under the symbol "DCT."
14
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
------------------------
2005
High Low
Quarter ended March 31, 2005 $4.40 $2.25
Quarter ended June 30, 2005 4.10 1.92
Quarter ended September 30, 2005 3.38 2.60
Quarter ended December 31, 2005 3.90 2.78
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
As of March 16, 2006, there were approximately 82 stockholders of record of
our Common Stock and approximately 4,220 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, 2005 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 1,385,800 $2.51 2,050,200
Equity compensation plans -- -- --
not approved by security holders
------------------------- ------------------------ -----------------------
Total 1,385,800 $2.51 2,050,200
All other sales of equity securities by the Company during 2005 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 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.
In 2004, we commenced a Phase II clinical trial protocol for the study of the
Delcath drug delivery system for inoperable primary liver cancer and
adenocarcinomas and neuroendocrine cancers that have metastazed to the liver
using melphalan.
During 2004, we commenced a Phase III clinical trial study of the Delcath drug
delivery system for inoperable melanoma in the liver using doxorubicin and we
are continuing to recruit sites worldwide.
16
In 2006, we started enrolling and treating patients in a Phase III protocol for
the study of the Delcath drug delivery system for inoperable melanoma in the
liver using melphalan under the Fast Track and SPA approved protocol.
Over the next 12 months, we expect to continue to incur substantial expenses
related to the research and development of our technology, including Phase III
clinical trials using melphalan and doxorubicin with the Delcath system and
Phase II clinical trials using melphalan with the Delcath system. Additional
funds, when available, will be committed to pre-clinical and clinical trials for
the use of other chemotherapy agents with the Delcath system for the treatment
of liver cancer, and the development of additional products and components. We
will also continue efforts to qualify additional sources of the key components
of our device, in an effort to further reduce manufacturing costs and minimize
dependency on a single source of supply.
Liquidity and Capital Resources
We expect our available funds to be sufficient for our anticipated needs for
working capital and capital expenditures through 2007 provided no studies using
new agents or treating new organs are initiated. 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 2007. 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
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
17
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-15
Report of Independent Registered Public Accounting Firm
Balance Sheet as of December 31, 2005
Statements of Operations for the years ended December 31, 2005 and 2004 and
cumulative from inception (August 5, 1988) to December 31, 2005
Statements of Stockholders' Equity for the years ended December 31, 2005 and
2004 and cumulative from inception (August 5, 1988) to December 31, 2005
Statements of Cash Flows for the years ended December 31, 2005 and 2004 and
cumulative from inception (August 5, 1988) to December 31, 2005
Notes to Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
18
On April 25, 2005, Eisner LLP ("Eisner") was dismissed as the independent
registered public accounting firm for the Company. On April 27, 2005, the
Company retained Carlin, Charron & Rosen, LLP to act as its independent
registered public accounting firm. The decision to change accountants was
approved by the Audit Committee of the Company's Board of Directors.
The reports of Eisner on the balance sheets of the Company as of December 31,
2003 and 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 did not
contain any adverse opinion or disclaimer of opinion, nor were they modified as
to uncertainty, audit scope or accounting principles.
In connection with the audits of the periods described above, and the subsequent
interim period through April 25, 2005, except for a reportable condition with
respect to the Company's internal controls regarding identifying the Company's
awards of stock options which awards were described in the Company's Form 8-K
reports dated March 22, 2005 and April 5, 2005, there were no disagreements
between the Company and Eisner on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to Eisner's satisfaction, would have caused
Eisner to make reference to the subject matter of the disagreement (s) in
connection with its reports.
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.
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, 2005 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 2006
Annual Meeting of Stockholders.
19
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.
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, 2005 (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 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)).
4.3 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)).
4.4 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 Registrant's Current Report on Form 8-K dated November 24,
2004 (Commission File No. 001-16133)).
4.5 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)).
4.6 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
20
Exhibit No. Description
Registrant's Registration Statement on Form S-3 (Registration No.
333-121681)).
4.7 Form of 2005 Series A Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.1 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
4.8 Form of 2005 Series B Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.2 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
4.9 Form of 2005 Series C Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.3 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
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, between the Company and M. S. Koly, as
amended by Amendment No. 1 thereto (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 2005 (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)).
21
Exhibit No. Description
10.11 Registration Rights Agreement dated as of November 24, 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 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)).
10.14 Common Stock Purchase Agreement dated as of November 27, 2005 by
and among Delcath Systems, Inc. and the Purchasers Listed on the
Schedule I thereto (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 001-16133)).
10.15 Registration Rights Agreement dated as of November 27, 2005 by
and among Delcath Systems, Inc. and the Purchasers Listed on the
Schedule I thereto (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 001-16133)).
10.16 Voting Agreement dated as of November 27, 2005 by and between
Delcath Systems, Inc. and the purchasers listed on Exhibit A to
the Common Stock Purchase Agreement dated November 27, 2005 and
Vertical Ventures LLC (incorporated by reference to Exhibit 10.3
to Registrant's Current Report on Form 8-K dated November 28,
2005 (Commission File No. 001-16133)).
10.17 Form of Incentive Stock Option Agreement under the Company's
2004 Stock Incentive Plan (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2005)).
10.18 Form of Nonqualified Stock Option Agreement under the Company's
2004 Stock Incentive Plan (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2005)).
10.19 Form of Stock Grant Agreement under the Company's 2004 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2005 (Commission File No. 001-16133)).
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 Carlin, Charron & Rosen, 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 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
22
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.
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 31, 2006
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 31, 2006
- ------------------------------ Treasurer
M. S. Koly and Director (Principal Executive Officer)
/s/ PAUL M. FEINSTEIN Chief Financial Officer March 31, 2006
- ------------------------------ (Principal Financial Officer and
Paul M. Feinstein Principal Accounting Officer)
/s/ SAMUEL HERSCHKOWITZ. M.D. Chairman of the Board, Non-Officer March 31, 2006
- ------------------------------
Samuel Herschkowitz, M.D.
/s/ MARK A. CORIGLIANO Director, March 31, 2006
- ------------------------------
Mark A. Corigliano
/s/ DANIEL ISDANER Director March 31, 2006
- ------------------------------
Daniel Isdaner
/s/ VICTOR NEVINS Director March 31, 2006
- ------------------------------
Victor Nevins
EXHIBIT INDEX
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, 2005 (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 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)).
4.3 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)).
4.4 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 Registrant's Current Report on Form 8-K dated November 24,
2004 (Commission File No. 001-16133)).
4.5 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)).
4.6 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
Exhibit No. Description
Registrant's Registration Statement on Form S-3 (Registration No.
333-121681)).
4.7 Form of 2005 Series A Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.1 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
4.8 Form of 2005 Series B Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.2 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
4.9 Form of 2005 Series C Warrant to Purchase Shares of Common Stock
issued pursuant to the Common Stock Purchase Agreement dated as
of November 27, 2005 (incorporated by reference to Exhibit 4.3 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 011-16133)).
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, between the Company and M. S. Koly, as
amended by Amendment No. 1 thereto (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 2005 (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)).
Exhibit No. Description
10.11 Registration Rights Agreement dated as of November 24, 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 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)).
10.14 Common Stock Purchase Agreement dated as of November 27, 2005 by
and among Delcath Systems, Inc. and the Purchasers Listed on the
Schedule I thereto (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 001-16133)).
10.15 Registration Rights Agreement dated as of November 27, 2005 by
and among Delcath Systems, Inc. and the Purchasers Listed on the
Schedule I thereto (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated November 28, 2005
(Commission File No. 001-16133)).
10.16 Voting Agreement dated as of November 27, 2005 by and between
Delcath Systems, Inc. and the purchasers listed on Exhibit A to
the Common Stock Purchase Agreement dated November 27, 2005 and
Vertical Ventures LLC (incorporated by reference to Exhibit 10.3
to Registrant's Current Report on Form 8-K dated November 28,
2005 (Commission File No. 001-16133)).
10.17 Form of Incentive Stock Option Agreement under the Company's
2004 Stock Incentive Plan (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2005)).
10.18 Form of Nonqualified Stock Option Agreement under the Company's
2004 Stock Incentive Plan (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2005)).
10.19 Form of Stock Grant Agreement under the Company's 2004 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2005 (Commission File No. 001-16133)).
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 Carlin, Charron & Rosen.
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 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
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, 2005 F-3
Statements of Operations for the years ended December 31,
2005 and 2004 and cumulative from inception
(August 5, 1988) to December 31, 2005 F-4
Statements of Stockholders' Equity for the years ended
December 31, 2005 and 2004 and cumulative from
inception (August 5, 1988) to December 31, 2005 F-5
Statements of Cash Flows for the years ended December 31,
2005 and 2004 and cumulative from inception
(August 5, 1988) to December 31, 2005 F-6
Notes to Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Delcath Systems, Inc.
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage company) as of December 31, 2005, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2005 and for the period from August 5, 1988
(inception) to December 31, 2005. 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 referenced above present fairly, in all
material respects, the financial position of Delcath Systems, Inc. (a
development stage company) as of December 31, 2005, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2005 and for the period from August 5, 1988 (inception) to December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, CT
March 24, 2006
F-2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
2005
----------------
Assets
Current assets
Cash and cash equivalents $ 1,704,131
Certificates of deposit 11,097,790
Interest receivable 91,574
Prepaid insurance 26,917
----------------
Total current assets 12,920,412
Property and equipment, net 7,554
----------------
Total assets $ 12,927,966
================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 330,070
----------------
Total current liabilities 330,070
----------------
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;
18,877,753 shares issued and 18,849,653 outstanding 188,497
Additional paid-in capital 38,244,566
Deficit accumulated during development stage (25,835,167)
----------------
Total stockholders' equity 12,597,896
----------------
Total liabilities and stockholders'
equity $ 12,927,966
================
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
----------------------------------
2005 2004 December 31, 2005
----------------------------------- --------------------
Costs and expenses
General and administrative expenses $ 1,367,344 $ 1,059,815 $ 8,439,205
Research and development costs 1,744,251 2,306,733 17,059,480
---------------- ----------------- --------------------
Total costs and expenses 3,111,595 3,366,548 25,498,685
---------------- ----------------- --------------------
Operating loss (3,111,595) (3,366,548) (25,498,685)
Other income (expense)
Interest income 246,976 100,216 1,333,596
Interest expense -- -- (171,473)
---------------- ----------------- --------------------
Net loss $ (2,864,619)$ (3,266,332) $ (24,336,562)
================ ================= ====================
Common share data
Basic and diluted loss per share $ (0.18)$ (0.28)
================ =================
Weighted average number of basic
and diluted common shares
outstanding 16,038,716 11,543,256
================ =================
See accompanying notes to financial statements.
F-4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Years ended December 31, 2005 and 2004 and
cumulative from inception (August 5, 1988) to December 31, 2005
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 due to relevant technology
milestones not being fully achieved,
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 (common stock at $7.39 per
share and Class B preferred stock at
$2.55 per share), 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 (including 10,318 warrants,
each to purchase one share of common
stock at $10.87), 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 (including 78,438 warrants
each to purchase one share of common stock
at $10.87) 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 for consulting
services valued at $10.87 per share based
on a 1996 agreement 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 as a settlement of a dispute
with a former director at $1.45 per
share,
the price originally paid, April 17, 1998 (3,450) (35) -- -- (3,450) (35)
Exercise of stock options 8,626 86 -- -- 8,626 86
Sale of stock (including 5,218 warrants each
to purchase one share of common stock
at $14.87), 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 (including 1,200,000 warrants
each to purchase one share of common
stock at $6.60), 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
1,720 stock options (including 1,720 warrants
each to purchase one share of common
stock at $6.00), issued as compensation -- -- -- -- -- --
Sum of fractional common shares
cancelled after year 2000
stock splits (36) (1) -- -- (36) (1)
Stock warrants (150,000 at $7.00 and 150,000
at $6.60) 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 -- -- -- -- -- --
Sale of stock (including 3,895,155 warrants
to purchase one share of common stock at
$0.775) on May 20, 2003 including under-
writer'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 -- -- 1,730,580 17,305
Deficit accumulated from inception
to 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
Exercise of 2002 Warrants 20,265 203 -- -- 20,265 203
Sale of stock, April, 2004 290,457 2,905 -- -- 290,457 2,905
Stock options issued as compensation -- -- -- -- -- --
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 Warrants 2,160,163 21,602 -- -- 2,160,163 21,602
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 -- -- -- -- -- --
---------- --------- --------- --------- ----------- -----------
Balance at December 31, 2004 15,243,185 $ 152,432 (28,100) $ (281) 15,215,085 $ 152,151
Exercise of 2003 Representative's
Unit Warrants 42,180 422 -- -- 42,180 422
Exercise of Representative's Common
Stock Warrants 157,180 1,572 -- -- 157,180 1,572
Exercise of stock options 597,000 5,970 -- -- 597,000 5,970
Stock options issued as compensation -- -- -- -- -- --
Exercise of 2004 Warrants 1,107,313 11,073 -- -- 1,107,313 11,073
Exercise of 2005 Warrants 940,957 9,410 -- -- 940,957 9,410
Sale of stock, November, 2005 753,013 7,530 -- -- 753,013 7,530
Shares issued as compensation 36,925 369 -- -- 36,925 369
Net Loss -- -- -- -- -- --
---------- --------- --------- --------- ----------- ----------
Balance at December 31, 2005 18,877,753 $ 188,778 (28,100) $ (281) 18,849,653 $ 188,497
========== ========= ========= ========= =========== ==========
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 due to relevant technology
milestones not being fully achieved,
March 8, 1990 -- -- -- -- -- --
Sale of stock, October 2, 1990 -- -- -- -- -- --
Sale of stock (common stock at $7.39 per share
and Class B preferred stock at
$2.55 per share), January 23, 1991 -- -- -- -- 416,675 4,167
Sale of stock, August 30, 1991 -- -- -- -- -- --
Sale of stock, December 31, 1992 -- -- -- -- -- --
Sale of stock (including 10,318 warrants,
each to purchase one share of common
stock at $10.87), July 15, 1994 -- -- -- -- -- --
Sale of stock, December 19, 1996 -- -- -- -- -- --
Shares issued (including 78,438 warrants each
to purchase one share of common stock at
$10.87) 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 for consulting
services valued at $10.87 per share based
on a 1996 agreement -- -- -- -- -- --
Shares issued in connection with
exercise of warrants -- -- -- -- -- --
Sale of stock, January 16, 1998 -- -- -- -- -- --
Sale of stock, September 24, 1998 -- -- -- -- -- --
Shares returned as a settlement of a dispute
with a former director at $1.45 per
share, the price originally paid,
April 17, 1998 -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Sale of stock (including 5,218 warrants
each to purchase one share of
common stock at $14.87),
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 (including 1,200,000 warrants
each to purchase one share of common
stock at $6.60), October 19, 2000 -- -- -- -- -- --
Shares issued as compensation
for stock sale -- -- -- -- -- --
1,720 stock options (including 1,720 warrants
each to purchase one share of common
stock at $6.00), issued as compensation -- -- -- -- -- --
Sum of fractional common shares
cancelled after year 2000
stock splits -- -- -- -- -- --
Stock warrants (150,000 at $7.00 and 150,000
at $6.60) 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 -- -- -- -- -- --
Sale of stock (including 3,895,155 warrants
to purchase one share of common stock at
$0.775) on May 20, 2003 including under-
writer's exercise of overallotment option -- -- -- -- -- --
Proceeds from sale of unit option -- -- -- -- -- --
Exercise of 2003 Warrants -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 2003 -- -- -- -- -- --
------ -------- ---------- -------- --------- --------
Balance at December 31, 2003 -- $ -- -- $ -- -- $ --
Sale of stock, March, 2004 -- -- -- -- -- --
Exercise of 2002 Warrants -- -- -- -- -- --
Sale of stock, April, 2004 -- -- -- -- -- --
Stock options issued as compensation -- -- -- -- -- --
Sale of stock, November, 2004 -- -- -- -- -- --
Sale of stock, December, 2004 -- -- -- -- -- --
Exercise of 2003 Warrants -- -- -- -- -- --
Exercise of 2003 Representative's
Unit Warrants -- -- -- -- -- --
Exercise of Representative's Common
Stock Warrants -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Net Loss -- -- -- -- -- --
----- -------- ---------- -------- --------- -----
Balance at December 31, 2004 -- $ -- -- $ -- -- $ --
Exercise of 2003 Representative's
Unit Warrants -- -- -- -- -- --
Exercise of Representative's Common -- -- -- -- -- --
Stock Warrants -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Stock options issued as compensation -- -- -- -- -- --
Exercise of 2004 Warrants -- -- -- -- -- --
Exercise of 2005 Warrants -- -- -- -- -- --
Sale of stock, November, 2005 -- -- -- -- -- --
Shares issued as compensation -- -- -- -- -- --
Net Loss -- -- -- -- -- --
----- -------- ---------- -------- --------- ----
Balance at December 31, 2005 -- $ -- -- $ -- -- $ --
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 due to relevant technology
milestones not being fully achieved,
March 8, 1990 4,141 -- --
Sale of stock, October 2, 1990 24,827 -- 25,000
Sale of stock (common stock at $7.39 per
share and Class B preferred stock at
$2.55 per share), 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 (including 10,318 warrants,
each to purchase one share of common
stock at $10.87), July 15, 1994 1,120,968 -- 1,122,000
Sale of stock, December 19, 1996 999,605 -- 1,000,000
Shares issued (including 78,438 warrants
each to purchase one share of common
stock at $10.87) 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 for consulting
services valued at $10.87 per share based
on a 1996 agreement 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 as a settlement of a dispute
with a former director at $1.45 per
share, the price originally paid, April 17,
1998 (4,965) -- (5,000)
Exercise of stock options 67,414 -- 67,500
Sale of stock (including 5,218 warrants each
to purchase one share of common
stock at $14.87), 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 (including 1,200,000 warrants
each to purchase one share of common
stock at $6.60), October 19, 2000 5,359,468 -- 5,371,468
Shares issued as compensation
for stock sale (850) -- --
1,720 stock options (including 1,720 warrants
each to purchase one share of common
stock at $6.00), issued as compensation 3,800 -- 3,800
Sum of fractional common shares
cancelled after year 2000
stock splits 1 -- --
Stock warrants (150,000 at $7.00 and 150,000
at $6.60) issued as compensation 198,000 -- 198,000
Sale of stock on April 3, 2002 265,068 -- 267,500
Repurchases of stock, November
and December 2002 (50,822) -- (51,103)
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)
Sale of stock (including 3,895,155 warrants
to purchase one share of common stock at
$0.775) on May 20, 2003 including under-
writer'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 -- 1,291,200
Deficit accumulated from inception
to December 31, 2003 -- (18,205,511) (18,205,611)
----------- ---------- ----------
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
Exercise of 2002 Warrants 26,547 -- 26,750
Sale of stock, April, 2004 635,130 -- 638,035
Stock options issued as compensation 5,222 -- 5,222
Sale of stock, November, 2004 1,829,305 -- 1,840,000
Sale of stock, December, 2004 497,630 -- 500,000
Exercise of 2003 Warrants 1,652,524 -- 1,674,126
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 -- (3,266,332) (3,266,332)
------------- ------------ -----------
Balance at December 31, 2004 $ 29,605,543 $ (22,970,548) $ 6,787,146
Exercise of 2003 Representative's
Unit Warrants 42,686 -- 43,108
Exercise of Representative's Common
Stock Warrants 200,619 -- 202,191
Exercise of stock options 525,140 -- 531,110
Stock options issued as compensation 8,270 -- 8,270
Exercise of 2004 Warrants 2,883,418 -- 2,894,491
Exercise of 2005 Warrants 2,573,363 -- 2,582,773
Sale of stock, November, 2005 2,302,471 -- 2,310,002
Shares issued as compensation 103,056 -- 103,425
Net Loss -- (2,864,619) (2,864,619)
---------- ----------- ----------
Balance at December 31, 2005 $ 38,244,567 $ (25,835,167) $ 12,597,897
=========== ============= ============
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
from inception
(August 5, 1988)
Year ended December 31, to
------------------------------
2005 2004 December 31, 2005
-------------- -------------- ---------------------
Cash flows from operating activities:
Net loss $ (2,864,619) $ (3,266,332) $ (24,336,562)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense 8,270 5,222 2,533,662
Stock and warrant compensation expense
issued for consulting services 103,425 -- 339,711
Depreciation expense 6,052 5,526 37,744
Amortization of organization costs -- -- 42,165
Rent expense attributable to lease deposit -- 24,000 --
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 20,899 (316) (26,917)
Increase in interest receivable (58,688) (18,614) (91,574)
(Decrease) increase in accounts payable
and accrued expenses (234,556) 304,426 330,070
-------------- -------------- -------------------
Net cash used in operating activities (3,019,217) (2,946,088) (21,171,701)
-------------- -------------- -------------------
Cash flows from investing activities
Purchase of furniture and fixtures -- (5,345) (45,298)
Purchase of short-term investments (11,097,790) (6,052,383) (22,067,494)
Proceeds from maturities of short-term
investments 7,055,129 1,014,575 10,969,704
Organization costs -- -- (42,165)
-------------- -------------- -------------------
Net cash used in investing activities (4,042,661) (5,043,153) (11,185,253)
-------------- -------------- -------------------
Cash flows from financing activities:
Net proceeds from sale of stock and exercise
of stock options and warrants 8,563,674 7,877,961 32,906,759
Repurchases of common stock -- -- (51,103)
Dividends paid -- -- (499,535)
Proceeds from short-term borrowings -- -- 1,704,964
-------------- -------------- -------------------
Net cash provided by financing activities 8,563,674 7,877,961 34,061,085
-------------- -------------- -------------------
Increase (decrease) in cash and cash equivalents 1,501,796 (111,280) 1,704,131
Cash and cash equivalents at beginning of period 202,335 313,615 --
-------------- -------------- -------------------
Cash and cash equivalents at end of period $ 1,704,131 $ 202,335 $ 1,704,131
============== ============== ==================
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, 2005 and 2004
(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 (GAAP). The preparation of financial statements in conformity
with GAAP 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) Property and Equipment
Property and equipment (primarily 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 totaled $37,744 at December 31, 2005. Depreciation
expense for the years ended December 31, 2005 and 2004 was $6,052 and
$5,526, respectively. Maintenance and repairs are charged to
operations as incurred. Expenditures which substantially increase the
useful lives of the related assets are capitalized.
(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, 2005 and 2004
(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 fair market value of the underlying
stock on the date of grant exceeded 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, 2005 and 2004 would have
been increased to the pro forma amounts indicated as follows:
2005 2004
Net loss $ (2,886,619) $ (3,266,332)
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 (133,194) (93,793)
------------ -----------
Pro forma net loss $ (2,997,813) $ (3,360,125)
============= =============
F-8
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
Loss per share (basic and diluted):
As reported $ (0.18) $ (0.28)
Pro forma (0.19) (0.29)
The per share weighted average fair value of stock options
granted in July 2005 was $.58 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 3.77%
and volatility of 41% while the per share weighted average fair
value of stock options granted in November, 2005 using the
Black-Scholes option-pricing model was $.66 with the weighted
average assumption of a risk free interest rate of 4.45% and a
volatility of 35%.
(f) Net Loss Per Common Share
For the years ended December 31, 2005 and 2004, potential common
shares from the exercise of options and warrants were excluded
from the computation of diluted earnings per share (EPS) because
their effects would be antidilutive. 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 EPS computation.
(g) Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), "Share-Based Payment." SFAS No.
123 (revised 2004) requires companies to recognize in the
statement of operations the grant-date fair value of stock
options and other equity-based compensation. That cost will be
recognized over the period during which an employee is required
to provide service in exchange for the award, usually the vesting
period. Subsequent changes in fair value during the requisite
service period, measured at each reporting date, will be
recognized as compensation cost over that period. SFAS No. 123
(revised 2004) is effective in the first interim or annual period
beginning after June 15, 2005. The Company will be required to
adopt SFAS No. 123 (revised 2004) in 2006. The Company is
currently evaluating the impact of the adoption of SFAS 123
(revised 2004) on the Company's financial position and results of
operations.
In December 2005, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment to FASB
Statements No. 133 and 140" and in May 2005, the FASB issued SFAS
No. 154 "Accounting and Error Corrections - a replacement of APB
opinion No. 20 and FASB Statement No. 3." The Company is not
significantly impacted by these statements and does not expect
their implementation to have a material impact on the Company's
financial statements.
F-9
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
(h) 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.
(i) Cash Equivalents
The Company considers highly liquid debt instruments with
maturities of three months or less at date of acquisition to be
cash equivalents.
(j) Reclassification
Certain prior year amounts have been reclassified to conform to
the current year presentation.
(2) Stockholders' Equity
(a) Stock Issuances
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 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.
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 in a private placement to institutional and accredited
investors. The Company received proceeds net of issuance costs 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 March 2004, proceeds of $26,750 were received as 20,265 warrants
the Company issued in a private placement in 2002 were exercised.
F-10
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
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.
In June 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 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 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 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 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 an equal number of Representative's Common Stock Warrants.
152,025 Representative's Common Stock Warrants were exercised with an
equal number of shares of common stock being issued for which the
Company received 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 of 2004. 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.
In November 2005, the Company completed the sale of 753,013 shares of
its common stock and the issuance of warrants to purchase 711,600
common shares in a private placement to institutional and accredited
investors. The Company received net proceeds of $2,310,001 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 2005, the Company received net proceeds of $43,108 upon the
exercise of 8,436 of the Representative Unit Purchase Warrants that
were issued to underwriters as part of the 2003
F-11
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
public offering. This resulted in the issuance of 42,180 shares of
common stock together with an equal number of Representative's Common
Stock Warrants. 157,180 Representative's Common Stock Warrants were
exercised with an equal number of shares of common stock being issued
and receipt of net proceeds of $202,191.
The Company received a net amount of $531,110 upon the exercise of
597,000 in stock options during 2005. 100,000 options were exercised
at a price of $0.60 per share; 60,000 were exercised at a price of
$0.71 per share; 120,000 were exercised at a price of $0.85 per share;
and 317,000 were exercised at a price of $1.03 per share.
In 2003, the Company issued stock options as compensation to three
non-employees. The cost of these options, which is based on an annual
fair value calculation based on the vesting period of each option, is
being recognized annually. The cost for the years 2005 and 2004 are
$8,270 and $5,222, respectively.
During 2005, the Company received net proceeds of $2,894,491 as
1,069,526 of the November 2004 Warrants were exercised and 37,787 of
the March 2004 Warrants were exercised for which it has issued shares
of its common stock.
During 2005, the Company issued notice to the holders of 1,200,000
Redeemable Common Stock Purchase Warrants issued in 2000 (the "2000
Warrants") that the Company would offer to exchange on a one-for-one
basis any outstanding 2000 Warrants for new warrants. The new warrants
would be called the 2005 Redeemable Common Stock Purchase Warrants -
Series A (Expiring December 31, 2005) (the "Exchange Warrants").
989,554 of the 2000 Warrants were exchanged for Exchange Warrants.
During 2005, the Company received net proceeds of $2,582,773 as
940,957 of the Exchange Warrants were exercised following a notice of
redemption issued on November 15, 2005 in accordance with the terms of
the Exchange Warrants. The holders of 48,597 Exchange Warrants that
remained outstanding following the redemption received the redemption
price of $0.10 per Exchange Warrant. All such warrants have now been
redeemed and trading therein has ceased.
During 2005, the Company issued common stock to Directors and certain
consultants that totaled 36,925 shares that had issuance values of
between $2.78 and $2.95.
(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, stock appreciation rights,
restricted stock, and stock grants may be awarded. A stock option
grant allows the holder of the option to
F-12
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
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 2005 and 2004 is as follows:
The Plans
---------
Exercise Weighted Weighted
Price Average Average
Stock Per Exercise Remaining Life
Options Share Price (Years)
------- ----- ----- -------
Outstanding at December 31, 2003 1,520,684 $0.60 - $4.93 $2.09 2.92
Exercised (62,000) $0.71 - $1.03 .72
Expired (441,664) $2.90 - $4.93 4.14
----------
Outstanding at December 31, 2004 1,017,020 $0.60 - $3.31 1.28 2.72
Granted 967,500 $2.78 - $3.59 3.20
Expired (1,720) $3.31 3.31
Exercised (597,000) $0.60 - $1.03 .89
----------
Outstanding at December 31, 2005 1,385,800 $.71 - $3.59 $2.51 4.17
=========
At December 31, 2005, 2004, and 2003 options for 394,300, 737,520, and
935,678 shares, respectively, were exercisable at a weighted average
exercise price of $1.89, $1.30, and $2.79 per share, respectively.
F-13
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
(d) Warrants
A summary of warrant activity is as follows:
Exercise Weighted Weighted
Price Average Average
Per Exercise Remaining Life
Warrants Warrant Price (Years)
-------- ------- ----- -------
Outstanding at
December 31, 2003 4,628,970 $0.775 - 10.50 $ 3.17 3.35
Issued 2,537,668 $2.60 - 3.01 2.76
Exercised (2,614,478) $0.775 - 1.32 0.84
Expired (19,412) $0.775 - 1.28 1.17
-------------
Outstanding at
December 31, 2004 4,532,748 $1.02 - 10.50 $ 4.30 2.12
Issued 711,600 $3.60 - 3.91 $ 3.75
Exercised (2,247,624) $1.02 - 3.01 $ 2.55
Expired (825,763) $2.75 - 10.50 $ 7.01
-----------
Outstanding at
December 31, 2005 2,170,961 $1.02 - 3.91 $ 3.14 3.27
===========
(3) Income Taxes
As of December 31, 2005, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$21,420,000. 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 $8,000,000 is available
to offset future federal taxable income, if any, ratably through 2025.
The available net operating loss carryforwards after applying the
annual limitation under Section 382 resulted in a deferred tax asset
of approximately $3,473,000 at December 31, 2005 ($2,295,000 at
December 31, 2004). 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, 2005 and 2004. The
valuation allowance increased $1,178,000 during the year ended
December 31, 2005, and increased $1,015,000 during the year ended
December 31, 2004.
F-14
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2005 and 2004
(4) Rents
The Company currently occupies its office space on a month-to-month
basis. Rent expense totaled $87,376 for each of the years ended
December 31, 2005 and 2004.
F-15
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-114600, 333-121681 and 333-130872) and the
Registration Statement on Form S-8 (No. 333-119898) of Delcath Systems, Inc. of
our report dated March 24, 2006, relating to the financial statements which
appear in this Annual Report on Form 10-KSB.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, Connecticut
March 31, 2006
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 31, 2006
/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 31, 2006
/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, 2005 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 31, 2006
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, 2005 as 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 31, 2006
