================================================================================
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, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ____________ to ____________
Commission file number: 001-16133
DELCATH SYSTEMS, Inc.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 06-1245881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Summer Street, Stamford, Connecticut 06905
(Address of principal executive offices) (Zip Code)
203-323-8668
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
-------------------------------------- -----------------------------
Common Stock, par value $.01 per share Boston Stock Exchange
Redeemable Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Redeemable Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form. [ ]
The issuer's revenues for its most recent fiscal year were: $0.
The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the closing sales price of $1.05 per share, was $ 4,324,842
as of February 28, 2003.
At February 28, 2003, the registrant had outstanding 4,118,897 shares of par
value $0.01 Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2003 Annual Meeting of Incorporated into Part
Stockholders. (A definitive proxy statement III of this Form 10-KSB
will be filed with the Securities and Exchange
Commission within 120 days after the close of
the fiscal year covered by this Form 10-KSB.)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
================================================================================
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
-------
We were incorporated under Delaware law in 1988. We are a development stage
company, and we have developed the Delcath system to isolate the liver from the
general circulatory system and to administer chemotherapy and other therapeutic
agents directly to the liver. Since our inception, we have raised approximately
$14 million in funds (net of fundraising expenses), and we have invested
approximately $10 million of those funds in research and development costs
associated with development and testing of the Delcath system.
The Delcath system is not currently approved for marketing by the United States
Food and Drug Administration, and it cannot be marketed in the United States
without FDA pre-marketing approval. We plan to conduct Phase III clinical trials
designed to secure marketing approval in the United States and possibly in
foreign markets for use of the Delcath system with a particular chemotherapy
agent, doxorubicin, currently used to treat malignant melanoma that has spread
to the liver. We also plan to continue our clinical trial for the use of the
Delcath system with another chemotherapy agent, melphalan, which is also
currently used to treat malignant melanoma that has spread to the liver.
Additionally, we plan to continue 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-marketing
approval for use of the Delcath system with doxorubicin to
treat malignant melanoma that has spread to the liver. Our
highest priority is completing the Phase III clinical trials,
data preparation, statistical analysis and regulatory
documents associated with an application for pre-market
approval of commercial sale of the Delcath system in the
United States for use in administering doxorubicin in the
treatment of melanoma that has spread to the liver.
o Obtaining approval to market the Delcath system in the United
States for the treatment of other forms of liver cancer using
other chemotherapy agents and treatment of hepatitis using
anti-viral drugs. In August 2001, we commenced a Phase I
clinical trial at the National Cancer Institute using
melphalan, a chemotherapy agent. In addition to researching
the use of other chemotherapy agents with the Delcath system
to treat cancer, we plan to research the use of other
compounds with the Delcath system to treat other diseases,
such as hepatitis. Our timing to begin these studies will
depend on our ability to establish strategic alliances with
pharmaceutical manufacturers or other strategic partners in
conjunction with our research into other therapeutic
compounds and to raise additional funds for these purposes.
Additional FDA pre-marketing approval will be required to
market the Delcath system for these uses.
o Introducing the Delcath system into foreign markets. We will
seek to establish strategic relationships with domestic and
foreign firms that have a recognized presence or experience
in foreign markets that we intend to target. Our strategy is
to focus on markets that have a high incidence of liver
cancer and the means to provide and pay for cancer
treatments. According to the World Health Organization, many
Asian and European countries, including China, Japan, Greece,
Hong Kong, the Philippines, France, Germany, Italy and Spain,
have a higher incidence of liver cancer than the United
States. Additionally, Australia has been cited as having the
highest incidence of skin cancer in the world. Given that our
current Phase III clinical trials are with a chemotherapy
agent that is used to treat malignant melanoma that has
spread to the liver, upon obtaining FDA pre-marketing
approval, we intend to target the
1
Australian market. We also intend to seek to enter into
arrangements with strategic partners who have experience with
obtaining regulatory approval and marketing medical devices
in those markets and are willing to bear the cost of those
activities.
The Cancer Treatment Market
---------------------------
The American Cancer Society projects that about 1,334,100 new cases of cancer
will be diagnosed in 2003. According to the American Cancer Society's "Cancer
Facts and Figures 2003," cancer remains the second leading cause of death in the
United States. 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. The National Institutes of Health, in the American Cancer Society's
"Cancer Facts & Figures 2003," estimates the overall costs of cancer in the year
2002 to be $171.6 billion, including $61 billion in direct medical costs, $15.5
billion for indirect morbidity costs attributable to lost productivity due to
illness and $95.2 billion for indirect mortality costs attributable to lost
productivity due to 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 initial Phase III clinical trials, we will seek to develop data on
metastatic melanoma which has spread to the liver. According to the American
Cancer Society's "Cancer Facts & Figures 2003," the five-year survival rate for
liver cancer patients ,both primary and secondary, is approximately 7%, compared
to the 62% for all other forms of cancer combined. 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, more than 70% of cancerous liver tumors cannot be surgically
removed at the time of diagnosis. A significant number of patients treated for
primary and metastatic liver cancer will also experience a recurrence of their
disease.
Metastatic liver cancer is characterized by microscopic pieces of other forms of
cancer that detach from the primary site and travel via the blood stream and
lymphatic system into the liver, where they grow into new tumors. This growth
often continues even after removal of the primary cancer or cancerous organ.
When cancer cells enter the liver and develop into tumors, they tend to grow
very quickly. In many cases, the patient dies not from the primary cancer, but
from the tumors in the liver; the liver becomes the "life limiting organ."
People cannot survive without a liver capable of performing its critical
biologic functions: facilitating the conversion of food into energy and
filtering toxic agents from the blood. The liver is one of the three most common
sites to which cancer may spread. Due to numerous factors, including the absence
of viable treatment options, metastatic liver cancer often causes death.
According to the 2002 World Health Report, liver cancer is the third most common
form of cancer worldwide, accounting for 616,000 deaths. The American Cancer
Society in its "Cancer Facts & Figures 2003" has projected that in the United
States there will be approximately 17,300 newly diagnosed cases of liver cancer,
and 54,200 new cases of melanoma.
Primary liver cancer is particularly prevalent in Southern Europe, Asia and
developing countries, where the primary risk factors for the disease are
present. These risk factors include: hepatitis-B, hepatitis-C, relatively high
levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to
industrial pollutants.
Current Liver Cancer Treatments
-------------------------------
The prognosis for primary and secondary liver cancer patients is poor. Although
limited treatment options are currently available for liver cancer, they are
typically ineffective, are generally associated with significant side-effects
and can even cause death. Traditional treatment options, discussed in more
detail below, include surgery, chemotherapy, cryosurgery, percutaneous ethanol
injection and radiation.
2
Surgery
-------
While surgery is considered the "gold standard" treatment option to address
liver tumors, an estimated 75% of liver tumors are unresectable, which means
they do not qualify for surgical removal. This is most often due to the
following:
o Operative risk: limited liver function or poor patient health
threatens survival as a result of the surgery; or
o Technical feasibility: the proximity of a cancerous tumor to
a critical organ or artery or the size, location on the liver
or number of tumors makes surgery not feasible.
For the patients who qualify for surgery, there are significant complications
related to the procedure. Recurrence of tumors is common, and in that event,
surgery typically cannot be repeated.
We believe that delivery of drugs with the Delcath system may enable surgical
removal in some of the cases which are currently inoperable by reducing the size
and number of tumors sufficiently to make resection feasible. Shrinking a tumor
using chemotherapy and then removing the tumor is a procedure known as adjuvant
therapy. After resection, chemotherapy can be administered through the Delcath
system with the objective of destroying micro metastases in the liver that may
remain undetected, thus preventing or delaying any recurrence of tumor growth.
Chemotherapy
------------
The most prevalent form of liver cancer treatment is intravenous chemotherapy.
The effectiveness of this treatment, however, is limited by its side effects.
Generally, the higher the dosage of chemotherapy administered, the greater its
ability to kill cancer cells. However, due to the toxic nature of chemotherapy
agents, the higher the dosage administered, the greater damage chemotherapy
agents cause to healthy tissues. As a result, the dosage of chemotherapy
required to kill cancer cells can be lethal to patients.
The side effects caused by doxorubicin, the drug we are seeking to have approved
for use in the Delcath system, are representative of the side-effects associated
with many chemotherapy agents. Doxorubicin causes irreversible heart tissue
damage. Depending on dosage levels, the damage caused by doxorubicin can be
serious and lead to congestive heart failure. Doxorubicin can also cause severe
mucositis leading to ulceration of the mouth and digestive organs, damage to a
patient's immune system through destruction of bone marrow cells, as well as
acute nausea, severe vomiting, dermatological problems and hair loss. The use of
doxorubicin can be fatal even when it is administered with careful patient
monitoring.
The limited effectiveness of intravenous chemotherapy treatment and its
debilitating, often life-threatening, side-effects makes the decision to undergo
chemotherapy treatment difficult. In some instances, in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy, despite
its side effects. In other cases, recognizing the inevitable result of liver
cancer, the physician and patient choose only to manage the patient's discomfort
from cancer with pain killers while foregoing treatment.
To address this trade-off between the efficacy of intravenous chemotherapy
treatment and its dire side effects, physicians have experimented with
techniques to isolate the liver from the general circulatory system and to
achieve a targeted delivery of chemotherapy agents to the liver. In the 1980's,
a physician developed a procedure in which he surgically diverted the blood flow
from the liver while infusing high dosages of chemotherapy agents into the
liver. A filtration circuit reduced drug concentrations before returning the
diverted blood to the patient. The treatment, however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times, long hospital stays and very high costs. Other physicians have
experimented with the delivery of chemotherapy agents to the liver by catheter,
attempting to use one or more catheters to remove chemotherapy agents before
they enter the general circulatory system. We are unaware of any system,
however, which contains the patented attributes of the Delcath design.
3
Cryosurgery
-----------
Cryosurgery is the destruction of cancer cells using sub-zero temperatures in an
open surgical procedure. During cryosurgery, multiple stainless steel probes are
placed into the center of the tumor and liquid nitrogen is circulated through
the end of the device, creating an ice ball. Cryosurgery involves a cycle of
treatments in which the tumor is frozen, allowed to thaw and then refrozen.
While cryosurgery is considered to be relatively effective, we believe adoption
of this procedure has been limited because:
o It is not an option for patients who cannot tolerate an open
surgical procedure;
o It involves significant complications which are similar to
other open surgical procedures, as well as liver fracture and
hemorrhaging caused by the cycle of freezing and thawing;
o It is associated with mortality rates estimated to be between
one and five percent; and
o It is expensive compared to other alternatives.
Percutaneous Ethanol Injection
------------------------------
Percutaneous ethanol injection, or PEI, involves the injection of alcohol into
the center of the tumor. The alcohol causes cells to dry out and cellular
proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary liver cancer,
it is generally considered ineffective on large tumors as well as metastatic
tumors. Patients are required to receive multiple treatments, making this option
unattractive for many patients. Complications include pain and alcohol
introduction to bile ducts and major blood vessels. In addition, this procedure
can cause cancer cells to be deposited along the needle track when the needle is
withdrawn.
Radiation Therapy
-----------------
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation therapy
is not considered an effective means of treating liver cancer and is rarely used
for this purpose. Radiation is often used as an adjunct to other treatments for
liver cancer.
Implanted Infusion Pumps
------------------------
Implanted infusion pumps can be used to better target the delivery of
chemotherapy agents to the tumor. Arrow International markets an implantable
pump typically used to treat colorectal cancer which has metastasized to the
liver. This pump, however, lacks a means of preventing the entry of chemotherapy
agents into the patient's general circulation after it passes through the liver.
This technique does not enable physicians to prescribe higher doses of
chemotherapy.
Other Methods of Treatment
--------------------------
Still other liver cancer treatments include liver transplants, embolization,
removal of tumors through the use of radio frequency waves and the use of
biological response modulators, monoclonal antibodies and liposomes. The
effectiveness of these treatments is limited, many have dose limiting
side-effects and none is widely used.
4
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.
The double balloon catheter has one large passageway and three smaller
passageways. Each of two low-pressure balloons is inflated through one of the
three smaller passageways. Blood flows out of the liver through the large
passageway to the filtration system. A separate access port attaches to the
large passageway and is designed for sampling fluid or flushing the system. The
third smaller passageway allows blood exiting the legs and kidneys to bypass the
liver and return to the heart.
The Delcath system involves a series of three catheter insertions, each of which
is made through the skin. During test procedures, patients are treated with
intravenous sedation and local anesthesia at catheter insertion sites. In some
cases general anesthesia has been used. An infusion catheter is inserted into
the artery through which blood normally flows to the liver. A second catheter --
the Delcath double balloon catheter -- is inserted through the inferior vena
cava, a major vessel of the heart . The balloons on the double balloon catheter
are then inflated. This procedure prevents the normal flow of blood from the
liver to the heart through the inferior vena cava because the inferior vena cava
has been blocked. A chemotherapy agent is then infused into the liver through
the infusion catheter. The infused blood is prevented from flowing to the heart,
but leaves the liver through perforations on the double balloon catheter and
flows through this catheter out of the body where the infused blood is pumped
through activated charcoal filters to remove most of the chemotherapy agent. The
filtered blood is returned to the patient through the jugular vein which leads
to the superior vena cava, another major vessel of the heart, thus restoring the
cleansed blood to normal circulation. Infusion is administered over a period of
thirty minutes. Filtration occurs during infusion and for thirty minutes
afterward. The catheters are removed and manual pressure is maintained on the
catheter puncture sites for approximately fifteen minutes. The entire procedure
takes approximately two to three hours to administer.
During Phase I and Phase II clinical trials, patients remained in the hospital
overnight for observation after undergoing treatment with the Delcath system.
Once physicians become familiar with using the Delcath system, we
5
expect the procedure to be performed on an outpatient basis, with the patient
resuming normal activities the day after the procedure is performed. We expect a
patient to undergo an average of four treatments, one every three weeks. A new
Delcath system kit is used for each treatment.
Integral to our research and development efforts is our program of clinical
research with prominent researchers and physicians that is being conducted
presently at The National Cancer Institute and was previously conducted at Yale
University, M.D. Anderson Cancer Center and Wright Patterson Air Force Base.
Our Phase III Clinical Trials
-----------------------------
Phase III clinical trials are a prerequisite for FDA approval of Delcath's
pre-marketing application. During these trials, administration of doxorubicin
through the Delcath system must be proven to be safe and effective for the
treatment of liver cancer. The FDA requires us to demonstrate that delivering
doxorubicin using the Delcath system results in patient survival times that are
longer than those obtained from administering chemotherapy agents intravenously.
We have conducted Phase I and II clinical trials at three United States medical
centers under investigational device and investigational new drug exemptions
granted by the FDA. The trials were designed to demonstrate the system's
"functionality," or its ability to administer to and extract from the liver
approved and marketed chemotherapy agents. Forty-four patients participated in
the trials. Twenty-one of these test subjects had primary liver cancer or
melanoma which had spread to the liver and were treated with doxorubicin. The
remaining twenty-three test subjects suffered from other forms of liver cancer
and/or were treated with another chemotherapy agent, 5-FU. These trials
demonstrated that the Delcath system was capable of extracting approximately 70%
to 85% of the chemotherapy agent administered to the liver. Therefore, the
Delcath system permits the delivery of higher dosages of chemotherapy agents to
the cancer site while at the same time minimizing damage to healthy tissue.
We believe the results of the clinical trials we have conducted indicate that
the Delcath system delivered:
o more chemotherapy agent to the tumor site; and
o less chemotherapy agent to the general circulation than
delivered by administration of the same dose by intravenous
means.
In addition, clinicians involved in the Phase I and Phase II clinical trials
observed:
o reduction in tumor size; and
o the safety of the system at higher dosage levels of
chemotherapy than those used in conventional intravenous
chemotherapy delivery.
Further, though not demonstrated in a statistically significant manner because
of the limited number of patients tested, clinicians observed survival times of
patients treated with the Delcath system which exceeded those that would
generally be expected in patients receiving chemotherapy treatment through
conventional intravenous means of delivery.
Based on the results of our Phase I and Phase II clinical trials, we submitted
to the FDA our application for pre-marketing approval of the Delcath system as a
medical device. In response to our application, the FDA classified the Delcath
system as a drug delivery system which requires us to obtain approval of new
labeling for the drug being used in the clinical trials. The application to
change the labeling must be filed by a drug manufacturer holding an existing new
drug application or an abbreviated new drug application. We have reached a
preliminary verbal understanding with a drug manufacturer holding an existing
license for doxorubicin to submit an application to the FDA supporting the new
labeling based on data from the Phase III clinical trial. The pre-marketing
approval and drug relabeling applications must demonstrate the clinical utility
of a particular drug when administered through the Delcath system. To do so, we
must demonstrate, in a statistically meaningful manner, that administering
chemotherapy agents with the Delcath system results in survival times of
patients that are longer than those obtained from administering chemotherapy
agents intravenously.
6
In December 2002, we filed a registration statement with the Securities and
Exchange Commission for an underwritten public offering of securities in the
form of units. Each unit will consist of shares of common stock and warrants to
purchase shares of common stock. With a substantial portion of the proceeds that
we receive from our planned public offering, we intend to conduct Phase III
clinical trials designed to demonstrate that administering doxorubicin with the
Delcath system to treat malignant melanoma that has spread to the liver results
in patient survival times that are longer than those obtained from administering
chemotherapy agents intravenously.
In December 1999, the FDA approved our protocols for conducting the Phase III
clinical trials.
We expect the Phase III clinical trials to be conducted at several medical
centers, such as the NCI and the Sydney Cancer Centre, and to involve 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 either of two specified chemotherapy agents delivered
intravenously. Trials will commence upon approval of a budget by the respective
institutions. Once a budget is approved, the trials will commence at that
institution. We expect that the trials will begin in 2003. The Ethics Committee
of the Sydney Melanoma Unit, which is a part of the Sydney Cancer Centre, has
given us approval to start our Phase III clinical trial there. However, our
timetable is subject to uncertainty and we cannot assure you that we can meet
our planned schedule. We do not know whether all of the medical centers we have
identified will be available to conduct the clinical trials when we are in a
position to have them commence or that we will be ready to commence the trials
within any particular time period.
We intend to hire a contract research organization ("CRO") to conduct these
trials. The CRO represents the clinical trial sponsor. They ensure that the
principal investigator follows the established protocol and collects the
clinical data. We have not begun negotiations with a CRO and we cannot assure
you that we will be able to engage an organization on acceptable terms and
conditions in a timely manner or at all. The CRO and principal investigators
conducting the clinical trials are not our employees. As a result, we have
limited control over their activities and can expect that only limited amounts
of their time will be dedicated to our clinical trials. They may fail to meet
their contractual obligations or fail to meet regulatory standards in the
performance of their obligations, and we may not be able to prevent or correct
their failures. Failure of the CRO to perform as expected or required, including
failure of the principal investigators to enroll a sufficient number of patients
for our trials, could result in the failure of the clinical trials and the
failure to obtain FDA pre-marketing approval. We believe that we will acquire
sufficient data to seek FDA pre-marketing approval of the Delcath system within
twelve to eighteen months of the commencement of the last patient enrolled.
We do not know how long the FDA may take to evaluate our submission, and they
may require that additional trials be conducted or may not grant approval.
The FDA pre-marketing approval we are currently seeking is limited to
administration of doxorubicin with our 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-marketing approvals
for using the Delcath system with other chemotherapy agents for treatment of
other liver cancers and with anti-viral drugs for treatment of other diseases,
such as hepatitis. In many instances, the process of applying for and obtaining
regulatory approvals involves rigorous pre-clinical and clinical testing. The
time, resources and funds required for completing necessary testing and
obtaining approvals is significant, and FDA pre-marketing approval may never be
obtained for some medical devices or drug delivery systems. If we fail to raise
the additional capital required or enter into strategic partnerships to finance
this testing or if we fail to obtain the required approvals, our potential
growth and the expansion of our business would likely be limited.
7
Our Clinical Trial and Agreement with The National Cancer Institute
-------------------------------------------------------------------
In June 2001, the Company announced that The National Institutes of Health/The
National Cancer Institute approved a clinical study protocol for administering
escalating doses of another chemotherapy agent, melphalan, through the Delcath
system to patients with unresectable cancer of the liver.
The Phase I clinical trial conducted at The National Cancer Institute ("NCI")
began in September 2001 and involved a total of 24 patients, all experiencing
metastatic liver cancer. The goal of a Phase I clinical trial is to determine
the maximum tolerated dose of melphalan that can be administered before it
becomes toxic to the patient's system.
This clinical trial, which will also include a Phase II study, is subject to the
terms and conditions of the Cooperative Research and Development Agreement (the
"CRADA") between us and NCI. We obtained FDA approval to conduct the Phase I
clinical trial; however, further FDA approval is necessary to conduct Phase II
studies. We have not yet requested such approval. The goal of a Phase II
clinical trial is to determine various factors such as the appropriate dosage,
the timing of each dose and the efficacy of the proposed dose. We cannot
estimate how long it will be until we receive FDA approval to commence the Phase
II study. The scope of the Phase I and Phase II studies is:
o To develop a Delcath system-based Phase I treatment protocol
for the regional therapy of the liver using escalating doses
of melphalan delivered through the utilization of the Delcath
system; and
o To develop Delcath system-based Phase II treatment protocols
as a follow-up to the Phase I study. The Phase II study will
involve patients with specific histologies (diseases) who
have unresectable cancers confined to the liver using the
maximum tolerated dose of melphalan administered using the
Delcath system.
The patients will be treated with up to four series of infusions based upon
toxicity and response to treatment. The Phase II study is expected to begin
shortly after completion of the Phase I study and to take twelve to eighteen
months from the time that the FDA approves the Phase II study protocol.
The CRADA commits NCI to perform the research necessary under the Phase I and
Phase II protocols approved by the FDA with Delcath acting as the sponsor, and
NCI providing the principal investigator. Delcath will provide funding to NCI in
the amount of $918,750 payable in quarterly installments over the five-year term
of the agreement 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. The term of the CRADA is intended to allow
for what the parties expect to be the potential maximum amount of time necessary
to complete and evaluate Phase I and Phase II trials. An amendment to the CRADA
would be necessary if the parties decide to initiate additional clinical trials
using another chemotherapy agent. We are using money raised in our initial
public offering and will use a portion of the net proceeds of our planned public
offering to fund this project. If the results of the Phase I and Phase II trials
are successful, we will probably need additional capital to pay for the expenses
associated with a Phase III clinical trial.
Research for Hepatitis Treatment
--------------------------------
Another disease that attacks the liver is viral hepatitis. The incidence of
viral hepatitis in the United States and worldwide is increasing. The long-range
effects of some forms of hepatitis can include massive death of liver cells,
chronic active hepatitis, cirrhosis and hepatoma. The current treatment for
viral hepatitis is limited and includes long-term injections of interferon
alpha, which is similar to chemotherapy in its toxicity and dosage limitations.
We plan to seek a strategic partner to conduct clinical trials to determine the
feasibility of using the Delcath system to administer anti-viral drugs,
including interferon alpha, in the treatment of viral hepatitis. We have not
entered into any arrangements, understandings or agreements with potential
strategic partners.
Sales and Marketing
-------------------
We intend to focus our marketing efforts on the sixty-one 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
8
institutions including the Sydney Melanoma Unit of the University of Sydney
Sydney Cancer Centre. We will focus these efforts on two distinct groups of
medical specialists in these comprehensive cancer centers:
o oncologists who have primary responsibility for the patient;
and
o interventional radiologists who are members of the hospital
staff and work with catheter-based systems.
Upon diagnosis of cancer, a patient is usually referred to a medical oncologist.
This physician generally provides palliative treatments (non-curative) and
refers the patient to a surgical oncologist if surgery appears to be an option.
Both medical and surgical oncologists will be included in our target market.
Generally, oncologists do not position catheters. This is done either by an
interventional radiologist or a surgeon.
We plan to hire a marketing director at such time as we receive an indication
from the FDA that approval of the Delcath system is forthcoming and then hire a
sales manager and four sales representatives to market the system in the United
States.
In addition, if we can establish foreign testing and marketing relationships, we
plan to utilize one or more corporate partners to market products outside the
United States. We believe distribution or corporate partnering arrangements will
be cost effective, will be implemented more quickly than a direct sales force
established by us in such countries and will enable us to capitalize on local
marketing expertise in the countries we target.
Since we plan to sell the Delcath system to a large number of hospitals and
physician practices, we do not expect to be dependent upon one or a few
customers.
Market acceptance of the Delcath system will depend upon:
o the ability of our clinical trials to demonstrate against the
control group a statistically measurable increase in life
expectancy for the kinds of cancers treated at a cost
effective price;
o our ability to educate physicians on the use of the system
and its benefits compared to other treatment alternatives;
and
o our ability to convince healthcare payors that use of the
Delcath system results in reduced treatment costs of
patients.
This will require substantial efforts and expenditures.
Nissho Agreement
----------------
In December 1996, we entered into an agreement with Nissho Corporation, a large
manufacturer and distributor of medical devices and pharmaceuticals based in
Osaka, Japan which grants to Nissho the exclusive right to distribute the
Delcath system in Japan, China, Korea, Hong Kong and Taiwan until December 31,
2004. Nissho, at that time, invested $1,000,000 in Delcath.
Products covered by the agreement include the Delcath system for the treatment
of cancer in the liver and the lower extremities, as well as new products that
may be added by mutual agreement. Nissho is required to purchase products from
Delcath in connection with clinical trials and for resale in its market at
prices to be determined by mutual agreement. Nissho has agreed, in its
territory, not to engage in the business of manufacturing, distributing or
selling systems similar to the Delcath system for the liver or other organs or
body regions.
9
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 hospitals for
the Delcath system kit is approximately $4,000. A patient normally undergoes
four treatments with the Delcath system, each requiring a new system kit. Each
treatment with the Delcath system, including the cost of the treatment kit, has
an estimated cost of approximately $12,000, resulting in a total estimated
treatment cost of approximately $48,000. This compares to a total estimated cost
of conventional aggressive chemotherapy treatment of approximately $160,000 to
$180,000, which includes the hospitalization and treatment costs associated with
the side-effects of the systemic delivery of chemotherapy agents.
Manufacturing
-------------
We plan to utilize contract manufacturers to manufacture the components of the
Delcath system. In order to maintain quality control, we plan to perform final
assembly and packaging in our own facility. If we undertake these operations,
our facility will be required to comply with the FDA's good manufacturing
practice and quality system requirements. If we sell the Delcath system in some
foreign markets, our facility will also need ISO 9000 approval from the European
Union which is a required approval that European manufacturers must obtain from
the International Organization for Standardization.
The double balloon catheter is being manufactured domestically by the Burron OEM
division of B. Braun Medical, Inc. of Germany. The double balloon catheter must
be manufactured in accordance with manufacturing and performance specifications
that are on file with the FDA. Burron has demonstrated that the components it
manufactures meet these specifications. Burron's manufacturing facility is ISO
9000 approved, which will allow the use of the catheter 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 Burron to manufacture
the catheter 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.
Currently, we purchase the activated charcoal filters used in the Delcath system
from Asahi Medical Products of Japan. Asahi has informed us that it will
discontinue manufacturing these filters in the near future. We have ordered a
final shipment of filters from Asahi which we expect will be sufficient to meet
our needs for at least the next twelve months. However, as part of our
application process with the FDA, we obtained approval to utilize filters from
any manufacturer that falls within certain performance parameters and meets the
specifications on file with the FDA. Therefore, we are currently actively
seeking an alternative filter manufacturer that is capable of providing us with
the quality of filters that are required to meet the specifications on file with
the FDA in the quantity that we will require to conduct future clinical trials
and to market the Delcath system commercially. We have already identified one
potential supplier in the United States.
10
Competition
-----------
The healthcare industry is characterized by extensive research efforts, rapid
technological progress and intense competition from numerous organizations,
including biotechnology firms and academic institutions. Competition in the
cancer treatment industry, and specifically the markets for systems and devices
to improve the outcome of chemotherapy treatment for cancer, is intense. We
believe that the primary competitive factors for products addressing cancer
include safety, efficacy, ease of use, reliability and price. We also believe
that physician relationships, especially relationships with leaders in the
interventional radiology and oncology communities, are important competitive
factors.
The Delcath system competes with all forms of liver cancer treatments that are
alternatives to resection including radiation, intravenous chemotherapy and
chemotherapy through implanted infusion pumps, liver transplants, embolization,
cryosurgery, radiowave ablation and the use of biological response modulators,
monoclonal antibodies and liposomes. Many of Delcath's competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources. In addition, some of our competitors have
considerable experience in conducting clinical trials and other regulatory
approval procedures. Our competitors may develop more effective or more
affordable products or treatment methods, or achieve earlier product development
or patent protection, in which case our chances to achieve meaningful revenues
or profitability will be substantially reduced.
Many large pharmaceutical companies and research institutions are developing
systems and devices to improve the outcome of chemotherapy treatment for cancer.
Arrow International currently markets an implantable infusion pump, which has
been successful in facilitating regional drug delivery. However, Arrow's pump
lacks a means of preventing the entry of these agents into the patient's general
circulation after they pass through the liver. Other companies, including Merck
& Co., Inc., are developing various chemotherapy agents with reduced toxicity,
while other companies are developing products to reduce the toxicity and
side-effects of chemotherapy treatment. In addition, gene therapy, vaccines and
other minimally invasive procedures are currently being developed as
alternatives to chemotherapy.
Technological developments are expected to continue at a rapid pace in both
industry and academia which could result in a short product life cycle for our
Delcath system.
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-marketing application prior to commercial
distribution.
Doxorubicin, the drug that we are initially seeking to have approved for
delivery by the Delcath system, is a widely used chemotherapy agent that has
been approved by the FDA. Melphalan, the drug that will be administered through
the Delcath system in the NCI-sponsored study, is a chemotherapy agent that has
also been approved by the FDA. Like all approved drugs, the approved labeling
includes indications for use, method of action, dosing, side-effects and
contraindications. Because the Delcath system delivers doxorubicin through a
mode of administration and at a dose strength that differs from those currently
approved, approval for revised labeling of doxorubicin and melphalan products
permitting their use with the Delcath system must be obtained. The application
to change the labeling must be filed by a drug manufacturer holding an existing
new drug application or an abbreviated new drug application. We are currently in
discussions with a drug manufacturer who holds an existing license for
doxorubicin for the manufacturer to submit an application supporting the new
labeling, assuming data from the Phase III clinical trial is favorable. We are
also currently in discussions with the drug manufacturers that hold a new drug
application or an abbreviated new drug application and plan actively to solicit
one of them to file an application for new labeling with the FDA for
doxorubicin.
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
11
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;
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, fire hazard control 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-marketing 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-marketing 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 and respond to our submission of the Delcath system for commercial
sale within three months. 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.
12
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 that would likely cause
or contribute to a death or serious injury if the malfunction were to recur. If
safety or efficacy problems occur after the product reaches the market, the FDA
may take steps to prevent or limit further marketing of the product.
Additionally, the FDA actively enforces regulations prohibiting marketing or
promoting of devices or drugs for indications or uses that have not been cleared
or approved by the FDA. Further, the Food, Drug and Cosmetic Act authorizes the
FDA to impose post-market surveillance requirements with respect to a Class III
device which is reasonably likely to have a serious adverse health consequence
or which is intended to be implanted in the human body for more than one year or
to be a life sustaining or life supporting device used outside a hospital or
ambulatory treatment center.
The Food, Drug and Cosmetic Act regulates a device manufacturer's design
control, quality control and manufacturing procedures by requiring the
manufacturer to demonstrate and maintain compliance with quality systems
regulations including good manufacturing practices and other requirements. These
regulations require, among other things, that:
o design controls, covering initial design and design changes
be in place;
o the manufacturing process be regulated, controlled and
documented by the use of written procedures; and
o the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing
of every aspect of the process.
The FDA monitors compliance with quality systems regulations, including good
manufacturing practice requirements, by conducting periodic inspections of
manufacturing facilities. If violations of the applicable regulations are found
during FDA inspections, the FDA will notify the manufacturer of such violations
and the FDA, administratively or through court enforcement action, can prohibit
further manufacturing, distribution, sales and marketing of the device until the
violations are cured. If violations are not cured within a reasonable length of
time after the FDA provides notification of such violations, the FDA is
authorized to withdraw approval of the pre-marketing approval application.
Investigational devices that require FDA pre-marketing approval in the United
States but have not received such approval may be exported to countries
belonging to the European Union, European Economic Area and some other specified
countries, provided that the device is intended for investigational use in
accordance with the laws of the importing country, has been manufactured in
accordance with the FDA's good manufacturing practices or ISO standards, is
labeled on the outside of the shipping carton "for export only," is not sold or
offered for sale in the United States and complies with the specifications of
the foreign purchaser. The export of an investigational device for
investigational use to any other country requires prior authorization from the
FDA. An investigational device may be exported for commercial use only as
described below, under "Foreign Regulation."
DRUGS. A manufacturer of a chemotherapy agent must obtain an amendment of a
supplemental new drug application for a chemotherapy product providing for its
use with the Delcath system before the system may be marketed in the United
States to deliver that agent to the liver or any other site. The FDA-approved
labeling for both doxorubicin and melphalan does not provide for its delivery
with the Delcath system. We must partner with
13
the holders of an approved new drug application for doxorubicin and melphalan to
make this change to the labeling of both agents. We are seeking to partner with
drug companies for this purpose, but we have no assurance that we will find
partners or that the FDA will approve the application. If this approval is
obtained, it would not have a negative effect on the manufacturers of either
doxorubicin or melphalan. Rather, the drug manufacturer would have the
opportunity to expand the use of the drugs as a result of changing their label
to include the Delcath labeling.
Phase III clinical trial protocols using doxorubicin have been approved by the
FDA under our investigational new drug application. FDA regulations also require
that prior to initiating the trials the sponsor of the trials obtain
institutional review board approval from each investigational site that will
conduct the trials. We are seeking the approval of institutional review boards
at several medical centers by assembling and providing them with information
with respect to the trials.
The FDA requires that, in order to obtain approval to re-label doxorubicin for
delivery using the Delcath system, we demonstrate that delivering doxorubicin
using the system results in patient survival times that are longer than those
obtained from administering chemotherapy agents intravenously.
The approved Phase III clinical trial protocols are designed to obtain approval
of both new drug labeling and a pre-marketing approval application providing for
the use of doxorubicin with the Delcath system. The trial protocols were
approved by both the FDA division that approves new drugs and the division that
reviews applications to market new devices. All of the data generated in the
trials will be submitted to both of these FDA divisions. The foregoing facts
will also apply if our clinical trial using melphalan is successful in Phases I,
II and III.
If we successfully complete the clinical trials with both agents, we believe the
manufacturers of doxorubicin and melphalan will submit to the FDA an application
to deliver the agent to the liver through the Delcath system. Under the Food,
Drug and Cosmetic Act, the Delcath system cannot be marketed until the new drug
application, or supplemental new drug application and the pre-marketing approval
application are approved, and then only in conformity with any conditions of use
set forth in the approved labeling.
FOREIGN REGULATION. In order for Nissho or any other foreign strategic partner
to market our products in Asia, Europe, Latin America and other foreign
jurisdictions, they must obtain required regulatory approvals or clearances and
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These regulations, including the requirements for
approvals or clearances to market, may differ from the FDA regulatory scheme. In
addition, there may be foreign regulatory barriers other than pre-marketing
approval or clearance.
In April 1996, legislation was enacted that permits a medical device which
requires FDA pre-marketing approval but which has not received such approval to
be exported to any country for commercial use, provided that the device:
o complies with the laws of that country;
o has valid marketing authorization or the equivalent from the
appropriate authority in any of a list of industrialized
countries including Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the
European Economic Union; and
o meets other regulatory requirements regarding labeling,
compliance with the FDA's good manufacturing practices or ISO
manufacturing standards, and notification to the FDA.
In order for us to market and sell the Delcath system in the European Community,
we must obtain a CE mark, which is the official marking required by the European
Community for all electric and electronic equipment that will be sold anywhere
in the European Union, except for limited use as a clinical trial device.
Supplemental device approvals also might be required to market and sell the
Delcath system.
Patents, Trade Secrets and Proprietary Rights
---------------------------------------------
Our success depends in large part on our ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care
14
industry has traditionally placed considerable emphasis on obtaining patent and
trade secret protection for significant new technologies, products and
processes. We hold the following seven United States patents, as well as three
corresponding foreign patents in Canada, Europe and Japan:
Summary Description of Patents Patent No.
------------------------------ ----------
Isolated perfusion method for cancer treatment U.S. #5,069,662
Isolated perfusion device -- catheter for use in
isolated perfusion in cancer treatment U.S. #5,411,479
Device and method for isolated pelvic perfusion U.S. #5,817,046
Catheter design to allow blood flow from renal veins
and limbs to bypass occluded segment of IVC U.S. #5,893,841
Balloon inside catheter to restrict blood flow or
prevent catheter from moving U.S. #5,897,533
Catheter with slideable balloon to adjust isolated segment U.S. #5,919,163
Isolated perfusion method for kidney cancer U.S. #6,186,146
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, 2003 we had 5 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 are 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 and
scientific consultants.
ITEM 2. DESCRIPTION OF PROPERTIES.
We currently occupy approximately 3,600 square feet of office space at 1100
Summer Street, Stamford, Connecticut, pursuant to a lease that expires on
December 22, 2003, and we have the option to extend until December 21, 2006. We
have occupied these facilities since 1992, and the space is adequate for our
current needs. If we require additional space in the future, we believe that
satisfactory space will be available at commercially reasonable rates in or near
our current facility, although there can be no assurance that additional
facilities and equipment will be available upon 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.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any litigation other than routine litigation incidental to
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock traded on the Nasdaq National Market under the symbol
"DCTHU" from October 19, 2000, the effective date of our registration statement,
filed on Form SB-2 under the Securities Act of 1933 (no. 333-39470) relating to
our initial public offering of our Common Stock, until October 19, 2001. In
accordance with the terms of our initial public offering, effective October 22,
2001, the Company's common shares and warrants were decoupled from the units
issued October 19, 2000 and commenced separate trading. Our common shares trade
on the NASDAQ Small Cap market under the symbol "DCTH" and on the Boston Stock
Exchange under the symbol "DCT." Our warrants trade under the symbol "DCTHW."
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
------------------------
2002
High Low
Quarter ended March 31, 2002 $2.90 $0.94
Quarter ended June 30, 2002 1.90 0.68
Quarter ended September 30, 2002 1.11 0.63
Quarter ended December 31, 2002 2.66 0.31
2001
High Low
Quarter ended December 31, 2001
(Since October 19 only) $1.795 $0.56
Unit Price Range
----------------
2001
Quarter ended March 31, 2001 $5.69 $2.19
Quarter ended June 30, 2001 3.20 1.25
Quarter ended September 30, 2001 2.92 1.26
October 1, 2001- October 19, 2001 1.35 1.00
As of February 28, 2003, there were approximately 81 stockholders of record
of our Common Stock and approximately 686 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.
16
Equity Compensation Plan Information
------------------------------------
Plan category Number of securities Weighted average exercise Number of securities
to be issued upon price of outstanding remaining available for
exercise of options, warrants and future issuance under
outstanding options, rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a))
(a) (b) (c)
Equity compensation plans
approved by security holders 1,145,684 $2.43 371,858
Equity compensation plans
not approved by security holders - - -
--------- ----- -------
Total 1,145,684 $2.43 371,858
Use of Proceeds of Initial Public Offering
------------------------------------------
As noted above, the effective date of our first registration statement, filed on
Form SB-2 under the Securities Act of 1933 (no. 333-39470) relating to our
initial public offering of our Common Stock, was October 19, 2000. A total of
1,200,000 units were sold for $6.00 per unit, each unit consisting of one share
of our Common Stock and one redeemable warrant to purchase one share of our
Common Stock for $6.60 per share until October 18, 2005. The initial public
offering resulted in gross proceeds of $7.2 million, $720,000 of which was
applied toward the underwriting discount. Cash expenses relating to the
offering, including a non-accountable expense reimbursement to the underwriters,
totaled approximately $1.45 million. Net proceeds to Delcath were approximately
$5.4 million. From the time of receipt through December 31, 2002 the net
proceeds were applied toward:
Approximate
Application of Net Proceeds Dollar Amount
--------------------------- -------------
Research and development:
Phase III clinical trials using the Delcath system with doxorubicin ....... $2,009,000
Phase I clinical trials using the Delcath system with melphalan ...... 901,000
Research and development stage clinical trials for other chemotherapy agents 87,000
Repayment of indebtedness ...................................................... 270,000
Working capital and general corporate purposes ................................. 671,000
----------
Total .......................................................................... $3,938,000
The remaining net proceeds are being held in temporary investments in short term
commercial paper and certificate of deposit.
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, which now total ten. We
expect to continue to incur significant losses from costs for
17
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 over at least the next three years. 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 continued
throughout 2002.
NCI is currently preparing a clinical trial protocol for a Phase II trial of
melphalan, based on the data collected in the Phase I study. Enrollment in this
Phase II study is expected to begin during 2003. The Principal Investigator at
the NCI has informed the Company that he plans to publish and/or present his
findings in appropriate medical forums once treatment within Phase I of the
trial is completed.
We also announced that the Ethics Committee of the Sydney Melanoma Unit of the
University of Sydney Sydney Cancer Centre has given us approval to proceed with
a Phase III study of the Delcath drug delivery system for inoperable cancer in
the liver. Other potential sites are not as far along as Sydney in their
preparations to participate in this clinical trial.
Our management continued to speak to potential investors and investment analysts
at a series of meetings in several major U. S. cities and in Europe. On April 3,
2002 we raised $267,500 upon completion of a private placement of 243,181 shares
of common stock with an investment group.
Over the next 12 months, we expect to continue to incur substantial expenses
related to the research and development of our technology, including Phase III
clinical trials using doxorubicin with the Delcath system and Phase I and 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
-------------------------------
Without raising any additional funds, we currently anticipate that our available
funds will be sufficient to meet our anticipated needs for working capital and
capital expenditures through at least the next 12 months. The Company is not
projecting any capital expenditures that will significantly affect the Company's
liquidity during the next 12 months.
Our future liquidity and capital requirements will depend on numerous factors,
including the progress of our research and product development programs,
including clinical studies; the timing and costs of making various United States
and foreign regulatory filings, obtaining approvals and complying with
regulations; the timing and effectiveness of product commercialization
activities, including marketing arrangements overseas; the timing and costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property rights; and the effect of competing technological and market
developments.
The Company's future results are subject to substantial risks and uncertainties.
The Company expects to require additional working capital in the future and
there can be no assurance that such working capital will be available on
acceptable terms, if at all.
18
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 it ever achieving consistent profitability. The Company had working
capital at December 31, 2002 of $1,360,469. The Company will require additional
working capital in the future and there can be no assurance that such working
capital will be available on acceptable terms, if at all. In addition, the
Company will need additional capital in the future to fully implement its
business strategy as set forth herein.
In December 2002, we filed a registration statement with the Securities and
Exchange Commission for an underwritten public offering of securities in the
form of units. Each unit will consist of shares of common stock and warrants to
purchase shares of common stock. We plan to use the net proceeds to fund a Phase
III clinical trial using doxorubicin and the Phase II clinical trial at The
National Cancer Institute using melphalan. We also anticipate using a portion of
the net proceeds to hire an additional employee to serve as Director of Research
and Development.
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 and acquisition strategy, our ability to achieve operating
efficiencies, industry pricing and technology trends, evolving industry
standards, domestic and international regulatory matters, general economic and
business conditions, the strength and financial resources of our competitors,
our ability to find and retain skilled personnel, the political and economic
climate in which we conduct operations, the risks discussed in Item 1 above
under "Description of Business" and other risk factors described from time to
time in our other documents and reports filed with the Securities and Exchange
Commission (the "Commission"). We do not assume any responsibility to publicly
update any of our forward-looking statements regardless of whether factors
change as a result of new information, future events or for any other reason. We
advise you to review any additional disclosures we make in our Form 10-QSB, Form
8-K and Form 10-KSB reports filed with the Commission.
Application of Critical Accounting Policies
-------------------------------------------
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Note 1 to the Company's financial statements included herein. The
Company has not adopted any significant new accounting policies during the
twelve months ended December 31, 2002, but has reclassified its Statements of
Operations to reflect cost and expense accounts on a functional basis for 2002
and prior.
(b) Management's Discussion and Analysis of Financial Condition and Results of
Operation.
Not applicable.
19
ITEM 7. FINANCIAL STATEMENTS.
Please refer to pages F-1 through F-17 Independent Auditors' Report Balance
Sheet as of December 31, 2002
Statements of Operations for the years ended December 31, 2002 and 2001 and
cumulative from inception (August 5, 1988) to December 31, 2002 Statements of
Stockholders' Equity for the years ended December 31, 2002 and 2001 and
cumulative from inception (August 5, 1988) to
December 31, 2002
Statements of Cash Flows for the years ended December 31, 2002 and 2001 and
cumulative from inception (August 5, 1988) to December 31, 2002 Notes to
Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Information in response to Item 304 of Regulation S-B is not included herein
because such information has been "previously reported," as defined in Rule
12b-2 under the Exchange Act.
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 and 405 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 2003 Annual Meeting
of Stockholders
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-B is incorporated into this
Form 10-KSB by reference to the Definitive Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER.
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 is incorporated into this
form 10-KSB by reference to the Definitive Proxy Statement.
20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
Delcath Systems, Inc., as amended to January 31, 2003.
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)).
4.4 Warrant Agreement, dated January 5, 2001, by and between
Delcath Systems, Inc. and Euroland Marketing Solutions,
Ltd. (incorporated by reference to Exhibit 4.5 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 2000 (Commission File No. 001-16133)).
4.5 Warrant No. W-2 to purchase up to 150,000 units granted to
Euroland Marketing Services, Ltd. (incorporated by
reference to Exhibit 4.6 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
4.6 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)).
4.7 Form of Warrant Agreement by and between Delcath Systems,
Inc. and Whale Securities Co., L.P. (incorporated by
reference to Exhibit 4.2 to Amendment No. 5 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
4.8 Form of Warrant Agreement by and between American Stock
Transfer & Trust Company, as warrant agent, Whale
Securities Co., L.P. and Delcath Systems, Inc.
(incorporated by reference to Exhibit 4.3 to Amendment No.
5 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
10.1 1992 Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Registrant's Registration Statement on
Form SB-2 (Registration No. 333-39470)).
10.2 1992 Non-Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Registrant's Registration
Statement on Form SB-2 (Registration No. 333-39470)).
10.3 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 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and M.S. Koly, as amended on April 30, 1999
(incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
10.6 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and Samuel Herschkowitz, M.D., as amended on
April 30, 2000 (incorporated by reference to Exhibit 10.4
to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
10.7 Distributorship Agreement, dated as of December 27, 1996,
by and between Delcath Systems, Inc. and Nissho Corporation
(incorporated by reference to Exhibit 10.6 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
21
Exhibit No. Description
----------- -----------
10.8 Consulting Services Agreement, between Delcath Systems,
Inc. and Euroland Marketing Solutions, Ltd. (incorporated
by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
10.9 Amendment to Key Employment Agreement, dated October 30,
2001, by and between Delcath Systems, Inc. and M. S. Koly
(incorporated by reference to Exhibit 10.10 to Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 2001 (Commission File No. 001-16133)).
10.10 Amendment to Key Employment Agreement, dated October 30,
2001, by and between Delcath Systems, Inc. and Samuel
Herschkowitz (incorporated by reference to Exhibit 10.11 to
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2001 (Commission File No. 001-16133)).
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant o Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant o Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated October 1, 2002
reporting under Item 5 its issuance of a press release on October 1, 2002,
announcing that its board of directors approved a stock repurchase program
whereby the Company is authorized to repurchase a portion of its common stock.
2. The Company filed a Current Report on Form 8-K dated December 9, 2002
reporting under Item 5 its issuance of a press release on December 9, 2002,
announcing it has filed a registration statement with the Securities and
Exchange Commission for an underwritten public offering of securities in the
form of units. Each unit will consist of shares of common stock and warrants to
purchase shares of common stock.
ITEM 14. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and its Chief Financial
officer within 90 days of the filing of this report, the Company's Chief
Executive Officer and its 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 the Company that are designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act are recorded, processed, summarized and reported within
the time periods specified in the rules and forms issued by the Securities and
Exchange Commission. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer or officers and its
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, and there were no corrective actions with
regard to significant deficiencies and material weaknesses.
22
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELCATH SYSTEMS, Inc.
Registrant
/s/ M. S. Koly
----------------------------
M. S. Koly, President
March 12, 2003
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 resident, Chief Executive March 12, 2003
----------------------------- fficer, Treasurer and Director
M. S. Koly Principal Executive Officer)
/s/ Thomas S. Grogan Chief Financial Officer March 12, 2003
----------------------------- (Principal Financial Officer
Thomas S. Grogan and Principal Accounting Officer)
/s/ Samuel Herschkowitz, M.D. Chairman of the Board March 12, 2003
-----------------------------
Samuel Herschkowitz, M.D.
/s/ Mark Corigliano Director March 12, 2003
-----------------------------
Mark A. Corigliano
/s/ Daniel Isdaner Director March 12, 2003
-----------------------------
Daniel Isdaner
/s/ Victor Nevins Director March 12, 2003
-----------------------------
Victor Nevins
23
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 annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by others
within the registrant, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
/s/ M. S. Koly
------------------------------------------
M. S. Koly
Chief Executive Officer
(Principal executive officer)
24
CERTIFICATION
BY CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14
I, Thomas S. Grogan, certify that:
1. I have reviewed this annual report on Form 10-KSB of DELCATH
SYSTEMS, INC.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by others
within the registrant, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
/s/ Thomas S. Grogan
------------------------------------------
Thomas S. Grogan
Chief Financial Officer
(Principal financial officer)
25
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Index to Financial Statements
-----------------------------
Page
----
Independent Auditors' Report F-2
Balance Sheet as of December 31, 2002 F-3
Statements of Operations for the years ended December 31,
2002 and 2001 and cumulative from inception
(August 5, 1988) to December 31, 2002 F-4
Statements of Stockholders' Equity for the years ended
December 31, 2002 and 2001 and cumulative from
inception (August 5, 1988) to December 31, 2002 F-5
Statements of Cash Flows for the years ended December 31,
2002 and 2001 and cumulative from inception
(August 5, 1988) to December 31, 2002 F-6
Notes to Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Delcath Systems, Inc.:
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage company) as of December 31, 2002, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2002 and for the period from August 5, 1988
(inception) to December 31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Delcath Systems, Inc. (a
development stage company) as of December 31, 2002, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2002 and for the period from August 5, 1988 (inception) to December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
Eisner LLP
New York, NY
February 6, 2003
F-2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
2002
-----------
Assets
Current assets:
Cash and cash equivalents ................................................. $ 1,063,650
Certificate of deposit .................................................... 370,000
Interest receivable ....................................................... 5,406
Prepaid insurance ......................................................... 96,583
------------
Total current assets .................................... 1,535,639
Furniture and fixtures, net .................................................... 13,750
Deferred costs in connection with a proposed
financing transaction ..................................................... 238,571
Due from affiliate ............................................................. 24,000
------------
Total assets ............................................ $ 1,811,960
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 175,170
------------
Total current liabilities ............................... 175,170
------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding ........................... --
Common stock, $.01 par value; 15,000,000 shares authorized;
4,146,997 shares issued and 4,118,897 outstanding ...................... 41,189
Additional paid-in capital ................................................ 19,049,406
Deficit accumulated during development stage .............................. (17,453,805)
------------
Total stockholders' equity ................................. 1,636,790
------------
Total liabilities and stockholders' equity ................. $ 1,811,960
============
See accompanying notes to financial statements
F-3
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
Cumulative
from inception
Year ended December 31, (August 5, 1988)
----------------------------------- to
2002 2001 December 31, 2002
----------------------------------- --------------------------
Costs and expenses:
General and administrative expenses ........ $ 723,763 $ 953,652 $ 5,303,309
Research and development costs ............. 1,173,275 1,115,004 11,410,881
----------------------------------- --------------------------
Total costs and expenses ................ 1,897,038 2,068,656 16,714,190
----------------------------------- --------------------------
Operating loss .......................... (1,897,038) (2,068,656) (16,714,190)
Other income (expense):
Interest income ............................ 89,992 208,220 930,463
Interest expense ........................... -- (15,571) (171,473)
----------------------------------- --------------------------
Net loss ................................ $ (1,807,046) $ (1,876,007) $ (15,955,200)
================ ================= ==========================
Common share data:
Basic and diluted loss per share ........... $ (0.44) $ (0.48)
================ =================
Weighted average number of basic
and diluted common shares
outstanding .......................... 4,085,049 3,903,816
================ =================
See accompanying notes to financial statements.
F-4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Years ended December 31, 2002 and 2001 and
cumulative from inception (August 5, 1988) to December 31, 2002
Common stock $.01 par value Preferred Stock
-------------------------------------------------------------------------- ----------------
Issued In treasury Outstanding $.01 par value
------------------------- --------------------- ---------------------- ----------------
No. of No. of No. of No. of
shares Amount shares Amount shares Amount shares Amount
------------ -------- --------- ---------- ---------- -------- ------ ------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 ............... 621,089 $ 6,211 -- $ -- 621,089 $ 6,211 -- $ --
Sale of preferred stock,
August 22, 1988 ............... -- -- -- -- -- -- -- --
Shares returned as of March 8, 1990 -- -- (414,059) (4,141) (414,059) (4,141) -- --
Sale of stock, October 2, 1990 ..... -- -- 17,252 173 17,252 173 -- --
Sale of stock, January 23, 1991 .... -- -- 46,522 465 46,522 465 -- --
Sale of stock, August 30, 1991 ..... -- -- 1,353 14 1,353 14 -- --
Sale of stock, December 31, 1992 ... -- -- 103,515 1,035 103,515 1,035 -- --
Sale of stock, July 15, 1994 ....... -- -- 103,239 1,032 103,239 1,032 -- --
Sale of stock, December 19, 1996 ... -- -- 39,512 395 39,512 395 -- --
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 ............. 58,491 585 98,388 984 156,879 1,569 -- --
Sale of stock, December 31, 1997 ... 53,483 535 -- -- 53,483 535 -- --
Exercise of stock options .......... 13,802 138 3,450 35 17,252 173 -- --
Shares issued as compensation ...... 2,345 23 828 8 3,173 31 -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Shares issued in connection with
exercise of warrants .......... 21,568 216 -- -- 21,568 216 -- --
Sale of stock, January 16, 1998 ... 34,505 345 -- -- 34,505 345 -- --
Sale of stock, September 24, 1998 .. 3,450 35 -- -- 3,450 35 -- --
Shares returned, April 17, 1998 .... (3,450) (35) -- -- (3,450) (35) -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Exercise of stock options .......... 8,626 86 -- -- 8,626 86 -- --
Sale of stock, June 30, 1999 ....... 46,987 470 -- -- 46,987 470 -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Shares issued in connection with
exercise of warrants .......... 2,300 23 -- -- 2,300 23 -- --
Sale of stock, April 14, 2000 ...... 230,873 2,309 -- -- 230,873 2,309 -- --
Dividends paid on preferred stock .. 690,910 6,909 -- -- 690,910 6,909 -- --
Conversion of preferred stock ...... 833,873 8,339 -- -- 833,873 8,339 -- --
Sale of stock, October 19, 2000 .... 1,200,000 12,000 -- -- 1,200,000 12,000 -- --
Shares issued as compensation
for stock sale ................ 85,000 850 -- -- 85,000 850 -- --
Stock options issued as
compensation .................. -- -- -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 2000 .......... -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- ----- ----
Balance at December 31, 2000 ....... 3,903,852 39,039 -- -- 3,903,852 39,039 -- --
Sum of fractional common shares
cancelled after year 2000
stock splits .................. (36) (1) -- -- (36) (1) -- --
Stock warrants issued as
compensation .................. -- -- -- -- -- -- -- --
Net loss for year ended
December 31, 2001 ............. -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- -- -----
Balance at December 31, 2001 ....... 3,903,816 39,038 -- -- 3,903,816 $ 39,038 -- $ --
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
Net loss for year ended ............ -- -- -- -- -- -- -- --
December 31, 2002 ............. -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- -- -----
Balance at December 31, 2002 ....... 4,146,997 $ 41,470 (28,100) $ (281) 4,118,897 $ 41,189 -- $ --
============ ============ ============ ============ ============ ========== == =====
Class A Class B
preferred stock preferred stock
----------------------- ---------------------- Deficit
$.01 par value $.01 par value accumulated
----------------------- ---------------------- Additional during
No. of No. of paid-in development
shares Amount shares Amount 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 ............... 2,000,000 20,000 -- -- 480,000 -- 500,000
Shares returned as of March 8, 1990 -- -- -- -- 4,141 -- --
Sale of stock, October 2, 1990 ..... -- -- -- -- 24,827 -- 25,000
Sale of stock, January 23, 1991 .... -- -- 416,675 4,167 1,401,690 -- 1,406,322
Sale of stock, August 30, 1991 ..... -- -- -- -- 9,987 -- 10,001
Sale of stock, December 31, 1992 ... -- -- -- -- 1,013,969 -- 1,015,004
Sale of stock, July 15, 1994 ....... -- -- -- -- 1,120,968 -- 1,122,000
Sale of stock, December 19, 1996 ... -- -- -- -- 999,605 -- 1,000,000
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 ............. -- -- -- -- 1,703,395 -- 1,704,964
Sale of stock, December 31, 1997 ... -- -- -- -- 774,465 -- 775,000
Exercise of stock options .......... -- -- -- -- 30,827 -- 31,000
Shares issued as compensation ...... -- -- -- -- 34,454 -- 34,485
Amortization of compensatory
stock options granted ......... -- -- -- -- 2,496,347 -- 2,496,347
Forfeiture of stock options ........ -- -- -- -- (279,220) -- (279,220)
Shares issued in connection with
exercise of warrants .......... -- -- -- -- 234,182 -- 234,398
Sale of stock, January 16, 1998 ... -- -- -- -- 499,655 -- 500,000
Sale of stock, September 24, 1998 .. -- -- -- -- 56,965 -- 57,000
Shares returned, April 17, 1998 .... -- -- -- -- (4,965) -- (5,000)
Amortization of compensatory
stock options granted ......... -- -- -- -- 1,166,418 -- 1,166,418
Forfeiture of stock options ........ -- -- -- -- (407,189) -- (407,189)
Exercise of stock options .......... -- -- -- -- 67,414 -- 67,500
Sale of stock, June 30, 1999 ....... -- -- -- -- 775,722 -- 776,192
Amortization of compensatory
stock options granted ......... -- -- -- -- 98,186 -- 98,186
Forfeiture of stock options ........ -- -- -- -- (554,371) -- (554,371)
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 ...... (2,000,000) (20,000) (416,675) (4,167) 15,828 -- --
Sale of stock, October 19, 2000 .... -- -- -- -- 5,359,468 -- 5,371,468
Shares issued as compensation
for stock sale ................ -- -- -- -- (850) -- --
Stock options issued as
compensation .................. -- -- -- -- 3,800 -- 3,800
Deficit accumulated from inception
to December 31, 2000 .......... -- -- -- -- -- (12,272,147) (12,272,147)
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2000 ....... -- -- -- -- 18,637,159 (13,770,752) 4,905,446
Sum of fractional common shares
cancelled after year 2000
stock splits .................. -- -- -- -- 1 -- --
Stock warrants issued as
compensation .................. -- -- -- -- 198,000 -- 198,000
Net loss for year ended
December 31, 2001 ............. -- -- -- -- -- (1,876,007) (1,876,007)
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2001 ....... -- $ -- -- $ -- $ 18,835,160 $(15,646,759) $ 3,227,439
Sale of stock on April 3, 2002 ..... -- -- -- -- 265,068 -- 267,500
Repurchases of stock, November ..... -- -- -- -- (50,822) -- (51,103)
and December 2002
Net loss for year ended ............ -- -- -- -- -- (1,807,046) (1,807,046)
December 31, 2002 ............. -- -- -- -- -- -- --
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2002 ....... -- $ -- -- $ -- $ 19,049,406 $(17,433,805) $ 1,636,790
============ ============ =========== ============ ============ ============ ============
F-5
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
from inception
Year ended December 31, (August 5, 1988)
----------------------------------- to
2002 2001 December 31, 2002
---------------- ---------------- -----------------------------
Cash flows from operating activities:
Net loss .......................................... $ (1,807,046) $ (1,876,007) $ (15,955,200)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense ............. -- -- 2,520,170
Stock and warrant compensation expense
issued for consulting services .............. -- 198,000 236,286
Depreciation expense .......................... 6,410 5,014 21,174
Amortization of organization costs ............ -- -- 42,165
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses ....... (26,916) (501) (96,583)
Decrease (increase) in interest receivable .... 47,882 (20,920) (5,406)
Due from affiliate ............................ -- -- (24,000)
(Decrease) increase in accounts
payable and accrued expenses ................ (910) (622,835) 175,170
------------ ------------ -----------------------------
Net cash used in operating activities ..... (1,780,580) (2,317,249) (13,086,224)
------------ ------------ -----------------------------
Cash flows from investing activities:
Purchase of furniture and fixtures ................ (6,664) (13,260) (34,924)
Purchase of short-term investments ................ (370,000) (1,500,000) (2,900,000)
Proceeds from maturities of short-term
investments ..................................... 1,500,000 -- 2,530,000
Organization costs ................................ -- -- (42,165)
------------ ------------ -----------------------------
Net cash provided by (used in)
investing activities ................ 1,123,336 (1,513,260) (447,089)
------------ ------------ -----------------------------
Cash flows from financing activities:
Deferred costs in connection with a proposed
financing transaction ........................... (238,571) -- (238,571)
Net proceeds from sale of stock and exercise
of stock options and warrants ................... 267,500 -- 13,681,208
Repurchases of outstanding common stock ........... (51,103) -- (51,103)
Dividends paid .................................... -- -- (499,535)
(Repayments of) proceeds from short-term borrowings -- (230,000) 1,704,964
------------ ------------ -----------------------------
Net cash (used in) provided by financing
activities ................................ (22,174) (230,000) 14,596,963
------------ ------------ -----------------------------
(Decrease) increase in cash and cash
equivalents .......................... (679,418) (4,060,509) 1,063,650
Cash and cash equivalents at beginning of period ...... 1,743,068 5,803,577 --
------------ ------------ -----------------------------
Cash and cash equivalents at end of period ............ $ 1,063,650 $ 1,743,068 $ 1,063,650
============ ============ =============================
Cash paid for interest ................................ $ -- $ 36,141 $ 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, 2002 and 2001
(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-marketing approvals for the use of its delivery system
using doxorubicin and melphalan, chemotherapeutic agents, to treat
malignant melanoma that has spread to the liver.
(b) Basis of Financial Statement Presentation
The accounting and financial reporting policies of the Company
conform to accounting principles generally accepted in the United
States of America. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make assumptions
and estimates that impact the amounts reported in those
statements. Such assumptions and estimates are subject to change
in the future as additional information becomes available or as
circumstances are modified. Actual results could differ from these
estimates.
(c) Furniture and Fixtures
Furniture and fixtures are recorded at cost and are being
depreciated on a straight line basis over the estimated useful
lives of the assets of five years. Accumulated depreciation
amounted to $21,074 at December 31, 2002.
(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, 2002 and 2001
(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 expense is recorded on the date of grant only if the
current fair market value of the underlying stock exceeds the
exercise price. Fair market values of the Company's Common Stock
at the dates options were granted, prior to the Company's stock
becoming publicly traded, were based on third party sales of stock
at or around the dates options were granted, or in the absence of
such transactions, based on a determination by the board of
directors based on current available information. Such cost is
then recognized over the period the recipient is required to
perform services to earn such compensation. If a stock option does
not become vested because an employee fails to fulfill an
obligation, the estimate of compensation expense recorded in
previous periods is adjusted by decreasing compensation expense in
the period of forfeiture.
In 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," 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 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, 2002 and 2001
would have been increased to the pro forma amounts indicated as
follows:
2002 2001
-------------- --------------
Net loss $ (1,807,046) $ (1,876,007)
Stock-based employee compensation
expense included in net loss, net of
related tax effects
0 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effects
(44,769) (133,263)
Pro forma net loss (1,851,815) (2,009,270)
Loss per share (basic and diluted):
As reported $ (0.44) $ (0.48)
Pro forma (0.45) (0.51)
F-8
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
The per share weighted average fair value of stock options granted
during 2002 and 2001 was $.28 and $.30, respectively, estimated on
the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for the
grants for 2002 and 2001 , respectively: risk free interest rates
of 2.84% and 3.6%-4.95% respectively, and volatility of 41% and
26.7% - 36.3%, respectively, while no dividend yield and expected
lives of five years were assumed for both years.
(f) Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share", which requires presentation of both basic and diluted
earnings per share (EPS) on the face of the Statements of
Operations. Basic EPS excludes dilution, and is computed using the
weighted average number of common shares outstanding during the
period. The diluted EPS calculation assumes all dilutive stock
options or contracts to issue Common Stock were exercised or
converted into Common Stock at the beginning of the period.
For the years ended December 31, 2002 and 2001, the following
potential common shares were excluded from the computation of
diluted EPS because their effects would be antidilutive:
2002 2001
---- ----
Shares issuable upon exercise of options 1,145,684 902,936
Shares issuable upon exercise of warrants 1,516,985 1,626,938
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 6,781,566 6,408,690
--------- ---------
Totals 9,444,235 8,938,564
(g) Research and Development Costs
Research and development costs include the costs of materials,
personnel, outside services and applicable indirect costs incurred
in development of the Company's proprietary drug delivery system.
All such costs are charged to expense when incurred.
(h) Statements of Cash Flows
For purposes of the statements of cash flows, the Company
considers highly liquid debt instruments with maturities of three
months or less at date of acquisition to be cash equivalents. At
December 31, 2002 cash equivalents excluded a certificate of
deposit in the amount of $370,000.
F-9
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
(i) Reclassifications
Reclassifications have been made to reflect cost and expense
accounts on a functional basis for 2001 and prior, which is
consistent with the Company's current presentation.
Operating costs and expenses were previously presented as follows:
Cumulative
from inception
Year (August 5, 1988)
Ended to
December 31, December 31,
2001 2001
------------- --------------
Legal, consulting and accounting fees $ 1,034,025 $ 6,025,255
Stock option compensation expense -- 2,520,170
Compensation and related expenses 557,087 3,304,703
Other operating expenses 477,544 2,967,024
------------- --------------
Total costs and expenses $ 2,068,656 $ 14,817,152
------------- --------------
(j) Stock Splits
All share and per share amounts give retroactive effect to stock
splits effected by the Company.
(2) Stockholders' Equity
(a) Stock Issuances
BGH Medical Products, Inc. (name later changed to Delcath Systems,
Inc.), a Delaware corporation (BGH - Delaware), was formed on
August 5, 1988. As of August 22, 1988, BGH Medical Products, Inc.,
a Connecticut corporation (BGH - Conn.), was merged into BGH
-Delaware, the surviving corporation. As of the merger date, the
authorized capital stock of BGH - Conn. consisted of 5,000 shares
of common stock, par value $.01 per share, of which 1,000 shares
were issued and outstanding. Upon the merger, each BGH - Conn.
Common Share outstanding was exchanged into 621.089 BGH - Delaware
Common Shares. As a result of the conversion, BGH - Delaware
issued 621,089 shares of Common Stock at $.01 par value. The
aggregate amount of the par value of all Common Shares issued as a
result of the exchange, $6,211, was credited as the Common Stock
capital of BGH - Delaware, and the difference in respect to the
capital account deficiency was charged to additional paid-in
capital.
F-10
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
On August 22, 1988, BGH - Delaware then sold in a private
placement 2,000,000 shares of Class A Preferred Stock, with a par
value of $.01, to two affiliated venture capital funds for an
aggregate amount of $500,000 in cash.
On March 8, 1990, 414,059 shares of Common Stock were returned to
the Company by certain stockholders as treasury stock due to
relevant technology milestones not being fully achieved within the
specified time period, in accordance with provisions of a
stockholders' agreement.
Effective May 7, 1990, the Company changed its name to Delcath
Systems, Inc.
On October 2, 1990, the Company sold 17,252 shares of Common
Treasury Stock, $.01 par value, for an aggregate amount of
$25,000.
On January 23, 1991, the Company offered in a private placement
shares of Common Stock and/or Class B Preferred Stock at $7.39 and
$2.55 per share respectively for an aggregate maximum amount of
$2,000,000. Under the terms of the private placement, 46,522
shares of Common Treasury Stock and 416,675 shares of Class B
Preferred Stock were sold, yielding net proceeds to the Company of
$1,406,322. The Common Stock and Class B Preferred Stock sold each
has a par value of $.01, resulting in an increase in additional
paid-in capital of $1,401,690 The two affiliated venture capital
funds that owned the Class A Preferred Shares purchased 117,650 of
the Class B Preferred Shares sold in the private placement.
On August 30, 1991, the Company sold an additional 1,353 shares of
Common Treasury Stock at $7.39 per share, yielding proceeds to the
Company of $10,001. The shares have a par value of $.01, resulting
in an additional paid-in capital amount of $9,987.
In a December 1992 private placement, the Company sold 103,515
shares of Common Stock held in its treasury at $10.14 per share
for a total placement of $1,050,000 ($1,015,004 after expenses).
The shares issued have a par value of $.01, resulting in an
additional paid-in capital amount of $1,048,965 ($1,013,969 after
expenses). The two affiliated venture capital funds that owned the
Class A Preferred Shares purchased 27,604 of the Common Treasury
Shares sold.
Effective January 1, 1994, the Company issued 1,725 shares of
Common Treasury Stock at $1.45 per share for a total price of
$2,500 upon the exercise of stock options by an employee of the
Company.
During the first quarter of 1994, the Company increased its
authorized number of Common Shares from 5,000,000 to 15,000,000.
On July 15, 1994, the Company sold through a private placement
offering, units at a price of $51,000 per unit. Each unit
consisted of 4,693 Common Shares and 469 Warrants, each of which
entitled the holder to purchase one share of Common Stock for
$10.87. In connection therewith, the Company sold twenty-two (22)
units (103,239 Common Shares and 10,324 Warrants expiring August
30, 1997) for total proceeds of $1,122,000. The two affiliated
venture capital funds that owned the Class A Preferred Shares
purchased six (6) of the units sold. During
F-11
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
August 1997, the holders of Warrants exercised 8,916 Warrants to
purchase 8,916 Common Shares at $10.87 each for total proceeds of
$96,900. The remaining Warrants expired unexercised.
Effective January 1, 1995, the Company issued 1,725 shares of
Common Treasury Stock at $1.45 per share for a total price of
$2,500 upon the exercise of stock options by an employee of the
Company.
Effective January 1, 1996, the Company issued 828 shares of Common
Stock, valued at $10.87 per share for a total of $9,000, as
compensation for consulting services.
On December 19, 1996, the Company sold through a private
transaction 39,512 shares of Common Stock for total proceeds of
$1,000,000. In connection with the offering, the purchaser
obtained sole distribution rights for the Company's products in
Japan, Korea, China, Taiwan, and Hong Kong through December 31,
2004. No value was attributed to the distribution rights. In
addition, under certain conditions, the purchaser will be required
to buy certain products from the Company.
On April 26, 1996, the Company entered into short-term borrowing
agreements with 26 investors under which it borrowed $1,704,964
bearing interest at 10.25% per annum. Under the terms of the
agreements, on December 22, 1996, the short-term borrowings were
converted into 156,879 shares of Common Stock, based on a
conversion price of $10.87 per share, and 78,438 Warrants,
expiring April 25, 1999, entitling the holders to purchase 78,438
additional shares of Common Stock at $10.87 per share. The two
affiliated venture capital funds discussed above provided $250,000
of the short-term loan, converting that debt into approximately
23,003 shares of Common Stock and 11,502 Warrants. From April 26,
1996 through December 22, 1996, interest of $114,948 accrued on
the borrowings. Such interest was paid in January 1997. During
September 1997, the holders of Warrants exercised 1,150 Warrants
to purchase 1,150 Common Shares at $10.87 each for total proceeds
of $12,499. During December 1997, the two affiliated venture
capital funds exercised their 11,502 Warrants to purchase 11,502
Common Shares at $10.87 each for total proceeds of $124,999.
During April 1999, the holders of Warrants exercised 2,300
Warrants to purchase 2,300 Common Shares at $10.87 each for total
proceeds of $24,998. The remaining Warrants expired unexercised.
In 1997, the Company issued 2,345 shares of Common Stock, valued
at $10.87 per share based on a 1996 agreement, for a total cost of
$25,485, as compensation for consulting services.
From September 1997 through December 31, 1997, the Company
received $775,000 and issued 53,483 shares of Common Stock. During
January 1998, the Company received an additional $500,000 and
issued another 34,505 shares of Common Stock. In April 1998, under
the terms of restricted stock sale agreements, the Company issued
to the purchasers of the 87,988 shares of Common Stock 11,732
three-year Warrants entitling the holders to purchase 11,732
Common Shares at $10.87 per share. These Warrants expired
unexercised in April 2001.
F-12
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
In December 1997, the holder of non-incentive stock options
exercised 13,802 options to purchase 13,802 restricted Common
Shares at $1.88 each for total proceeds of $26,000.
In April 1998, a venture capital firm exercised 8,626
non-incentive stock options to purchase 8,626 restricted Common
Shares at $7.83 each for total proceeds of $67,500.
In April 1998, in connection with the settlement of a dispute with
a former director, the Company cancelled 3,450 shares of Common
Stock previously held by the former director in return for $1.45
per share, the price originally paid by the former director.
In September 1998, the Company sold 3,450 shares of restricted
Common Stock to an individual for $16.52 per share, yielding
proceeds to the Company of $57,000.
In June 1999, the Company sold 46,987 shares of Common Stock to
individual investors for $16.52 per share and Warrants entitling
the holders to purchase 5,218 Common Shares at $14.87 per share
(which warrants expired April 30, 2002), yielding proceeds to the
Company of $776,192.
In April 2000, the Company sold 230,873 Common Shares at $2.17 per
share to existing stockholders in a rights offering yielding
proceeds to the Company of $501,825.
The Company completed an initial public offering ("IPO") on
October 19, 2000 of 1,200,000 units for $6.00 per unit, each unit
consisting of one share of Common Stock and one redeemable Warrant
to purchase one share of Common Stock at a price of $6.60 until
October 18, 2005. In connection with the initial public offering,
the Company received $7,200,000 before offering costs ($5,371,468
after expenses). The Company also issued to the underwriter
Warrants to purchase 120,000 units for $6.60 per unit, each unit
consisting of one Common Share and one redeemable Warrant to
purchase one share of Common Stock at a price of $10.50 until
October 18, 2005. The Company also issued 85,000 shares of Common
Stock valued at $510,000 for legal services provided in connection
with the offering.
Also, in connection with the initial public offering, the holders
of the 2,000,000 outstanding shares of the Company's Class A
Preferred Stock and the 416,675 outstanding shares of the
Company's Class B Preferred Stock agreed to convert their shares
into Common Stock prior to the closing of the offering. Upon the
conversion of the Company's Class A Preferred Stock and the
Company's Class B Preferred Stock into 833,873 shares of Common
Stock, the holders of the Class A and Class B shares received an
aggregate of $499,535 in cash and 690,910 shares of Common Stock
valued at $999,070 in payment of declared dividends.
In December 2000, the Company issued 1,720 Common Stock options at
an exercise price of $3.31, fair valued at $2.21 per option for a
total of $3,800, and 1,720 Warrants to purchase Common Stock at an
exercise price of $6.00, fair valued at $0 per Warrant, as
compensation for consulting services. Both the options and
Warrants expire December 1, 2005.
The Company issued the following common stock warrants in 2001 for
consulting services:
F-13
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
(1) 150,000 fully vested warrants to purchase 150,000 units at
$7.00 per unit, through January 4, 2005, each unit consisting of
one fully-paid and non-assessable share of common stock, and one
Common Stock Purchase Warrant entitling the holder to purchase one
share of Common Stock for $6.60 per share. None of these warrants
have been exercised as of December 31, 2002. Such warrants, valued
at $175,000, were recognized as an expense in the first quarter of
2001.
(2) 150,000 warrants to purchase up to 150,000 shares of Common
Stock, through April 30, 2005, for $6.60 per share. 25,000 of such
warrants vested in 2001 and the remaining 125,000 warrants would
have vested if the share price of the Company's Common Stock
exceeded certain share price levels above the IPO price by May
2002. As of May 2002, none of the thresholds had been met, and the
125,000 remaining warrants did not vest and were forfeited. None
of the 25,000 vested warrants had been exercised as of December
31, 2002. The 25,000 vested, non-contingent warrants have been
valued at $23,000, and were recognized as an expense in the first
quarter of 2001. The expenses, as noted in (1) and (2) above,
recognized with these two warrant issues are non-cash expenses.
The values of the above warrants were $1.17 per warrant for
warrants described in (1) above, and $ .90 per warrant for the
25,000 warrants that vested immediately described in (2) above,
and were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions, respectively: risk free interest rates of 4.95% and
5.9%, volatility of 26.7% and 22.9%, expected lives of four years
and four and one half years, with no dividend yield for either
issue.
In 2001, the Company cancelled a total of 36 shares of Common
Stock which represented the total of fractional shares resulting
from stock splits during September and October 2000 in connection
with the Company's initial public offering.
On October 30, 2001, the Company entered into a Rights Agreement
with American Stock Transfer & Trust Company (the "Rights
Agreement") in connection with the implementation of the Company's
stockholder rights plan (the "Rights Plan"). The purposes of the
Rights Plan are to deter, and protect the Company's shareholders
from, certain coercive and otherwise unfair takeover tactics and
to enable the Board of Directors to represent effectively the
interests of shareholders in the event of a takeover attempt. The
Rights Plan does not deter negotiated 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.
F-14
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
On April 3, 2002, the Company received $267,500 by completing a
private placement of 243,181 shares of its Common Stock and
warrants to purchase up to 20,265 shares of Common Stock at an
exercise price of $1.32 per share that expire on April 3, 2005.
(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 outstanding Common Stock.
(c) Stock Option Plans
The Company established an Incentive Stock Option Plan, a
Non-Incentive Stock Option Plan, the 2000 Stock Option Plan and
the 2001 Stock Option Plan (collectively, the "Plans") under which
stock options may be granted. Additionally, the Company has
entered into separate contracts apart from the Plans under which
options to purchase Common Stock have been granted. A stock option
grant allows the holder of the option to purchase a share of the
Company's Common Stock in the future at a stated price. The Plans
are administered by the Compensation Committee of 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 and
2001, respectively, the 2000 and 2001 Stock Option Plans became
effective. Options granted under the Plans vest as determined by
the Company and expire over varying terms, but not more than five
years from the date of grant. Stock option activity for the period
January 1, 2001 through December 31, 2002 is as follows:
The Plans Other Option Grants
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at
December 31, 2000 689,684 $ 3.82 17,252 $ 2.90
Granted during 2001 280,000 .83 -- --
Expired during 2001 (84,000) 3.31 -- --
---------- -------
Outstanding at
December 31, 2001 885,684 2.94 17,252 2.90
Granted during 2002 260,000 .71 -- --
F-15
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
The Plans Other Option Grants
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Expired during 2002 -- (17,252) 2.90
---------- -------
Outstanding at
December 31, 2002 1,145,684 $ 2.43 -- $ --
========== =======
The following summarizes information about shares subject to option at
December 31, 2002:
Options outstanding Options exercisable
---------------------------------------------------------------------------- -------------------------------
Weighted
Weighted average Weighted
Number Range of average remaining Number average
outstanding exercise prices exercise price life in years exercisable exercise price
----------------- ------------------- ------------------ ---------------- ----------- ----------------
100,000 $ .60 $ .60 3.92 50,000 $ .60
260,000 .71 .71 4.25 .71
150,000 .85 .85 4.00 66,000 .85
30,000 1.53 1.53 3.67 7,500 1.53
172,525 2.90 2.90 2.00 172,525 2.90
164,020 3.31 3.31 2.95 164,020 3.31
269,139 4.93 4.93 1.00 269,139 4.93
------- -------
1,145,684 $ .60 - $4.93 $2.43 2.88 729,184 $3.38
========= ============= ===== ==== ======= =====
At December 31, 2001, options for 622,936 shares were exercisable at a
weighted average exercise price of $3.89 per share.
(3) Income Taxes
As of December 31, 2002, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$12,882,000 which may be available to offset future federal taxable
income, if any, through 2022. The use of net operating loss
carryforwards is subject to limitation in the event of a change in
the Company's ownership, as defined by Federal income tax
regulations. The net operating loss carryforwards resulted in a
deferred tax asset of approximately $4,380,000 at December 31, 2002
($3,777,000 at December 31, 2001). Management does not expect the
Company to be taxable in the near future and established a 100%
valuation allowance against the deferred tax asset created by the
net operating loss carryforwards at December 31, 2002 and 2001. The
valuation allowance increased $603,000
F-16
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2002 and 2001
during the year ended December 31, 2002, and $568,000 during the
year ended December 31, 2001.
(4) Due From Affiliate
The Company sublet office space from a corporation controlled by an
officer of the Company (the "affiliate"), whose lease with the
landlord expired August 1997. Thereafter, the Company's occupancy of
the premises continued pursuant to an informal arrangement, under
which the Company remitted monthly rental payments directly to the
landlord. Rent expense incurred pursuant to this arrangement
amounted to $87,376 for 2001. The informal arrangement was replaced
as of January 1, 2002 with a lease agreement between the Company and
the landlord (see Note 6). In connection with its occupancy, the
Company paid the affiliate $24,000 which the affiliate then paid to
the landlord as a deposit on the lease.
(5) Deferred Costs in Connection with a Proposed Financing Transaction
On December 5, 2002 the Company filed with the Securities and
Exchange Commission a registration statement for the issuance of
units, each unit to consist of common shares and warrants to
purchase common shares. The Company has incurred $238,571 of costs
associated with the transaction. These costs will be netted against
the proceeds from the stock offering and charged to additional paid
in capital, or charged to expense if the transaction is not
consummated. As of December 31, 2002, $21,705 of these costs were
accrued.
(6) Rents
On April 1, 2002, the Company executed an Amendment of Lease (the
"Amendment") directly with the landlord. The Amendment is effective
January 1, 2002 and expires December 22, 2003, and can be renewed by
the Company for an additional three years. Rent expense under this
lease for the year ended December 31, 2002 was $89,082. Future
minimum rent under this lease is $91,055 for the year ending
December 31, 2003.
(7) Subsequent Event
On January 31, 2003, the stockholders voted to approve an amendment
to the Company's certificate of incorporation to increase the
authorized number of shares of Common Stock, par value $0.01 per
share, from 15 million to 35 million.
F-17