UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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x
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31,
2008
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period
from
____________ to ____________
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Commission
file number: 001-16133
DELCATH
SYSTEMS, INC.
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Delaware
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06-1245881
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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600
Fifth Avenue, 23rd Floor, New York, NY
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10020
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(Address
of principal executive offices)
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(Zip
Code)
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212-489-2100
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, par value $0.01 per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.
Yes o No x
Indicate
by check mark whether the registrant (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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act).
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Large
accelerated filer
o
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Accelerated
filer x
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Non-accelerated filer o (Do not check if smaller reporting company)
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Smaller reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No x
The
aggregate market value of the voting common stock held by non-affiliates of the
issuer, based on the closing sales price of $2.46 per share, was $54,859,341 as
of June 30, 2008.
At
February 19, 2009, the registrant had outstanding 25,383,354 shares of par value
$0.01 Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant’s Proxy Statement for its 2009 Annual Meeting of Stockholders is
incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this
Form 10-K. The definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year covered
by this Form 10-K.
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PART
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PART
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PART
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34
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General
Delcath
Systems, Inc. (“we,” “us,” “our,” “Delcath,” or the “Company”) is a development
stage company that has developed an innovative device designed to administer
high dose chemotherapy and other therapeutic agents to diseased organs or
regions of the body. The Company was incorporated in the State of Delaware
in 1988 and since its inception has focused its efforts on the development of a
single product, The Delcath PHP System™, that isolates the circulatory system of
a specific organ or body region in order to deliver high dose chemotherapy or
other therapeutic agents directly to that diseased organ or body region. The
first application being tested with our system is for the treatment of cancers
of the liver. The Delcath PHP System™ isolates the liver from the
patient’s general circulatory system and delivers high doses of the
chemotherapeutic drug, melphalan hydrochloride, directly to tumors in the liver
while avoiding most of the toxicities that normally result from such high doses
of drug. In 2006, the Company began a Phase III clinical trial to
support the United States Food and Drug Administration (the “FDA”) approval
process for the Delcath PHP System™, however, the Delcath PHP System™ is not
currently approved by the FDA, and it cannot be marketed in the United States
without FDA pre-market approval. The trial is ongoing, and the Company expects
to complete enrollment of the trial in 2009.
Delcath
has also received approval from the FDA to begin working on a Phase III clinical
trial that will focus on the effectiveness of the Delcath PHP System™ in
administering high-dose doxorubicin as compared with standard systemic treatment
with the drug sorafenib for the treatment of primary liver
cancer. The Company is also conducting Phase II clinical trials,
testing the Delcath PHP System™ with the drug melphalan against hepatocellular
tumors (primary liver cancer) and neuroendocrine and adenocarcinoma tumors that
have spread to the liver, as well as melanomas metastatic to the liver that have
received certain prior regional treatment.
In the
future, we plan to conduct pre-clinical and clinical trials using the Delcath
PHP System™ with other chemotherapy agents to treat cancer in the liver. Since
our inception, we have raised approximately $52.7 million in aggregate funds
(net of fundraising expenses), and we have invested approximately $29.4 million
of those funds in research and development costs associated with development and
testing of the Delcath PHP System™. In the years ended December 31 2008, 2007
and 2006 we invested $5.4 million, $4.2 million and $2.7 million, respectively
on research and development activities. Delcath maintains a website at
www.delcath.com.
Strategy
We are
seeking to establish the Delcath PHP System™ as the standard technique for
delivering high dose chemotherapy agents directly to the liver and to further
develop and test the Delcath technology so that it can be used in the treatment
of other liver diseases as well as in other organs or regions of the
body. We seek to generate growth, revenues and high returns for our
stockholders through a strategy that includes the following
elements:
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Complete our clinical
trial and obtain FDA pre-market approval for use of the Delcath PHP
System™ with melphalan to
treat malignant melanoma that has spread to the liver. Our highest
priority is completing this Phase III clinical trial and related data
preparation, statistical analysis and filing of necessary regulatory
documents associated with an application for FDA pre-market approval of
the commercial sale of the Delcath PHP System™ in the United States for
the treatment of melanoma that has spread to the liver. Clinical trials of
the Delcath PHP System™ are
currently being enrolled at eleven hospitals in the U.S., led by the
National Cancer Institute (the
“NCI”).
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Obtain approval to
market the Delcath PHP System™ in the United States
for the treatment of cancers in addition to melanoma in the liver.
We are testing the System for the treatment of other cancers of the liver,
such as primary liver cancer, tumors of neuroendocrine and adenocarcinoma
origin that have spread to the liver, as well as melanomas in the liver
that received certain prior regional treatment with the drug
melphalan.
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Test the Delcath PHP
System™
with drugs other than melphalan for the treatment of cancers of the
liver We have tested the drugs doxorubicin and 5-FU with our system in
humans and we intend to evaluate other promising drug candidates for use
with the System to treat other tumors in the
liver.
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Explore other regional
therapy applications for the Delcath PHP System™. We are evaluating
the treatment of other organs and regions of the body that may be well
suited for the use of our technology. Other organs or body regions that
may be evaluated for compatibility with our technology include limbs,
kidneys, pancreas, and lungs.
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Investigate treatment
of hepatitis using anti-viral drugs. We believe that our technology
may be compatible with other compounds, including anti-virals, to treat
other diseases of the liver such as
hepatitis.
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Improve our
technology. We continue to identify improvements and modifications
to our technology with the goal of increasing potential drug dosing,
simplifying the procedure, shortening procedure recovery times and
expanding the uses of the Delcath PHP System™. These changes may include
new catheter designs, system architectures and the development of filters
with affinity to specific agents.
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Introduce the Delcath
PHP System™ into non-US
markets. We may seek to establish strategic relationships with
domestic or foreign firms that have an established presence or experience
in certain foreign markets. Our strategy focuses on markets that have both
a high incidence of liver disease and the public or private means to
provide and pay for the medical treatments associated with our technology.
We may explore arrangements with strategic partners who have experience in
obtaining the necessary regulatory approvals and marketing of medical
devices in markets that have high incidences of cancer and liver
disease.
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The
Cancer Treatment Market
According
to “Cancer Facts and Figures 2008,” cancer remains the second leading cause of
death in the United States exceeded only by heart disease. The most commonly
used treatments for cancers of the liver include surgical resection,
chemotherapy, radiation and hormone therapy.
The
financial burden of cancer is great for patients, their families and society.
“Cancer Facts & Figures 2008,” estimates the overall costs of cancer to be
$219.2 billion during 2007 including $89.0 billion for direct medical costs,
$18.2 billion for indirect morbidity costs attributable to lost productivity due
to illness and $112.0 billion for indirect mortality costs attributable to lost
productivity due to premature death.
The
Liver Cancer Market
Liver
cancer is one of the most prevalent and lethal forms of cancer. There are two
forms of liver cancer: primary and metastatic. Primary liver cancer is cancer
that originates in the liver. Metastatic or secondary cancer is cancer that has
spread from other places in the body to the liver. In our clinical trials, we
are treating both primary liver cancer and metastatic cancers in the
liver. According to the American Cancer Society’s “Cancer Facts &
Figures 2008,” the five-year survival rate for liver cancer patients is
approximately 10.8%, compared to 66% for all other forms of cancer combined. The
preferred method to treat liver cancer, once detected, is surgical removal of
the diseased portion of the liver. Frequently, symptoms of liver cancer do not
appear until the liver tumors have spread broadly within the liver, making
surgical resection impractical. As a consequence, less than 10% of primary and
metastatic liver tumors can be surgically removed. A significant number of
patients who are surgically resected for primary or metastatic liver cancer will
also experience a recurrence of their disease.
Metastatic
liver cancer is characterized by microscopic cancer cell clusters that detach
from the primary site of disease 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 in another part of the body.
Once these cancer cells enter the liver and develop into tumors, they tend to
grow very quickly. In many cases, patients die not as a result of their primary
cancer, but from the tumors that develop in their liver. Humans
cannot survive without a liver capable of performing its critical biological
functions, which include converting food into energy and filtering toxins from
the blood. Due to numerous factors, including the absence of viable treatment
options, metastatic liver cancer often causes death.
According
to Global Cancer Facts & Figures 2007 liver cancer is the third
leading cause of cancer death in men and the sixth leading cause among women. In
2007, there were estimated to be 711,000 new liver cancer cases worldwide
and 680,000 people
worldwide were projected to die from liver cancer in 2007. The incidence
of liver cancer has been steadily increasing in the United States over the past
two decades largely due to an increase in the rate of hepatitis
infection.
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. In Asia, liver cancer and diseases of the liver are one of the most
prevalent lethal diseases in males under the age of 35. The largest need for
effective treatments of primary liver cancer is found in Southern Europe and in
Asia.
Current
Liver Cancer Treatments
Limited
effective treatment options are currently available for liver cancer, and they
are generally associated with significant side effects and can even cause death.
Traditional treatment options, discussed in more detail below, include surgery,
liver transplant, chemotherapy, cryosurgery, percutaneous ethanol injection,
radiation therapy, including selective internal radiation therapy, implanted
infusion pumps and surgically isolated perfusion.
Resection
Surgical
resection is considered the “gold standard” treatment option for liver tumors,
however, approximately 90% of liver tumors are unresectable, which means they do
not qualify for surgical removal. For the patients who qualify for surgery,
there can be significant complications related to the procedure. Recurrence of
tumors is common, and in that event, surgery typically cannot be
repeated.
By
reducing the size and number of tumors by an amount sufficient to make resection
feasible, we believe that, in some cases, delivery of drugs with the Delcath PHP
System™ may allow for a surgical option for tumors that are currently
inoperable. Chemotherapy can also be administered through the Delcath
PHP System™ after resection with the objective of destroying micro metastases in
the liver that may remain undetected, thus preventing or delaying any recurrence
of tumor growth.
Transplant
Transplanting
a healthy donor liver into a patient with a diseased liver is rarely performed
due to the low availability of donor organs and the high probability of tumor
recurrence within the transplanted liver.
Chemotherapy
The most
prevalent form of liver cancer treatment is intravenous
chemotherapy. The effectiveness of this treatment option can be
dependent on the dose of chemotherapeutic drug administered. Generally, the
higher the dosage of chemotherapy administered, the greater its ability to kill
cancer cells, but due to the toxic side effects of chemotherapy agents, the
higher the dosage administered, the greater the damage chemotherapy agents cause
to healthy tissues. As a result, the high doses of chemotherapy that may be
required to kill cancer cells can be highly toxic or even lethal to
patients.
The side
effects caused by melphalan, the drug in our current clinical trials, are
similar to the side effects associated with a number of other chemotherapy
agents. Melphalan can cause severe mucositis leading to ulceration of the mouth
and digestive organs, can damage a patient’s immune system through destruction
of bone marrow cells, and cause acute nausea, severe vomiting, dermatological
problems and hair loss. The use of melphalan can be fatal even when administered
with careful patient monitoring.
Recently,
an oral chemotherapy, sorafenib, was approved as a treatment for patients with
unresectable hepatocellular carcinoma (“HCC”) or primary liver cancer.
Results of a clinical trial testing sorafenib demonstrated an increase in
overall survival of patients receiving this drug when compared against patients
receiving a placebo. The increased survival benefit was reported to be less than
three months. Subsequent to the approval of sorafenib as a treatment
for HCC, Delcath received approval from the FDA to initiate a Phase III trial
for the treatment of primary liver cancer with the Delcath PHP System™ versus a
control arm receiving sorafenib.
Cryosurgery
Cryosurgery
is the destruction of cancer cells using sub-zero temperatures. 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 into the
tumor, effectively freezing it. Cryosurgery involves a cycle of treatments in
which the tumor is frozen, allowed to thaw and then refrozen.
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 less effective against large tumors. Complications can
include pain and the potential introduction of alcohol into the 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 being withdrawn from the
tumor.
Radiation
Therapy
Radiation
therapy uses high dose x-rays or the delivery of localized radiation to kill
cancer cells. Radiation therapy using x-rays is not considered an effective
means of treating liver cancer and is rarely used for this purpose. A number of
localized radiation delivery mechanisms are currently being used and tested, and
may hold some effectiveness against certain types of liver cancers. In selective
internal radiation therapy, also known as SIRT, tiny beads or microspheres that
contain a radioactive isotope are administered through a catheter in the liver
where they lodge in small vessels in order to deliver radiation to the
tumor.
Radio
Frequency Ablation
Radio
frequency ablation uses electric current to destroy cancerous cells. The
procedure utilizes an ultrasound or CT scan to guide several needles into the
abdomen through small incisions. The needles are heated with an electric current
that burns the tumor and destroys the cancerous cells. This procedure is used
for patients with a limited number of smaller unresectable tumors.
Microwave
Ablation
Microwave
ablation is an experimental therapy similar to Radio Frequency Ablation that
uses microwaves instead of electrical current to destroy tumor
cells. Some physicians believe that the use of microwaves can enhance
the targeting tumors when compared to Radio Frequency Ablation.
Chemoembolization
Chemoembolization
is a commonly used therapy that involves the injection of a chemotherapeutic
drug in combination with a chemical to block normal blood flow into tumors in
the liver. Blocking blood flow deprives the tumor of essential oxygen
and nutrients and ultimately can kill the tumor.
Hepatic
Artery Infusion
Hepatic
artery infusion involves the injection of chemotherapeutic drugs directly into
the artery supplying blood to the liver. Because the chemotherapy agents pass
from the liver into the patient’s general circulation, hepatic arterial infusion
has similar toxicities to systemic administration and limits the ability to
administer higher doses of chemotherapy.
Implanted
Infusion Pumps
Implanted
infusion pumps can be used to target the delivery of chemotherapy agents to the
tumor. The pump is surgically implanted under the skin and delivers regular
doses of chemotherapeutic agents to a targeted area over time. This pump does
not prevent the entry of chemotherapy agents into the patient’s general
circulation after it passes through the liver. As a result, this technique
limits the ability to administer higher doses of chemotherapy.
Surgically
Isolated Perfusion
Physicians
have experimented with techniques to surgically isolate the liver from the
general circulatory system and to achieve a targeted delivery of chemotherapy
agents to the liver at higher than normal doses. In the 1980’s, a physician in
Germany published a surgical procedure that involved surgically clamping the
arteries and veins supplying the liver with blood while infusing high dosages of
chemotherapy agents directly into the liver. A blood filtration circuit reduced
drug concentrations before returning the diverted blood to the patient.
Regionalized isolated delivery can provide improved dosing while sparing
patients from some of the drug’s toxic effects on healthy tissue. The
treatment was not broadly adopted by the medical community because it is highly
invasive, and resulted in prolonged recovery times and long hospital stays at
very high costs. The Delcath PHP System™ was designed to improve upon and
overcome some of the shortcomings of this surgical approach.
Other
Methods of Treatment
Other
liver cancer treatments include gene therapy, hyperthermia and the use of
biological response modulators, monoclonal antibodies and liposomes. Many of
these treatment options are experimental, and their effectiveness is either
limited or unknown, or have dose limiting side effects.
Treatment with
the Delcath PHP System™
The
Delcath PHP System™ is designed to address the critical shortcomings of
conventional intravenous chemotherapy for the treatment of various cancers. The
Delcath PHP System™ isolates the liver from the patient’s general circulatory
system, allowing for the administration of high doses of chemotherapeutic drugs
directly to the isolated liver. The Delcath PHP System™ then captures and
diverts the flow of blood exiting the liver, which contains high doses of
chemotherapeutic agents. The blood passes through filters located
outside of the body that removes substantially all of these high doses of
chemotherapy from the blood before it is reintroduced to the patient’s general
circulatory system. By filtering out most of the high doses of drug,
healthy tissues and organs are less likely to be exposed to the harmful side
effects of these higher doses of chemotherapy. Based on human clinical data, we
believe that the Delcath PHP System™ allows for higher chemotherapy doses to be
delivered to the liver than can be administered by conventional intravenous
delivery. By delivering higher doses of the chemotherapy agent to the liver than
what would otherwise be possible via conventional chemotherapy, the treatment
kills a higher number of cancer cells and may lead to better clinical
outcomes.
The
Delcath PHP System™ kit includes the following disposable components
manufactured for Delcath by original equipment manufacturers:
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Infusion
catheter — an arterial infusion catheter used to deliver chemotherapy to
the liver.
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Double
balloon catheter — a multi-passageway catheter containing two low-pressure
occlusion balloons which are positioned to isolate and capture the blood
flow from the liver. The space between the balloons contains holes that
collect the drug-laden blood exiting the liver and divert it outside of
the body through the catheter to the filtration
circuit.
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Extracorporeal
filtration circuit — a blood tubing circuit containing disposable
components used with a non-disposable blood pump which push the isolated
blood through the System’s filters and guide the cleansed blood back to
the patient.
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Filters
— two activated carbon hemoperfusion filters used to remove most of the
chemotherapy agent from the isolated blood coming out of the liver before
the blood is returned to the patient’s general circulatory
system.
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Return
catheter — a thin-walled blood sheath used to deliver the filtered blood
from the extracorporeal filtration circuit back into the patient’s general
circulatory system.
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Series
of introducers and related accessories to properly place the
catheters.
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The
double balloon catheter has one large passageway and three smaller passageways.
Each of two low-pressure occlusion balloons is inflated via two of the three
smaller passageways. Blood flows out of the liver through the catheter’s large
passageway towards the filtration system. Attached to the large passageway, a
separate access port is designed for sampling fluid or flushing the system. The
third smaller passageway allows some blood exiting the legs and kidneys to
bypass the isolated segment of the body and return normally to the
heart.
The
Delcath PHP System™ involves a series of three catheter insertions, each of
which is made through the skin. During clinical test procedures, patients are
treated with intravenous sedation. In most cases to date general anesthesia has
been used. An infusion catheter is positioned in the artery that supplies blood
to the liver. A second catheter — the Delcath double balloon catheter — is
positioned in the inferior vena cava, a major vessel leading back to the
heart.
The
balloons on the double balloon catheter are then inflated. This procedure
prevents the normal flow of blood from the liver to the heart through the
inferior vena cava because the inferior vena cava has been blocked. After
isolation of the liver is confirmed, a chemotherapy agent is infused into the
liver through the infusion catheter. The drug-laden blood is prevented from
flowing to the heart and instead is collected as it exits the liver through the
double balloon catheter. Blood flows through the double balloon
catheter out of the body where it is pumped through two activated charcoal
filters to remove most of the chemotherapy agent. The filtered blood is returned
to the patient’s general circulatory system through the jugular vein. In our
clinical trials, chemotherapy infusion takes place over a period of thirty
minutes. Filtration occurs during infusion and for an additional thirty minutes
after the infusion is completed. After the sixty-minute filtration period is
complete, the catheters are removed and manual pressure is maintained on the
catheter puncture sites. The entire procedure takes approximately two to three
hours to administer.
During
our clinical trials, patients typically remain in the hospital overnight for
observation after undergoing treatment with the Delcath PHP System™. In time, we
expect the procedure to be performed on an outpatient basis, with the patient
resuming normal activities the day after the procedure is performed. An
advantage of the Delcath PHP System™ is that the procedure is repeatable and we
expect a patient to undergo an average of four treatments at approximately
one-month intervals. A new disposable Delcath PHP System™ kit is used for each
treatment.
Our
Clinical Trials
Following
completion of the Phase I trials at the NCI, Delcath met with the FDA to request
approval to move directly from the completed Phase I study of melphalan to a
Phase III trial of patients with melanoma metastatic to the liver. The FDA
granted Fast Track review status to the protocol and allowed Delcath to submit
the study under the provision of a Special Protocol Assessment (“SPA”). The FDA
granted an SPA for this trial in March 2006. The protocol covered by the SPA
Agreement calls for the treatment of 92 patients, equally randomized to either
the Delcath PHP System™ treatment or to receive “Best Available Care” in the
control arm of the trial. The primary efficacy endpoint for the trial is hepatic
progression free survival, which is defined as the length of time a patient is
both alive and free from any significant increase in the size of the tumor
within their liver (free from progression). Under the SPA Agreement, a patient
treated as part of the Best Available Care control group who has experienced
progression of their liver disease and thus met the primary trial endpoint may
be eligible to cross over and be treated with the Delcath PHP
System™. Patients are currently being treated at the NCI and at ten
additional clinical trial centers that were added to the trial during
2008.
We intend
to demonstrate that administering melphalan with the Delcath PHP System™ results
in better patient treatment outcomes than those obtained from other available
treatments in patients with malignant melanoma that has spread to the liver.
Phase III clinical trials are a prerequisite for FDA approval of Delcath’s
pre-market application. These trials are intended to demonstrate that the
administration of melphalan through the Delcath PHP System™ is safe and
effective for the treatment of melanoma in the liver.
The FDA
pre-market approval we are currently pursuing is for the administration of
melphalan with the Delcath PHP System™ to treat patients suffering from
metastatic melanoma that has spread to the liver. If we are granted this
approval, we plan to seek additional FDA pre-market approvals for using the
Delcath PHP System™ with other chemotherapy agents and for the treatment of
other liver cancers. The process of applying for and obtaining regulatory
approvals involves rigorous pre-clinical and clinical testing. The time,
resources and funds required for completing necessary testing and obtaining
approvals is significant, and FDA pre-market approval may never be
obtained. If we fail to raise additional capital or to enter into
strategic partnerships to finance this testing or if we fail to obtain the
required approvals, our potential growth and the expansion of our business would
likely be limited.
Prior to
starting the Phase III trials, we conducted Phase I and II clinical trials at
several centers in the United States and overseas under investigational device
(IDE) and investigational new drug (IND) exemptions granted by the FDA. The
trials were designed to demonstrate the System’s safety and “functionality,” or
its ability to administer to and extract from the liver approved and marketed
chemotherapy agents. Patients in these earlier trials had primary liver cancer
or other cancers that had spread to the liver. Patients were treated with
melphalan, doxorubicin or 5-FU. These trials demonstrated that the Delcath PHP
System™ was capable of extracting up to 85% of the chemotherapy agent
administered to the liver and permitted the delivery of higher dosages of these
three different anticancer agents to the liver, while at the same time
minimizing the exposure of healthy tissue and organs to the effects of these
chemotherapeutic agents.
We
believe the results of the clinical trials we have conducted indicate that the
Delcath PHP System™ delivered:
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more
chemotherapy agent to the tumor
site;
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less
chemotherapy agent to the general circulation than what would be delivered
by administration of the same dose of drug by intravenous means;
and
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high
dosing without the systemic toxicities that the patient would have
experienced if similar dosing was administered using conventional
intravenous delivery.
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The FDA
has classified the Delcath PHP System™ as a drug delivery system, which requires
us to obtain approval of new labeling for the higher doses of drug being used in
the clinical trials. The clinical trials are designed to provide the data to
support this labeling change.
During
2008, we added ten clinical trial sites to the Phase III clinical trial in order
to speed patient accrual and expand the geographic and institutional experience
with the Delcath PHP System™.
Our
Clinical Trial and Agreement with the National Cancer Institute
(NCI)
In 2001,
we announced that the NCI approved a Phase I clinical study protocol for
administering escalating doses of the chemotherapy agent melphalan through the
Delcath PHP System™, to patients with metastatic and unresectable cancer of the
liver.
The Phase
I clinical trial conducted at the NCI has been completed and has been followed
by a Phase II study treating patients with primary liver cancers,
adenocarcinomas and neuroendocrine cancers that have metastasized to the
liver. NCI is also the coordinating center for the Phase III study
treating patients with melanoma metastatic to the liver. In 2007, we expanded
the Phase II multi-histology clinical trial to include a fourth arm consisting
of patients with metastatic melanoma in the liver who have previously received
certain regional therapies. The Phase II and Phase III clinical
trials are subject to the terms and conditions of the Cooperative Research and
Development Agreement (the “CRADA”) between us and the NCI.
On March
29, 2007, following the December 14, 2006 expiration of the initial five-year
term of the CRADA between Delcath and the NCI, we announced that the agreement
had been extended for an additional five years. This extension enhances and
expands the initial CRADA by providing for collaboration between us and the NCI
in the joint development and evaluation of the Delcath PHP System™ device to
deliver high-dose melphalan to patients, and to evaluate the use of additional
chemotherapy agents with the Delcath PHP System™. Under the agreement, the
Surgery Branch of the NCI will work towards completion of the Delcath Phase III
trial for patients with metastatic melanoma in the liver using the drug
melphalan, and serve as the coordinating center for this multi-center trial, of
up to the current maximum of 15 clinical trial centers authorized by the
FDA.
Research
for Hepatitis Treatment
Another
disease that attacks the liver is viral hepatitis. Hepatitis is a general term
meaning inflammation of the liver and can be caused by a variety of different
viruses including hepatitis A, B, C, D and E, but usually refers to hepatitis B
and C. Hepatitis B and C are serious and common infectious diseases of the
liver, affecting millions of people throughout the world. The World Health
Organization estimates that more than 2 billion people alive today have been
infected with hepatitis B at some time in their lives. Of these, about 350
million remain infected chronically. Up to 3% of the world’s population may
harbor hepatitis C infection, with 4 million carriers in Europe alone. The
Center for Disease Control (the “CDC”) estimated there were 65,000 new cases of
hepatitis B and hepatitis C in the U.S. in 2006. According to the CDC, up to 1.4
million Americans have chronic hepatitis B virus infections and 3.2 million have
chronic hepatitis C virus infections. The incidence of viral hepatitis in the
United States and worldwide is increasing. The CDC further predicts the number
of deaths from hepatitis C will triple in the next two decades. The estimated
cost, including treatment and lost productivity due to sickness, is estimated to
be over $700 million per year for hepatitis B and over $600 million per year for
hepatitis C. 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
on evaluating studies to determine the feasibility of using the Delcath PHP
System™ to administer higher doses of anti-viral drugs in the treatment of viral
hepatitis. Prior to human clinical trials, we may perform testing on different
filters to determine their ability to remove certain antiviral agents and
conduct animal testing to determine the effect of high dose antiviral therapy
when delivered into the liver.
Other
Organs and Body Regions
Future
applications of the Delcath technology may include the treatment of pancreatic
tumors, biliary tumors, renal tumors and tumors of the limbs. Delcath has begun
to explore modifications to our core technology to allow for treatment of these
areas of the body using our perfusion technology. We are initiating discussions
with physicians who have shown interest in furthering the development of some of
these systems and plan to conduct bench and animal testing to establish the
feasibility of specific drugs for the treatment of these tumors.
Sales
and Marketing
If we
receive FDA approval, we may enter into collaboration with an existing medical
device marketer or we may market the system ourselves. If we develop our own
sales force, we intend to focus our initial marketing efforts on the over fifty
NCI-designated Cancer Centers in the United States, beginning with the hospitals
participating in the Phase III clinical trials. We plan to focus our efforts on
two distinct groups of medical specialists in these comprehensive cancer
centers:
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oncologists
who have primary responsibility for the cancer patient;
and
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interventional
radiologists who are physicians specialized in working with catheter-based
systems.
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We plan
to hire a sales and marketing director as we approach the expected filing of our
application for approval of the Delcath PHP System™ to the FDA We will then
consider establishing a group of sales representatives to market the System in
the United States.
In
addition, we plan to seek one or more corporate partners to market products
outside the United States. We believe distribution or corporate partnering
arrangements internationally will be cost effective, can be implemented more
quickly than a direct sales force and will enable us to capitalize on local
marketing expertise in the countries we target.
Since we
plan to sell the Delcath PHP 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 PHP System™ will depend upon:
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the
ability of our clinical trials to demonstrate improved patient outcomes
versus alternative treatment
alternatives;
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our
ability to educate physicians on the use of the system and its benefits
compared to other treatment alternatives;
and
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our
ability to obtain acceptable levels of reimbursement for the Delcath PHP
System™ from third party healthcare payers by demonstrating that the
System results in improved patient outcomes at a reasonable
cost.
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Third-Party Reimbursement
Because
the Delcath PHP System™ is characterized by the FDA as an experimental device,
it is not currently reimbursable in the United States. After it is approved by
the FDA, we will seek to have third-party payers, such as Medicare, Medicaid and
private health insurance plans, reimburse the cost of the Delcath PHP System™
and the associated procedures.
In the
United States, third-party payors consist of government programs, such as
Medicare, private health insurance plans, managed care organizations and other
similar programs. Three factors are key to the reimbursement of any
product:
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Coding,
which ensures uniform descriptions of the procedures, diagnoses and
medical products involved;
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Coverage,
which is the payor’s policy describing the clinical circumstances under
which it will pay for a given treatment;
and
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Payment
processes and amounts.
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Outside
of the United States, government managed health care systems and private
insurance control reimbursement for devices and procedures.
Attractive
reimbursement levels for hospitals and physicians can speed the rate at which
our technology is adopted as a standard of care for treating tumors in the
liver. Currently there is no unique code for the Delcath PHP
System™. However, many of the component parts of the procedure, such
as arterial catheterization and vascular imaging, are currently
reimbursable.
We have
retained an expert in medical coding and reimbursement to assist us in
developing a strategy to maximize reimbursement for the Delcath PHP
System™. We are compiling data comparing the Delcath PHP System™ with
alternative cancer treatments to prepare an analysis of the relative procedure
costs and the expected therapeutic advantages of the Delcath PHP System™ to
support our efforts to secure coding, coverage and reimbursement.
Manufacturing
We plan
to continue to utilize contract manufacturers to manufacture the components of
the Delcath PHP System™. The Delcath PHP System™ kit components must be
manufactured and sterilized in accordance with manufacturing and performance
specifications that are on file with the FDA.
The
catheters and catheter accessories contained within the Delcath PHP System™ kit
are being manufactured domestically by the OEM division of B. Braun Medical,
Inc. of Germany. B. Braun has demonstrated that the components it manufactures
meet Delcath’s specifications. B. Braun’s manufacturing facility is ISO 9000
approved, which will ultimately qualify the System to the standards set for
European markets. We have not entered into a written agreement with B. Braun to
manufacture the System either for the clinical trials or for commercial
sale.
Medtronic
USA, Inc. manufactures the components of the blood filtration circuit, including
the medical tubing through which a patient’s blood flows and various connectors,
as well as the blood filtration pump accessories. The components manufactured by
Medtronic have been cleared by the FDA for other applications but are considered
experimental under Delcath’s Investigational Device Exemption (IDE) and must
comply with manufacturing and performance specifications for the Delcath PHP
System™ that are on file with the FDA. Medtronic’s manufacturing facility is
also ISO 9000 approved and, thus, the components it manufactures may be used in
European markets.
The
Company currently obtains the activated charcoal filters used with the System
from Clark Research and Development. These activated charcoal filters
were previously marketed in the U. S. and overseas for blood detoxification, but
their use within the Delcath PHP System™ is considered experimental under
Delcath’s IDE approved by the FDA. Delcath is working with this and other filter
manufacturers to develop improved filters for use within the Delcath PHP
System™.
Competition
The
healthcare industry is characterized by extensive research, rapid technological
progress and significant competition from numerous healthcare companies and
academic institutions. Competition in the cancer treatment industry 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
medical and surgical oncology communities, are important competitive
factors.
The
Delcath PHP System™ competes with all forms of liver cancer treatments
including, surgical resection, liver transplant, chemotherapy, cryosurgery,
percutaneous ethanol injection, radiation therapy, selective internal radiation
therapy, radio frequency ablation, chemoembolization, hepatic artery infusion,
implanted infusion pumps, surgically isolated perfusion, gene therapy,
hyperthermia 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 in 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 the likelihood of our achieving meaningful revenues or
profitability will be substantially reduced.
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 PHP System™
is regulated in the United States by the FDA under the Federal Food, Drug and
Cosmetic Act. As such, it requires FDA approval of a pre-market application
prior to the commercial distribution of the Delcath PHP System™.
Melphalan,
the drug that we are initially seeking to have approved for use with the Delcath
PHP System™, is a widely used chemotherapy agent that has already been approved
by the FDA. The approved labeling for melphalan includes indications for use,
method of action, dosing, side effects and contraindications. Because the
Delcath PHP System™ delivers the drug through a different mode of administration
and at a dose strength that is substantially higher than that currently
approved, we will be seeking a revised label of melphalan for use with the
Delcath PHP System™. The clinical trials are designed to provide the necessary
clinical data to support this required labeling change.
Our
contract manufacturers are also subject to numerous federal, state and local
laws relating to matters such as safe working conditions, manufacturing
practices, environmental protection, and disposal of hazardous or potentially
hazardous substances.
Medical Devices. The Delcath
PHP System™ is a Class III medical device. Class III medical devices are subject
to the most stringent regulatory controls to assure reasonable safety and
effectiveness. FDA pre-market approval is required for all Class III medical
devices. An application for pre-market approval must be supported by data about
the device and its components, including the manufacturing and labeling of the
device, the results of animal and laboratory testing and data from human
clinical trials. The conduct of Phase III clinical trials is subject to
extensive regulation and to ongoing oversight by FDA as well as the
institutional review boards (“IRB”) at hospitals and research centers that
conduct the trials. Before commencing clinical trials, we obtained an
investigational device exemption (“IDE”) 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 PHP System™, by the FDA and
the institutional review boards at the sites where the trials are being
conducted.
Since our
protocol has received fast-track designation, we believe that the FDA will
review our pre-market application expeditiously. However, approval of the
Delcath PHP System™ may take longer than anticipated if the FDA requests
additional information or clarification, or if any major amendments to our
application are requested. In addition, the FDA may refer this application to an
advisory committee of experts. This process is referred to as a “panel review,”
and could delay the approval of the Delcath PHP System™.
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”. An approvable letter contains a list of
conditions that must be met to obtain full approval of an application. If and
when those conditions are met to the satisfaction of the FDA, the agency will
issue an order of approval for the application, authorizing commercial marketing
of the device for the specific indications approved. If the FDA’s evaluation of
the application, the clinical study sites or the manufacturing facilities is not
favorable, the FDA may 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 should be performed before approval, or that
post-approval studies must be conducted.
Approved
medical devices remain subject to extensive ongoing regulation. Advertising and
promotional activities are subject to regulation by the FDA and by the Federal
Trade Commission. Other ongoing FDA medical device reporting regulations require
that we provide information to the FDA on any deaths or serious injuries that
may have been caused or contributed to by the use of marketed device and product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunction were to recur.
Drugs. Delcath must obtain a
change to the current approved label for the drug melphalan before the Delcath
PHP System™ may be marketed in the United States. The current FDA-approved
labeling for melphalan provides for administration of the drug at lower doses
than we are currently using and does not provide for its delivery with the
Delcath PHP System™. Delcath plans to file a 505(b)(2) New Drug Application with
the FDA to request this change to the label. We have no assurance
that the FDA will approve our application for a change to the current
label.
The Phase
III clinical trial protocol using melphalan which has been approved by the FDA
is designed to obtain approval of both new drug labeling and a pre-market
approval application providing for the use of melphalan with the Delcath PHP
System™. The trial protocol was 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 trial will be submitted to both of these FDA
divisions.
Under the
Food, Drug and Cosmetic Act, the Delcath PHP System™ cannot be marketed until
the new drug application, or supplemental new drug application, and the
pre-market approval application, are approved, and then only in conformity with
any conditions of use set forth in the approved labeling.
Orphan Drug Regulation. On November 18, 2008,
we announced that
the FDA had granted Delcath two orphan-drug designations for the drug melphalan.
Delcath was granted designations of the drug melphalan for the treatment of
patients with cutaneous melanoma as well as patients with ocular
melanoma.
A human
drug application or supplement for a prescription drug product that has been
designated as a drug for a rare disease or condition (orphan drug) is not
subject to standard FDA application fees. Sponsors of orphan drugs can also
request a waiver from annual product and establishment fees.
The
Orphan Drug Act provides for a seven-year period of exclusive marketing to the
sponsor who obtains marketing approval for that designated orphan drug or
biological product. Exclusivity begins on the date that the marketing
application is approved by FDA for the designated orphan drug, and the
exclusivity only applies to the indication for which the drug has been
approved. An orphan designation does not limit the use of that drug
in other applications outside the approved designation in either a commercial or
investigational setting.
Foreign Regulation. In order
for our products to be marketed in Asia, Europe, Latin America or other foreign
jurisdictions, we must obtain the required regulatory approvals or clearances
and comply with the extensive regulations regarding safety, manufacturing
processes and quality requirements of the respective countries. These
regulations, including the requirements for approvals to market, may differ from
the FDA regulatory framework. In addition, there may be foreign
regulatory barriers other than pre-market approval or clearance.
In order
for us to market and sell the Delcath PHP System™ in foreign jurisdictions, we
must obtain required regulatory approvals or clearances and otherwise comply
with extensive regulations. The European Economic Area (EEA) has an
agreement between member states of the European Free Trade Association (EFTA),
the European Community (EC), and all member states of the European Union (EU)
regarding certain certifications for medical devices. The CE marking (also known
as CE mark) is a mandatory conformity mark on many products placed on the single
market in the European Economic Area (EEA). The CE marking does not certify that
a product has met EU consumer safety, health or environmental requirements, but
can permit the marketing of a medical device once obtained. Delcath has begun
the process of seeking the CE Mark for the Delcath PHP System™.
Delcath
has also begun the process of applying for an import license for the Delcath PHP
System™ into China. Under Chinese regulations, prior to considering the
importation of the Delcath PHP System™ into China Delcath must first have
obtained FDA pre-market approval for the Delcath PHP System™ in the United
States. Marketing our device in other parts of the world including China
requires the obtaining of country specific regulatory approvals and compliance
with extensive local regulations.
Patents,
Trade Secrets and Proprietary Rights
Our
success depends in large part on our ability to obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. Because of the length of time and expense associated with
bringing new products through the development and regulatory approval process,
the health care industry places considerable emphasis on obtaining patent and
trade secret protection for new technologies, products and processes. We hold
the following seven United States patents, as well as twenty corresponding
foreign patents in Canada, Europe and Asia that we believe are or may be
material to our business:
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Patent
Titles
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Patent
No.
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Expiration
Date
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Cancer
treatment and catheter for use in treatment
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U.S.
#5,411,479
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May
2, 2012
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Apparatus
and method for isolated pelvic perfusion
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U.S.
#5,817,046
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July
14, 2017
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Balloon
catheter with occluded segment bypass
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U.S.
#5,893,841
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August
30, 2016
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Catheter
with slideable balloon
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U.S.
#5,919,163
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July
14, 2017
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Cancer
treatment method
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U.S.
#6,186,146
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January
13, 2017
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Catheter
flow and lateral movement controller
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U.S.
#5,897,533
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September
2, 2017
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Method
for treating glandular diseases and malignancies
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U.S.
#7,022,097
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May
9,
2023
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We plan
to enforce our intellectual property rights vigorously. In addition, we conduct
searches and other activities relating to the protection of existing patents and
the filing of new applications. We are always seeking patent improvements that
we identify through manufacturing and clinical use of the Delcath PHP System™
which allow us to expand the use of the System beyond the treatment of cancers
in the liver.
U.S.
Patent law allows for the extension of a patent’s duration for a period of up to
five years after FDA approval. Delcath intends to seek extension for
some of our patents after pre-market approval.
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
December 31, 2008 we had six full-time employees. In January, 2009, we hired a
Controller and intend to recruit additional personnel in connection with the
research, development, manufacturing and marketing of our products. None of our
employees is represented by a union and we believe relationships with our
employees are good.
In
addition to our full-time employees, we engage the services of medical,
scientific, and financial consultants.
Internet
Access to Periodic Reports
We are a
reporting company and file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the “Commission”). Our Commission filings (File No. 1-16133) are available to
the public free of charge over the Internet at the Commission’s web site at
http://www.sec.gov,
and on our web site at http://www.delcath.com.
You may
also read and copy any document we file at the Commission’s public reference
room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may
request copies of these documents by writing to the Commission and paying a fee
for the copying cost.
You
should carefully consider the specific risks set forth below relating to our
business and our Company before making an investment decision. The risks and
uncertainties we have described are not the only ones facing our Company.
Additional risks and uncertainties not presently known to us or that we
currently consider immaterial also may adversely affect our Company. The
following risk factors should be read carefully in connection with evaluating
our business and the forward-looking statements that we make in this report and
elsewhere (including oral statements) from time to time. If any of the following
risks and uncertainties actually occurs, our business, financial condition or
operating results may be materially and adversely affected. In this event, the
trading price of our securities may decline and you may lose part or all of your
investment.
Risks
Related to Our Business and Financial Condition
If we are not successful in the
development and commercialization of the Delcath PHP System™, or if we are unable to market and
sell the product, we will not generate operating revenue or become
profitable.
The
Delcath PHP System™, a platform technology for the isolation of various organs
or regions of the body to permit the regional delivery of high doses of drugs
for the treatment of a variety of diseases, is our only product, and our entire
focus has been the development and commercialization of this product. If the
Delcath PHP System™ fails as a commercial product, we have no other products to
sell.
Continuing
losses may exhaust our capital resources. We have had no revenue to date, a
substantial accumulated deficit, recurring operating losses and negative cash
flow.
We expect
to incur significant and increasing losses while generating minimal revenues
over the next few years. From our inception on August 5, 1988 through December
31, 2008, we have incurred cumulative net losses of approximately $45.8 million.
For the years ended December 31, 2008 and 2007, we incurred net losses of
approximately $6.9 million and $3.7 million, respectively.
To date,
we have funded our operations through a combination of private placements of our
securities and through the proceeds of our public offerings in 2000, 2003 and
2007. Please see the detailed discussion of our sales of securities described in
Note 3 to our 2008 financial statements included in this report. We received
proceeds of approximately $5.6 million from private placements we completed in
2004; approximately $2.2 million on exercise of warrants and options in 2004;
approximately $2.5 million from a private placement we completed in 2005;
approximately $5.5 million on exercise of warrants and options in 2005;
approximately $5.1 million on exercise of warrants and options in 2006;
approximately $1.3 million on exercise of options in 2007; and approximately
$13.3 million from a registered direct offering we completed in 2007. As of
December 31, 2008, we had cash and cash equivalents of approximately $10.8
million.
If we
continue to incur losses, we may exhaust our capital resources, and as a result
may be unable to complete our clinical trials, product development and
commercialization of the Delcath PHP System™.
If we cannot raise the additional
capital that may be required to commercialize the Delcath PHP
System™, our potential
to generate future revenues will be significantly limited even if we receive FDA
pre-market approval.
Before we
can obtain approval to sell our product commercially, we will need pre-market
approval from the FDA. While we believe that we have sufficient capital to
conduct our operations for this year, our current resources may not be
sufficient to complete the Phase III clinical trial using melphalan or other
clinical trials that we may pursue and will be insufficient to fund the costs of
commercializing the Delcath PHP System™, which will be significant. Many of the
costs of conducting clinical trials are uncertain and not within our control,
including (i) the possibility that the FDA may require additional trials (ii)
the charges payable to each current or prospective clinical test site which is
based on the number of participants in the trial; (iii) the amount of the fee
per patient, which is individually negotiated with each test site; (iv) the
number of patients that may be required to be enrolled in any particular trial;
(v) the location of the test site which can affect other costs, including the
costs of retaining a clinical research organization, monitoring and other out of
pocket costs such as travel; (vi) the actual number of treatments performed per
patient in each clinical trial; and (vii) the possible increase or reduction in
trial costs billed to us where a patient’s insurer refuses or agrees to cover
certain treatment expenses. We do not know if additional financings
will be available when needed, or if they are available, that they will be
available on acceptable terms. If we are unable to obtain additional financing
as needed, we may not be able to complete our trials, obtain regulatory
approvals or sell the Delcath PHP System™ commercially.
If
we are unable to obtain additional funding, our general business operations will
be harmed.
While we
believe that we have sufficient capital to conduct current operations, we will
require additional capital for research and development and for clinical trials.
Our liquidity and capital requirements will depend on numerous factors,
including: our research and product development programs, including clinical
studies; the timing and costs of our various United Sates and foreign regulatory
filings, obtaining approvals and complying with regulations; the timing of
product commercialization activities; the timing and costs involved in
preparing, filing, prosecuting, defending and enforcing intellectual property
rights; and the impact of competing technological and market developments. We do
not know if additional financing will be available when needed, or if it is
available, if it will be available on acceptable terms. Insufficient funds may
require us to curtail or stop our research and development
activities.
There
are risks associated with forward-looking statements made by us and actual
results may differ.
Some of
the information contained in this filing contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as “may,” “will,” “expect,”
“anticipate,” “believe,” “estimate” and “continue,” or similar words. You should
read statements that contain these words carefully because they:
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discuss
our future expectations;
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contain
projections of our future results of operations or of our financial
condition; and
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state
other “forward-looking”
information.
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We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict and/or over
which we have no control. The risk factors listed in this section, other risk
factors about which we may not be aware, as well as any cautionary language in
this document, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. You should be aware that the occurrence of
the events described in these risk factors could have an adverse effect on our
business, results of operations and financial condition.
Risks
Related to FDA and Foreign Regulatory Approval
Even if the FDA grants pre-market
approval for use of the Delcath PHP System™ for the treatment of melanoma that
has metastasized to the liver with melphalan, our ability to market the device
would be limited to that use.
If the
FDA grants pre-market approval for use of the Delcath PHP System™ in the
treatment of melanoma that has metastasized to the liver with the drug
melphalan, our ability to market the System would be limited to its use with
that drug in treating that disease. Thereafter, physicians could use the System
for the treatment of other cancers or use other drugs (“off-label” use), but we
could not market it for such uses, unless we obtained separate FDA approval to
market the System for use with those other drugs or diseases.
If we do not obtain FDA pre-market
approval, we may not be able to export the Delcath PHP System™ to foreign markets, which will limit
our sales opportunities.
If the
FDA does not approve our application for pre-market approval for the Delcath PHP
System™, we will not be able to export the Delcath PHP System™ from the United
States for marketing abroad unless approval has been obtained from one of a
number of developed nations. We may not be able to obtain approval from one or
more countries where we would like to sell the Delcath PHP System™. If we are
unable to market the Delcath PHP System™ internationally because we are unable
to obtain required approvals, our international market opportunity will be
materially limited.
Conduct
of clinical trials and obtaining FDA pre-market approval could be
delayed.
We have
experienced, and may continue to experience, delays in conducting and completing
required clinical trials, caused by many factors. The pace of
completion of these clinical trials will be dependent on a number of factors,
some of which are out of our control.
Completion
of our clinical trials depends heavily on the ability of the clinical test sites
to identify patients to enroll in the clinical trials. The population
of appropriate patients (i.e., patients with melanoma that has metastasized to
the liver) is limited. Any significant delay in completing clinical trials or in
the FDA’s response to our submission, or a requirement by the FDA for us to
conduct additional trials, would delay the commercialization of the Delcath PHP
System™ and our ability to generate revenues.
The
FDA could temporarily or permanently halt the conduct of our clinical
trials.
If the
FDA decides for any reason that the Delcath PHP System™ is not sufficiently safe
or efficacious, it may require the Company to halt the trials. We may not be
able to resume our trials or be able to launch trials overseas if the FDA were
to halt the United States trials.
In
October 2007, Delcath received a letter from the FDA recommending that we
temporarily suspend enrollment in the Phase III and Phase II trials of the
Delcath PHP System™ in anticipation of a meeting with the Agency to discuss
certain gastrointestinal (“GI”) safety concerns. The recommendation was issued
by the FDA following reports by Delcath of four serious adverse GI events, which
may have been related to the infusion of melphalan. Following receipt of this
letter, we decided to voluntarily defer enrollment of new patients in our Phase
III and Phase II trials pending that meeting.
During a
meeting at the FDA that was attended by senior reviewers from both the Drug and
Device arms of the FDA, the Principal Investigator at the NCI presented an
analysis of the previously reported gastrointestinal toxicities and of the
changes incorporated into the trial protocols to prevent a recurrence of those
toxicities. These changes had been previously approved by the NCI Institutional
Review Board and were subsequently approved by the Data Safety Monitoring Board
that monitors the Phase III trial. Following that meeting, we were notified in
writing by the FDA that the studies could proceed and we resumed patient
enrollment in the trials less than a month after receiving the October
letter.
We may
experience a number of events that could further delay or prevent development of
the Delcath PHP System™, including:
|
|
·
|
the
FDA may put the Phase III and/or Phase II trials on clinical
hold;
|
|
|
·
|
additional
serious adverse events in the clinical trials could
occur;
|
|
|
·
|
other
regulators or institutional review boards may not authorize, or may delay,
suspend or terminate the clinical trial program due to safety
concerns.
|
If
similar events were to occur in the future, our clinical trials, and as a
result, our business, operations and stock price could be materially
impacted.
Third-party reimbursement may not be
available to purchasers of the Delcath PHP System™ or may be inadequate, resulting in
lower sales even if FDA pre-market approval is granted.
Physicians,
hospitals and other health care providers may be reluctant to purchase our
System if they do not receive substantial reimbursement for the cost of using
our products from third-party payors, including Medicare, Medicaid and private
health insurance plans.
The
Delcath PHP System™ is currently characterized by the FDA as an experimental
device. As such, Medicare, Medicaid and private health insurance plans will not
reimburse its use in the United States. We will seek reimbursement by
third-party payors of the cost of the Delcath PHP System™ after its use is
approved by the FDA. There are no assurances that third-party payors in the
United States or abroad will agree to cover the cost of procedures using the
Delcath PHP System™. Further, third-party payors may deny reimbursement if they
determine that the Delcath PHP System™ is not used in accordance with
established payor protocols regarding cost effective treatment methods or is
used for forms of cancer or with drugs not specifically approved by the
FDA.
Risks Related to
Manufacturing, Commercialization and Market Acceptance of the Delcath PHP
System™
We purchase components for the
Delcath PHP System™ from
sole-source suppliers. These manufacturers must comply with a number of FDA
requirements and regulations. If one of our suppliers fails to meet such
requirements or if we change suppliers, the successful completion of the
clinical trials and/or the commercialization of the Delcath PHP
System™ could be
jeopardized.
The components of the Delcath PHP
System™ must be
manufactured in accordance with manufacturing and performance specifications of
the Delcath PHP System™ on file with the FDA and meet good manufacturing
practice requirements. Many of the components of the Delcath PHP System™ are
manufactured by sole-source suppliers. If any of our suppliers fails to meet
those regulatory obligations, we may be forced to suspend or terminate our
clinical trials. Further, if we need to find a new source of supply, we may face
long interruptions in obtaining necessary components for the System, which could
jeopardize our ability to supply the Delcath PHP System™ to the
market.
We do not have any contracts with
suppliers for the manufacture of components for the Delcath PHP
System™. If we are
unable to obtain an adequate supply of the necessary components, we may not be
able to complete our clinical trials.
We do not
have long term supply contracts with suppliers of components for the Delcath PHP
System™. Certain components are available from only a limited number of sources.
Components of the Delcath PHP System™ are currently manufactured for us in small
quantities for use in our pre-clinical and clinical studies. We will require
significantly greater quantities to commercialize the product. We may not be
able to find alternate sources of comparable components. If we are unable to
obtain adequate supplies of components from our existing suppliers or need to
switch to an alternate supplier, commercialization of the Delcath PHP System™
could be delayed.
We have limited experience in
marketing products and lack adequate personnel to market and sell products, and
as a result, we may not be successful in marketing and selling the Delcath PHP
System™ even if we
receive FDA pre-market approval.
Delcath
has not previously sold, marketed or distributed any products and currently does
not have the personnel, resources, experience or other capabilities to market
the Delcath PHP System™. Our success will depend upon our ability to attract and
retain skilled sales
and
marketing personnel or our reaching an agreement with a third party to market
our product. Competition for sales and marketing personnel is intense, and we
may not be successful in attracting or retaining such personnel. Our inability
to attract and retain skilled sales and marketing personnel or to reach an
agreement with a third party could adversely affect our business, financial
condition and results of operations.
Market acceptance of the Delcath PHP
System™ will depend on
substantial efforts and expenditures in an area with which we have limited
experience.
Market
acceptance of the Delcath PHP System™ will depend upon a variety of factors
including:
|
|
·
|
Whether
our clinical trials demonstrate significantly improved, cost effective
patient outcomes;
|
|
|
·
|
Our
ability to educate physicians and drive acceptance of the use of the
Delcath PHP System™;
|
|
|
·
|
Our
ability to convince healthcare payors that use of the Delcath PHP System™
results in reduced treatment costs and improved outcomes for
patients;
|
|
|
·
|
Whether
the Delcath PHP System™ replaces treatment methods in which many hospitals
have made a significant investment. Hospitals may be unwilling to replace
their existing technology in light of their investment and experience with
competing technologies; and
|
|
|
·
|
Whether
doctors and hospitals are reluctant to use a new medical technology until
its value has been demonstrated. As a result, the Delcath PHP System™ may
not gain significant market acceptance among physicians, hospitals,
patients and healthcare payors.
|
Rapid technological developments in
treatment methods for liver cancer and competition with other forms of liver
cancer treatments could result in a short product life cycle for the Delcath PHP
System™.
Competition
in the cancer treatment industry is intense. The Delcath PHP System™ competes
with all forms of liver cancer treatments that are alternatives to the “gold
standard” treatment of surgical resection. Many of our competitors have
substantially greater resources and considerable experience in conducting
clinical trials and obtaining regulatory approvals. If these competitors develop
more effective or more affordable products or treatment methods, our
profitability will be substantially reduced and the Delcath PHP System™ could
have a short product life cycle.
The
loss of key personnel could adversely affect our business.
Our Chief
Executive Officer is responsible for the operation of our business, and we have
entered into an employment agreement with him for his services. The loss of his
services could delay our completion of the clinical trials, our obtaining FDA
pre-market approval, our introducing the Delcath PHP System™ commercially and
our generating revenues and profits. Competition for experienced personnel is
intense. If we cannot retain our current personnel or attract additional
experienced personnel, our ability to compete could be adversely
affected.
Risks
Related to 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.
Due to
the uncertainty of the patent prosecution process, there are no guarantees that
any of our pending patent applications will result in the issuance of a patent.
Even if we are successful in obtaining a patent, there is no assurance that it
will be upheld if later challenged or will provide significant protection or
commercial advantage. Because of the length of time and expense associated with
bringing new medical devices to the market, the healthcare industry has
traditionally placed considerable emphasis on patent and trade secret protection
for significant new technologies. Companies in the medical device industry may
use intellectual property infringement litigation to gain a competitive
advantage. If this type of litigation is successful, a third party may be able
to obtain an injunction prohibiting us from offering our product. Litigation may
be necessary to enforce any patents issued or assigned to us or to determine the
scope and validity of third-party proprietary rights. Litigation could be costly
and could divert our attention from our business. There are no guarantees that
we will receive a favorable outcome in any such litigation. If others file
patent applications with respect to inventions for which we already have patents
issued to us or have patent applications pending, we may be forced to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, which could also be costly
and could divert our attention from our business. If a third party violates our
intellectual property rights, we may be unable to enforce our rights because of
our limited resources. Use of our limited funds to defend our intellectual
property rights may also affect our financial condition adversely.
Risks
Related to Products Liability
We
may not carry sufficient products liability insurance and we may not be able to
acquire sufficient coverage in the future to cover large claims.
Clinical
trials, manufacturing and product sales may expose us to liability claims from
the use of the Delcath PHP System™. Though participants in clinical trials are
generally required to execute consents and waivers of liability, a court might
find such consents and waivers of liability to be ineffective or invalid. Were
such a claim asserted we would likely incur substantial legal and related
expenses even if we prevail on the merits. Claims for damages, whether or not
successful, could cause delays in the clinical trials and result in the loss of
physician endorsement. A successful products liability claim or recall would
have a material adverse effect on our business, financial condition and results
of operations. We currently carry some clinical trial insurance
coverage, but it may be insufficient to cover one or more large
claims.
Risks
Related to an Investment in Our Securities
Our
stock price and trading volume may be volatile, which could result in losses for
our stockholders.
The
equity markets may experience periods of volatility, which could result in
highly variable and unpredictable pricing of equity securities. The market price
of our common stock could change in ways that may or may not be related to our
business, our industry or our operating performance and financial condition.
Some of the factors that could negatively affect our share price or result in
fluctuations in the price or trading volume of our common stock
include:
|
|
·
|
actual
or anticipated quarterly variations in our operating
results;
|
|
|
·
|
changes
in expectations as to our future financial performance or changes in
financial estimates, if any, of public market
analysts;
|
|
|
·
|
announcements
relating to our business or the business of our
competitors;
|
|
|
·
|
conditions
generally affecting the healthcare and cancer treatment industries;
and
|
|
|
·
|
the
success of our operating strategy.
|
Many of
these factors are beyond our control, and we cannot predict their potential
impact on the price of our common stock. We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future.
Future
sales of our common stock may cause our stock price to decline.
The
market price of our common stock has historically been volatile. During the
three years ended December 31, 2008, the range of the high and low sales prices
of our common stock have ranged from a high of $6.00 (during the quarter ended
June 30, 2006) to a low of $0.82 (during the quarter ended December 31,
2008).
Sales of
substantial amounts of common stock, or the perception that such sales could
occur, could have an adverse effect on prevailing market prices for our common
stock.
Our
insiders beneficially own a significant portion of our stock.
As of
December 31, 2008, our executive officers, directors and affiliated persons
beneficially owned approximately 12.2% of our common stock. As a result, our
executive officers, directors and affiliated persons will have significant
influence to:
|
|
·
|
elect
or defeat the election of our
directors;
|
|
|
·
|
amend
or prevent amendment of our articles of incorporation or
bylaws;
|
|
|
·
|
effect
or prevent a merger, sale of assets or other corporate transaction;
and
|
|
|
·
|
affect
the outcome of any other matter submitted to the stockholders for
vote.
|
Sales of
significant amounts of shares held by our directors and executive officers, or
the prospect of these sales, could adversely affect the market price of our
common stock.
Anti-takeover
provisions in our Certificate of Incorporation and By-laws and under our
stockholder rights agreement may reduce the likelihood of a potential change of
control, or make it more difficult for our stockholders to replace
management.
Certain
provisions of our Certificate of Incorporation and By-laws and of our
stockholders rights agreement could have the effect of making it more difficult
for our stockholders to replace management at a time when a substantial number
of our stockholders might favor a change in management. These provisions
include:
|
|
·
|
providing
for a staggered board; and
|
|
|
·
|
authorizing
the board of directors to fill vacant directorships or increase the size
of our board of directors.
|
Furthermore,
our board of directors has the authority to issue up to 10,000,000 shares of
preferred stock in one or more series and to determine the rights and
preferences of the shares of any such series without stockholder approval. Any
series of preferred stock is likely to be senior to the common stock with
respect to dividends, liquidation rights and, possibly, voting rights. Our
board’s ability to issue preferred stock may have the effect of discouraging
unsolicited acquisition proposals, thus adversely affecting the market price of
our common stock and warrants.
We also
have a stockholder rights agreement that could have the effect of substantially
increasing the cost of acquiring us unless our board of directors supports the
transaction even if the holders of a majority of our common stock are in favor
of the transaction.
Our
Common Stock is listed on the NASDAQ Capital Market. If we fail to meet the
requirements of the NASDAQ Capital Market for continued listing, our Common
Stock could be delisted.
Our
Common Stock is currently listed on the NASDAQ Capital Market. To keep such
listing, we are required to maintain: (i) a minimum bid price of $1.00 per
share, (ii) a certain public float, (iii) a certain number of round lot
shareholders and (iv) one of the following: a net income from continuing
operations (in the latest fiscal year or two of the three last fiscal years) of
at least $500,000, a market value of listed securities of at least $35 million
or a stockholders' equity of at least $2.5 million. We are presently in
compliance with these requirements.
We are
also required to maintain certain corporate governance requirements. In the
event that in the future we are notified that we no longer comply with NASDAQ’s
corporate governance requirements, and we fail to regain compliance within the
applicable cure period, our Common Stock could be delisted from the NASDAQ
Capital Market.
If
our common stock is delisted from the NASDAQ Capital Market, we may be subject
to the risks relating to penny stocks.
If our
common stock were to be delisted from trading on the NASDAQ Capital Market and
the trading price of the common stock were below $5.00 per share on the date the
common stock were delisted, trading in our common stock would also be subject to
the requirements of certain rules promulgated under the Exchange Act. These
rules require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a “penny stock” and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors, generally institutions.
These additional requirements may discourage broker-dealers from effecting
transactions in securities that are classified as penny stocks, which could
severely limit the market price and liquidity of such securities and the ability
of purchasers to sell such securities in the secondary market.
A penny
stock is defined generally as any non-exchange listed equity security that has a
market price of less than $5.00 per share, subject to certain
exceptions.
We
do not expect to pay dividends in the foreseeable future. As a result, holders
of our common stock must rely on stock appreciation for any return on their
investment.
We have
never declared or paid any dividends to the holders of our common stock and we
do not expect to pay cash dividends in the foreseeable future. We currently
intend to retain all earnings for use in connection with the expansion of our
business and for general corporate purposes. Our board of directors will have
the sole discretion in determining whether to declare and pay dividends in the
future. The declaration of dividends will depend on our profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by our board of directors. Our ability to pay cash dividends in the future could
be limited or prohibited by the terms of financing agreements that we may enter
into or by the terms of any preferred stock that we may authorize and
issue.
Item 1B. Unresolved Staff
Comments
Not
applicable.
We
currently occupy 3,400 square feet of office space at 600 Fifth Avenue, New
York, N.Y. under a sublease which expires in July 2010. We have occupied these
facilities since September 2007, and the space is adequate for our current
needs. If we require different or additional space in the future, we believe
that satisfactory space will be available in or near our current facility,
although it is possible that additional facilities and equipment will not be
available on reasonable or acceptable terms, if at all. We believe that our
properties are adequately covered by insurance.
We
believe that our facilities and equipment are in good condition and are suitable
for our operations as presently conducted and for our foreseeable future
operations.
We do not
invest in real estate, interests in real estate, real estate mortgages or
securities of or interests in persons primarily engaged in real estate
activities.
None.
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common shares trade on the NASDAQ Capital Market under the symbol
“DCTH.”
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 Capital
Market:
Common
Stock Price Range
|
2008
|
||||||||
|
High
|
Low
|
|||||||
|
Quarter
ended March 31, 2008
|
$ | 2.22 | $ | 1.20 | ||||
|
Quarter
ended June 30, 2008
|
2.67 | 1.66 | ||||||
|
Quarter
ended September 30, 2008
|
2.55 | 1.26 | ||||||
|
Quarter
ended December 31, 2008
|
1.54 | 0.82 | ||||||
|
2007
|
||||||||
|
High
|
Low
|
|||||||
|
Quarter
ended March 31, 2007
|
$ | 4.93 | $ | 3.14 | ||||
|
Quarter
ended June 30, 2007
|
4.95 | 3.63 | ||||||
|
Quarter
ended September 30, 2007
|
4.63 | 3.29 | ||||||
|
Quarter
ended December 31, 2007
|
3.62 | 0.92 | ||||||
As of
February 19, 2009 there were approximately 85 stockholders of record 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.
Performance
Graph
The graph
below compares the cumulative total returns, including reinvestment of
dividends, if applicable, on the Company’s Common Stock with the returns on
companies in the NASDAQ Market Index and an Industry Group Index (Hemscott
Industry Group 513 - Drug Delivery).
The chart
displayed below is presented in accordance with the requirements of the
Securities and Exchange Commission. The graph assumes a $100 investment made on
December 31, 2003 and the reinvestment of all dividends, if applicable.
Stockholders are cautioned against drawing any conclusions from the data
contained in this section, as past results are not necessarily indicative of
future performance.
|
12/2003
|
12/2004
|
12/2005
|
12/2006
|
12/2007
|
12/2008
|
||||||||||||||
|
Delcath
Systems, Inc.
|
100.00
|
330.77
|
373.63
|
406.59
|
203.30
|
130.77
|
|||||||||||||
|
NASDAQ
Composite
|
100.00
|
110.06
|
112.92
|
126.61
|
138.33
|
80.65
|
|||||||||||||
|
Peer
Group
|
100.00
|
168.22
|
152.79
|
142.11
|
152.23
|
77.42
|
|||||||||||||
Equity
Compensation Plan Information
The
following table sets forth certain information as of December 31, 2008 with
respect to our compensation plans under which our equity securities are
authorized for issuance:
|
Number of securities to
be
issued upon exercise of outstanding options, warrants and
rights
|
Weighted
average exercise price of outstanding option, warrants and
rights
|
Number of securities
remaining available
for
future issuance under equity compensation plans (excluding securities
reflected in column (a))
|
||||||||
|
Plan
Category
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity compensation plans
approved by security holders
(1)
|
1,460,000
|
$
|
3.44
|
380,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||
|
Total
|
1,460,000
|
$
|
3.44
|
380,000
|
||||||
|
(1)
|
Includes
shares issued and issuable under the Delcath Systems, Inc. 2004 Stock
Incentive Plan.
|
Additional
Information
We did
not sell any equity securities during our 2008 fiscal year that were not
registered under the Securities Act of 1933, as amended, and have not
previously been described in a Quarterly Report on Form 10-Q or a Current Report
on Form 8-K.
During
the fourth quarter of our 2008 fiscal year, there were no purchases of our
common stock made by or on behalf of Delcath or any of our “affiliated
purchasers” (as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of
1934, as amended).
The
selected consolidated financial data presented below under the caption
“Statement of Operations Data” and “Balance Sheet Data” as of the end of and for
each of the years in the five-year period ended December 31, 2008, are derived
from the financial statements of Delcath Systems, Inc. The financial statements
as of December 31, 2008 and 2007 and for each of the three-year period ended
December 31, 2008 (and cumulative from inception) and the report thereon, are
included under Item 8, “Financial Statements and Supplementary Data.” The
selected financial data should be read in conjunction with the financial
statements and the related notes thereto and Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
|
Year
Ended December 31,
|
||||||||||||||||||
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||
|
Statement
of Operations Data
|
||||||||||||||||||
|
Costs
and expenses
|
$
|
8,066
|
$
|
6,913
|
$
|
11,699
|
$
|
3,112
|
$
|
3,367
|
||||||||
|
Operating
loss
|
8,066
|
6,913
|
11,699
|
3,112
|
3,367
|
|||||||||||||
|
Net
loss
|
6,865
|
3,664
|
10,952
|
2,865
|
3,266
|
|||||||||||||
|
Loss
per share
|
(0.27)
|
(0.16)
|
(0.55)
|
(0.18)
|
(0.28)
|
|||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||
|
Balance
Sheet Data
|
||||||||||||||||
|
Current
assets
|
$
|
11,341
|
$
|
18,091
|
$
|
8,760
|
$
|
12,920
|
$
|
7,338
|
||||||
|
Total
assets
|
11,359
|
18,106
|
8,764
|
12,928
|
7,352
|
|||||||||||
|
Current
liabilities
|
1,152
|
1,677
|
670
|
330
|
565
|
|||||||||||
|
Stockholder’s
equity
|
10,207
|
16,429
|
8,093
|
12,598
|
6,787
|
|||||||||||
Forward-Looking
Statements
This Form
10-K, including the section titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” contains forward-looking
statements regarding our future performance. All forward-looking
information is inherently uncertain and actual results may differ materially
from assumptions, estimates or expectations reflected or contained in the
forward-looking statements as a result of various factors, including those set
forth in this annual report on Form 10-K for the year ended December 31,
2008. Forward-looking statements convey our current expectations or
forecasts of future events. All statements contained in this Form
10-K other than statements of historical fact are forward-looking
statements. Forward-looking statements include statements regarding
our future financial position, business strategy, budgets, projected costs,
plans and objectives of management for future operations. The words
“may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,”
“expect,” “anticipate” and similar expressions may identify forward-looking
statements, but the absence of these words does not necessarily mean that a
statement is not forward-looking. With respect to the forward-looking
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
These
forward-looking statements speak only as of the date of this Form
10-K. Unless required by law, we undertake no obligation to publicly
update or revise any forward-looking statements to reflect new information or
future events or otherwise.
We are a
medical technology company that develops and manufactures an innovative device
designed to administer high dose chemotherapy and other therapeutic agents
directly to diseased organs or regions of the body. We are currently
focusing on the development of a single product, the Delcath PHP System™, for
the treatment of tumors of the liver. Based on human clinical data, we believe
that the Delcath PHP System™ allows physicians to deliver significantly higher
chemotherapy doses to the liver than could be administered by conventional
intravenous delivery.
The
Delcath PHP System™ is a disposable kit consisting of various catheters,
filters, and a tubing circuit used during cancer treatment to isolate the liver
from the patient’s general circulatory system. Our system allows for
ultra-high doses of chemotherapy agents to be directed at a patient’s liver
while at the same time limiting the exposure of healthy tissue and organs to the
harmful effects of those chemotherapeutic agents. By providing higher
dosing of chemotherapy agents than would otherwise be possible through
conventional chemotherapy, we believe that treatment with the Delcath PHP
System™ is more effective than conventional treatment at killing cancer cells
and preventing new cancer cell formation.
In 2006
we began a Phase III clinical trial to support a pre-market approval application
for use of the Delcath PHP System™ with melphalan, a chemotherapy agent, for the
treatment of metastatic melanoma that has spread to the liver. The
trial is being conducted under the Food and Drug Administration’s (“FDA”)
Special Protocol Assessment (“SPA”). Patients enrolled in this study currently
receive treatment at the National Cancer Institute, or NCI, which serves as the
coordinating center for this multi-center trial or at one of the other
participating centers. The trial is currently approved for expansion
to a maximum of 15 centers. In April 2008, the Institutional Review
Board of the University of Maryland Medical Center agreed to participate in our
Phase III study. In June 2008, St. Luke’s Cancer Center, the Albany
Medical Center, the Atlantic Melanoma Center of Atlantic Health and the
University of Texas Medical Branch joined this clinical trial. In the
third quarter, Swedish Medical Center of Colorado, John Wayne Cancer Institute,
Providence Health Systems, and Moffitt Cancer Center agreed to join the clinical
trial. In the fourth quarter of 2008, University of Pittsburgh Medical Center
agreed to join the trial which brings the total to eleven
centers. Each of the center’s Institutional Review Board (“IRB”) has
approved our treatment protocol. Critical to expediting completion of
this trial, the Western International Review Board, or WIRB, has also approved
our protocol. The WIRB, which provides review services for more than
100 institutions (academic centers, hospitals, networks and in-house biotech
research) in all 50 states and internationally, will help accelerate the
internal review process at a number of the hospitals currently participating in
the study. As of December 31, 2008 we have enrolled a total of 47
patients of the expected 92-patient trial. We expect to complete
patient enrollment in this study in 2009. Once the FDA grants
approval, we plan to conduct additional pre-clinical and clinical trials on the
use of the Delcath PHP System™ with other chemotherapy agents used to treat
cancer in the liver and seek additional FDA pre-market approvals.
In 2004
we began a multi-arm Phase II clinical trial for the use of the Delcath PHP
System™ with melphalan in the treatment of hepatocellular carcinomas as well as
neuroendocrine and adenocarcenoma cancers that have spread to the
liver. In 2007 an additional arm was added to the Phase II trial to
treat patients with metastatic melanomas that have spread to the liver who have
received prior surgical isolated hepatic perfusion. Based on
promising initial clinical results, we plan to focus our efforts on enrolling
patients for the treatment of metastatic neuroendocrine cancer. We
have currently enrolled 23 of the 25 patients required for the neuroendocrine
arm of the trial and we anticipate that we will complete patient enrollment in
this arm of the study in 2009.
As
indicated above, the Company is focusing on enrolling patients in the
neuroendocrine arm of the Phase II study. The other two arms treating
colorectal cancer and primary liver cancer will be refocused so as to optimize
the progress of those arms of the trial. The Company has entered into a
dialogue with the FDA concerning a clinical trial that will focus on the
effectiveness of the Delcath PHP System™ in administering high-dose doxorubicin
as compared with standard systemic treatment with sorafenib for the treatment of
primary liver cancer. In September 2008, the Company received a
conditional approval from the FDA to begin working on that trial.
The
successful development of the Delcath PHP System™ is highly uncertain, and
development costs and timelines can vary significantly and are difficult to
accurately predict. Various statutes and regulations also impact the
manufacturing, safety, labeling, storage, record keeping and marketing of our
system. The lengthy process of completing clinical trials, seeking
FDA approval and subsequent compliance with applicable statutes and regulations
require the expenditure of substantial resources. Any failure by us
to obtain, or any delay in obtaining, regulatory approvals could materially,
adversely affect our business. To date, we have not received approval
for the sale of our system in any market and, therefore, have not generated any
revenues. The Delcath PHP System™ has not yet been approved by the FDA and may
not be marketed in the United States without FDA pre-market
approval.
During
the next twelve months we plan to hire additional personnel to support the
development of the Delcath PHP System™. In June 2008 and July 2008 we hired two
senior executives. We hired a Chief Medical Officer to oversee the
expansion of clinical activity, moving us towards the conclusion of our first
Phase III clinical trial. We also hired a Senior Vice President for Regulatory
Affairs and Quality Systems, a position newly created to manage the extensive
FDA process. Our expenses generally include costs for clinical
studies, securing patents, regulatory activities, manufacturing, personnel, rent
for our facilities, and general corporate and working capital, including general
and administrative expenses. Because we have no FDA-approved product
and no commercial sales, we will continue to be dependent upon existing cash,
the sale of equity or debt securities, or establishing a strategic alliance with
appropriate partners to fund future activities. We cannot be assured that the
pace of patient enrollment will meet our projections, that we will obtain FDA
approval for our Delcath PHP System™, that we will have, or could raise,
sufficient financial resources to sustain our operations pending FDA approval,
or that, if and when the required approvals are obtained, there will be a market
for any of our products.
The
Company's expenditures are highly variable and are dependent upon the
number and pace of patients enrolled in our clinical trials. We
expect that the amount of capital required for our trials will increase over the
coming twelve months due to the increased number of patients enrolled at newly
added clinical trial centers. We believe that we have sufficient
capital for operations through 2009 and to substantially advance our ongoing
Phase III trial.
We are a
development stage company, and since our inception we have raised approximately
$52.7 million (net of fundraising expenses). We have financed our
operations primarily through public and private placements of equity
securities. We have
incurred net losses since we were founded and we expect to continue to incur
significant and increasing net losses over the coming years.
Liquidity
and Capital Resources
Our
future results are subject to substantial risks and uncertainties. We
have operated at a loss for our entire history and we anticipate that losses
will continue over the coming years. There can be no assurance that
we will ever generate significant revenues or achieve
profitability. We expect to use cash, cash equivalents and investment
proceeds to fund our operating activities. Our future liquidity and
capital requirements will depend on numerous factors, including the progress of
our research and product development programs, including our ongoing Phase II
and Phase III clinical trials; 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. We continue to move forward aggressively, most notably by adding
new sites to our ongoing clinical trials and increasing our efforts to enroll
additional patients in these trials. As we seek FDA approval and get our product
to market we expect that our capital expenditures will increase
significantly.
At
December 31, 2008, cash and cash equivalents totaled $10,787,137, as compared to
$7,886,937 at December 31, 2007. Nearly all of our
available funds are currently invested in money market funds and certificates of
deposit, which are reflected in our financial statements as cash and cash
equivalents. At December 31, 2007, in addition to cash and cash equivalents
totaling $7,886,937 we had $9,878,700 invested in treasury bills which were
listed separately from cash and cash equivalents in our financial statements.
At December 31, 2007, treasury bills plus cash and cash equivalents had a
combined value of $17,765,637.
During
the twelve months ended December 31, 2008, we used $6,723,277 of cash in our
operating activities. This amount compares to $5,569,197 used in our operating
activities during the comparable twelve month period ended December 31,
2007. The increase of $1,154,080, or 20.7%, is primarily due to
accelerated clinical development costs relating to all facets of the Delcath PHP
System™. We expect that our cash allocated to operating activities
will increase significantly as we aggressively move toward the full enrollment
and completion of our first Phase III clinical trial, and continue to navigate
the extensive FDA approval process. We believe we have sufficient capital to
fund our current clinical trials through 2009.
At
December 31, 2008, the Company’s accumulated deficit was approximately $47.3
million. Because our business does not generate any positive cash
flow from operating activities, we will likely need to raise additional capital
to develop our product beyond the current clinical trials or to fund development
efforts relating to new products. We anticipate that we could raise
additional capital in the event that we find it in our best interest to do so.
We anticipate raising such additional capital by either borrowing money, selling
shares of our capital stock, or entering into strategic alliances with
appropriate partners. To the extent additional capital is not
available when we need it, we may be forced to abandon some or all of our
development and commercialization efforts, which would have a material adverse
effect on the prospects of our business. Further, our assumptions
relating to our cash requirements may differ materially from those planned
because of a number of factors, including significant unforeseen delays in the
regulatory approval process, changes in the focus and direction of our clinical
trials and costs related to commercializing our product.
We have
funded our operations through a combination of private placements of our
securities and through the proceeds of our public offerings in 2000 and 2003
along with our registered direct offering in 2007. Please see the
detailed discussion of our various sales of securities described in Note
3.
Contractual
Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
We are
obligated to make future payments under various contracts such as long-term
research and development agreement obligations and lease agreements. The
following table provides a summary of our significant contractual obligations at
December 31, 2008 (in millions):
|
Payments
Due by Period
|
||||||
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
|
|
Operating
Activities:
|
||||||
|
Research
Activities
|
$ 3.0
|
$ 1.0
|
$ 1.0
|
$ 1.0
|
$ -
|
$ -
|
|
Operating
Leases
|
0.3
|
0.2
|
0.1
|
-
|
-
|
-
|
We have
an operating lease for office space that will expire on July 30, 2010, with a
rent obligation of $221,000 per annum.
Our five
year CRADA for the development of the Delcath PHP System™ with the NCI expired
on December 14, 2006 and has been extended for an additional five years to
December 14, 2011. The principal goal of the CRADA is to continue the
development of a novel form of regional cancer therapy by designing clinical
protocols utilizing the Delcath PHP System™ to regionally deliver
chemotherapeutics to patients with unresectable malignancies confined to an
organ or region of the body. Under the five year extension, we will pay
$1,000,000 per year for clinical support. These funds are payable in quarterly
amounts of $250,000, and will be used for material support of the CRADA
(including equipment, supplies, travel, and other related CRADA support), as
well as for support of existing or new scientific or clinical staff to be hired
by NCI who are to perform work under the CRADA.
Future
Capital Needs; Additional Future Funding
Our
future results are subject to substantial risks and uncertainties. We have
operated at a loss for our entire history and there can be no assurance that we
will ever achieve consistent profitability. We believe that our capital
resources are adequate to fund operations for the next twelve months, but
anticipate that we will require additional working capital to continue our
operations after the year ended December 31, 2009. There can be no assurance
that such working capital will be available on acceptable terms, if at
all.
Results
of Operations for the Year Ended December 31, 2008; Comparisons of Results of
the Years Ended December 31, 2007 and 2006
We have
operated at a loss for our entire history. We had a net loss for the twelve
months ended December 31, 2008, of $6,864,885, which is $3,201,379, or 87.4%,
more than the net loss from continuing operations for the same period in
2007. This increase is primarily due to increased research and development
costs due to an acceleration of patient enrollment as discussed below.
Additionally, the warrants issued in 2007 as part of our sale of common stock
are considered to be derivatives and are subject to valuation and adjustment on
a quarterly basis (see item 7A, below for a complete description). This
mark-to-market adjustment of the warrant valuation resulted in the recording of
$1,103,682 in derivative instrument income for the year ended December 31, 2008;
a $1,613,318 decrease from the $2,717,000 of derivative instrument income
recorded in the year ended December 31, 2007. This fluctuation accounts
for approximately fifty percent of the difference in net loss between
2008 and 2007.
We had a
net loss for the twelve months ended December 31, 2007, of $3,663,506, which is
$7,288,099, or 66.6%, less than the net loss from continuing operations for the
same period in 2006. This substantial decrease is primarily due to the
resolution of various legal matters that had been instituted in 2006, and their
related extraordinary costs which were incurred in 2006. There were, however,
additional expenses relating to a five-year extension to the CRADA with the NCI
that initially expired in December 2006. This extension was necessary for
continuing and expanding the collaboration between the Company and the NCI, but
will result in greater costs to the Company. The agreement with the NCI required
that the annual payments to them be increased five-fold from the previous
agreement. Additionally, the warrants that were issued in 2007 as part of the
Company’s sale of common stock and warrants are considered to be derivatives and
are subject to valuation and adjustment on a quarterly basis. This resulted in
the recording of derivative instrument income for the year of $2,717,000 which
substantially reduced the net loss from continuing operations.
General and Administrative
Expenses
General
and administrative expenses increased by less than 1% from $2,671,782 during the
twelve months ended December 31, 2007, to $2,687,688 for the twelve months ended
December 31, 2008. An increase in fees paid to Board of Director
members as well as an increase in insurance related costs during 2008 was offset
primarily by a reduction of payroll related expenses charged to general and
administrative which accounted for slight increase in the expense during fiscal
year 2008.
General
and administrative expenses decreased by 70.3% from $8,980,424 during the twelve
months ended December 31, 2006, to $2,671,782 for the twelve months ended
December 31, 2007. While legal fees incurred during 2007 were substantially less
than those incurred in 2006 and would have resulted in a greater reduction in
period-to-period expenses due to the resolution of various legal matters,
additional charges to general and administrative expenses were incurred in 2007
by share-based compensation for options granted to new members of the Board of
Directors, options granted to the President and Chief Executive Officer, and
options granted to newly hired management employees. Further, the cashless
exercise of options by outgoing members of the Board of Directors resulted in
additional charges to general and administrative expenses during
2007.
Research and Development
Expenses
During
the twelve months ended December 31, 2008, we incurred $5,378,335 in research
and development costs, which is a 26.8% increase as compared to $4,241,517 of
research and development costs we incurred during 2007. This increase is
primarily due to the acceleration of enrollment in our Phase III trial. With the
addition of several trial sites throughout 2008, we have seen a marked increase
in the rate of patient enrollment and treatment which has had a noticeable
impact on our research and development expenses.
During
the twelve months ended December 31, 2007, we incurred $4,241,517 in research
and development costs, which is a 56% increase as compared to $2,718,084 of
research and development costs during 2006. This change was primarily due to
additional expenses with the NCI, as well as accelerated clinical development
costs relating to all facets of the Delcath PHP System™ which required greater
expense but will hasten the progress toward final approval. In addition, the
Company allocated share-based compensation for stock and options awarded to
personnel involved with research and development related
initiatives.
Interest
Income
Interest
income generated during 2008 and 2007 is from our money market accounts and
treasury bills. During the twelve months ended December 31, 2008, we had
interest income of $299,956, as compared to interest income of $532,793 for the
same period in 2007, a 43.7% change. This decrease is primarily due to a reduced
cash position in 2008 from that in 2007, as well as the overall market
conditions which yielded a lower percentage return on our
investments.
During
the twelve months ended December 31, 2007, we had interest income of $532,793,
as compared to interest income of $620,403 for the same period in 2006, a 14%
change. This decrease is primarily due to a reduced cash position in 2007 from
that in 2006. The net proceeds from the sale of the Company’s common stock and
warrants in September 2007 were received on the last day of the third quarter of
fiscal 2007 and therefore did not have a material impact on annual interest
income.
Application
of Critical Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). Certain accounting
policies have a significant impact on amounts reported in the financial
statements. The notes to financial statements included in Item 8 contain a
summary of the significant accounting policies and methods used in the
preparation of our financial statements. We are still in the
development stage and have no revenues, trade receivables, inventories, or
significant fixed or intangible assets, and therefore have very limited
opportunities to choose among accounting policies or methods. In many
cases, we must use an accounting policy or method because it is the only policy
or method permitted under GAAP.
Additionally,
we devote substantial resources to clinical trials and other research and
development activities relating to obtaining FDA and other approvals for the
Delcath PHP System™, the cost of which is required to be charged to expense as
incurred. This further limits our choice of accounting policies and
methods. Similarly, management believes there are very limited
circumstances in which our financial statement estimates are significant or
critical.
We
consider the valuation allowance for the deferred tax assets to be a significant
accounting estimate. In applying SFAS No. 109, “Accounting for Income
Taxes,” management estimates future taxable income from operations and tax
planning strategies in determining if it is more likely than not that we will
realize the benefits of our deferred tax assets. Management believes
the Company does not have any uncertain tax positions as defined under FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109.”
The
Company has adopted the provisions of SFAS 123R. SFAS 123R
establishes accounting for equity instruments exchanged for employee
services. Under the provisions of SFAS 123R, share-based compensation
is measured at the grant date, based upon the fair value of the award, and is
recognized as an expense over the option holders’ requisite service period
(generally the vesting period of the equity grant). Effective
January 1, 2006, the Company adopted the modified prospective approach and,
accordingly, prior period amounts have not been restated. Under this
approach, the Company is required to record compensation cost for all
share-based payments granted after the date of adoption based upon the grant
date fair value, estimated in accordance with the provisions of SFAS 123R, and
for the unvested portion of all share-based payments previously granted that
remain outstanding based on the grant date fair value, estimated in accordance
with the original provisions of SFAS 123. The Company has expensed
its share-based compensation for share-based payments granted after January 1,
2006 under the ratable method, which treats each vesting tranche as if it were
an individual grant.
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances. The
adoption of SFAS No. 157 did not have a material effect on the carrying values
of the Company’s assets.
SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, SFAS No. 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
We may be
exposed to market risk through changes in market interest rates that could
affect the value of our investments. However, the Company’s
marketable securities consist of short-term and/or variable rate instruments
and, therefore, a change in interest rates would not have a material impact on
the fair value of our investment portfolio or related income.
In
January 2008, the Company entered into a research and development agreement with
Aethlon Medical, Inc., (“AEMD”) a publicly traded company whose securities are
quoted on the Over the Counter Bulletin Board. As part of this
agreement, the Company received 100,000 shares of restricted common stock of
AEMD. The Company allocated $46,200 of the cost of the
agreement to the fair value of the common stock acquired, using the closing
stock price at the date of the agreement and then discounting that value due to
certain sale restrictions on the stock being held. During the third
quarter ending September 30, 2008, the restriction on the common stock held
lapsed and as a result the fair value of the stock is calculated using the
closing stock price (unadjusted) at December 31, 2008. The investment
is classified as an available for sale security and had a fair value on December
31, 2008 of $22,000, which included a gross unrealized loss of $24,200, which is included as a
component of comprehensive loss.
The
Company measures all derivatives, including certain derivatives embedded in
contracts, at fair value and recognizes them in the balance sheet as an asset or
a liability, depending on the Company’s rights and obligations under the
applicable derivative contract. In 2007, the Company completed the
sale of 3,833,108 shares of its Common Stock and the issuance of warrants to
purchase 1,916,554 common shares in a private placement to institutional and
accredited investors. The Company received net proceeds of $13,303,267 in this
transaction. The Company allocated $4,269,000 of the total proceeds to warrants.
The shares were offered by the Company pursuant to an effective shelf
registration statement on Form S-3, which was filed with the Securities and
Exchange Commission on May 25, 2007 and was declared effective on June 7, 2007
(File No. 333-143280). The $4,269,000 in proceeds allocated to the
warrants was classified as a liability in accordance with EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s own Stock.” The warrants may require cash settlement in
the event of certain circumstances; including the Company’s inability to deliver
registered shares upon the exercise of the warrants by such warrant holders. The
warrants also contain a cashless exercise feature in certain circumstances.
Accordingly, the warrants have been accounted for as derivative instrument
liabilities, which are subject to mark-to-market adjustment in each period. As a
result, for the twelve month period ended December 31, 2008, the Company
recorded pre-tax derivative instrument income of $1,103,682. The resulting
derivative instrument liability totaled $448,318 at December 31, 2008.
Management believes that the possibility of an actual cash settlement with a
warrant holder of the recorded liability is quite remote, and expects that the
warrants will either be exercised or expire worthless, at which point the then
existing derivative liability will be credited to equity. The fair value of the
warrants was determined by using the Black-Scholes model assuming a risk free
interest rate of 1.20%, volatility of 68.97% and an expected life equal to the
September 24, 2012 contractual life of the warrants.
Item 8. Financial Statements and
Supplementary Data
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheets as of December 31, 2008 and 2007
|
F-2
|
|
Statements
of Operations for the years ended December 31, 2008, 2007, and 2006 and
Cumulative from Inception (August 5, 1988) to December 31,
2008
|
F-3
|
|
Statements
of Other Comprehensive Loss for the years ended December 31, 2008, 2007,
2006 and Cumulative from Inception (August 5, 1988) to December 31,
2008
|
F-4
|
|
Statements
of Stockholders’ Equity for the years ended December 31, 2008, 2007, and
2006 and Cumulative from Inception (August 5, 1988) to December 31,
2008
|
F-5-F-7
|
|
Statements
of Cash Flows for the years ended December 31, 2008, 2007, and 2006 and
Cumulative from Inception (August 5, 1988) to December 31,
2008
|
F-8
|
|
Notes
to Financial Statements
|
F-9-F-21
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Delcath Systems, Inc.
We have
audited the accompanying balance sheets of Delcath Systems, Inc. (“Company”) as
of December 31, 2008 and 2007, and the related statements of operations, other
comprehensive loss, stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2008 and cumulative from inception
(August 5, 1988) to December 31, 2008. We also have audited the Company’s
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Delcath
Systems Inc.’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to express an
opinion on these financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Delcath Systems, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008 and
cumulative from inception (August 5, 1988) to December 31, 2008 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, Delcath Systems Inc. maintained in all material respects
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
/s/ CCR
LLP
Glastonbury,
CT
February
27, 2009
DELCATH SYSTEMS,
INC.
(A
Development Stage Company)
Balance
Sheets as of December 31, 2008 and 2007
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
10,787,137
|
$
|
7,886,937
|
|||
|
Investments
- treasury bills
|
200,710
|
9,878,700
|
|||||
|
Investment
– marketable equity security
|
22,000
|
—
|
|||||
|
Prepaid
expenses
|
331,346
|
325,452
|
|||||
|
Total
current assets
|
$
|
11,341,193
|
$
|
18,091,089
|
|||
|
Property
and equipment, net
|
17,489
|
15,037
|
|||||
|
Total
assets
|
$
|
11,358,682
|
$
|
18,106,126
|
|||
|
Liabilities and Stockholders'
Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
703,489
|
$
|
125,278
|
|||
|
Derivative
instrument liability
|
448,318
|
1,552,000
|
|||||
|
Total
current liabilities
|
1,151,807
|
1,677,278
|
|||||
|
Commitments
and contingencies (Note 5)
|
—
|
—
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred
stock, $.01 par value; 10,000,000 shares authorized; no shares issued
and outstanding
|
—
|
—
|
|||||
|
Common
stock, $.01 par value; 70,000,000 shares authorized
|
253,553
|
252,593
|
|||||
|
Additional
paid-in capital
|
57,292,685
|
56,626,533
|
|||||
|
Deficit
accumulated during development stage
|
(47,315,163)
|
(40,450,278)
|
|||||
|
Accumulated
other comprehensive loss
|
(24,200)
|
—
|
|||||
|
Total
stockholders' equity
|
10,206,875
|
16,428,848
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
11,358,682
|
$
|
18,106,126
|
|||
See
Accompanying Notes to these Financial Statements.
DELCATH SYSTEMS,
INC.
(A
Development Stage Company)
Statements
of Operations
for
the Years Ended December 31, 2008, 2007, and 2006 and
Cumulative
from Inception (August 5, 1988) to December 31, 2008
|
Year
ended December 31,
|
Cumulative
from
inception
(August 5,
1988)
To
|
||||||||||||
|
2008
|
2007
|
2006
|
December
31, 2008
|
||||||||||
|
Costs
and expenses
|
|||||||||||||
|
General
and administrative expenses
|
$
|
2,687,688
|
$
|
2,671,782
|
$
|
8,980,424
|
$
|
22,779,099
|
|||||
|
Research
and development costs
|
5,378,335
|
4,241,517
|
2,718,084
|
29,397,416
|
|||||||||
|
Total
costs and expenses
|
8,066,023
|
6,913,299
|
11,698,508
|
52,176,515
|
|||||||||
|
Operating
loss
|
(8,066,023)
|
(6,913,299)
|
(11,698,508)
|
(52,176,515)
|
|||||||||
|
Derivative
instrument income
|
1,103,682
|
2,717,000
|
—
|
3,820,682
|
|||||||||
|
Interest
income
|
299,956
|
532,793
|
620,403
|
2,786,748
|
|||||||||
|
Other
(expense)/income
|
(202,500)
|
—
|
126,500
|
(76,000)
|
|||||||||
|
Interest
expense
|
—
|
—
|
—
|
(171,473)
|
|||||||||
|
Net
loss
|
$
|
(6,864,885)
|
$
|
(3,663,506)
|
$
|
(10,951,605)
|
$
|
(45,816,558)
|
|||||
|
Common
share data
|
|||||||||||||
|
Basic
and diluted loss per share
|
$
|
(0.27)
|
$
|
(0.16)
|
$
|
(0.55)
|
|||||||
|
Weighted
average number of basic and diluted common
shares outstanding
|
25,300,703
|
22,321,488
|
19,906,932
|
||||||||||
See
Accompanying Notes to these Financial Statements.
DELCATH
SYSTEMS, INC.
(A
Development Stage Company)
Statements
of Other Comprehensive Loss
for
the Years Ended December 31, 2008, 2007, and 2006 and Cumulative from Inception
(August 5, 1988) to December 31, 2008
|
Years
Ended December 31,
|
|||||||
|
2008
|
2007
|
2006
|
Cumulative
|
||||
|
Other
comprehensive loss:
|
|||||||
|
Net
loss
|
$ (6,864,885)
|
$ (3,663,506)
|
$
(10,951,605)
|
$ (45,816,558)
|
|||
|
Change
in unrealized loss on investments
|
(24,200)
|
—
|
—
|
(24,200)
|
|||
|
Other
comprehensive loss
|
$ (6,889,085)
|
$ (3,663,506)
|
$
(10,951,605)
|
$ (45,840,758)
|
|||
See Accompanying Notes to these
Financial Statements.
DELCATH
SYSTEMS, INC.
(A
Development Stage Company)
Statements
of Stockholders’ Equity
for
the Years Ended December 31, 2008, 2007, and 2006 and Cumulative from Inception
(August 5, 1988) to December 31, 2008
|
Common
stock $.01 par value
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Issued
|
In
Treasury
|
Outstanding
|
Preferred Stock $0.01 Par Value
|
Class A
Preferred Stock $0.01 Par Value
|
Class B
Preferred Stock $0.01 Par Value
|
Deficit
Accumulated
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
Additional Paid-in capital
|
During Development Stage
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued in connection with the formation of the
Company as of August 22, 1988
|
621,089
|
$
|
6,211
|
-
|
$
|
-
|
621,089
|
$
|
6,211
|
-
|
-
|
$
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
(5,211)
|
$
|
-
|
$
|
1,000
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of preferred stock, August 22, 1988
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,000,000
|
20,000
|
-
|
-
|
480,000
|
-
|
500,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
returned due to relevant technology milestones not being fully achieved,
March 8, 1990
|
-
|
-
|
(414,059
|
)
|
(4,141
|
)
|
(414,059
|
)
|
(4,141
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
4,141
|
-
|
-
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, October 2, 1990
|
-
|
-
|
17,252
|
173
|
17,252
|
173
|
-
|
-
|
-
|
-
|
-
|
-
|
24,827
|
-
|
25,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock (common stock at $7.39 per share and Class B preferred stock at
$2.55 per share), January 23, 1991
|
-
|
-
|
46,522
|
465
|
46,522
|
465
|
-
|
-
|
-
|
-
|
416,675
|
4,167
|
1,401,690
|
-
|
1,406,322
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, August 30, 1991
|
-
|
-
|
1,353
|
14
|
1,353
|
14
|
-
|
-
|
-
|
-
|
-
|
-
|
9,987
|
-
|
10,001
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, December 31, 1992
|
-
|
-
|
103,515
|
1,035
|
103,515
|
1,035
|
-
|
-
|
-
|
-
|
-
|
-
|
1,013,969
|
-
|
1,015,004
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock (including 10,318 warrants, each to purchase one share of common
stock at $10.87), July 15, 1994
|
-
|
-
|
103,239
|
1,032
|
103,239
|
1,032
|
-
|
-
|
-
|
-
|
-
|
-
|
1,120,968
|
-
|
1,122,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, December 19, 1996
|
-
|
-
|
39,512
|
395
|
39,512
|
395
|
-
|
-
|
-
|
-
|
-
|
-
|
999,605
|
-
|
1,000,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
issued (including 78,438 warrants each to purchase one share of common
stock at $10.87) in connection with conversion of short-term borrowings as
of December 22, 1996
|
58,491
|
585
|
98,388
|
984
|
156,879
|
1,569
|
-
|
-
|
-
|
-
|
-
|
-
|
1,703,395
|
-
|
1,704,964
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, December 31, 1997
|
53,483
|
535
|
-
|
-
|
53,483
|
535
|
-
|
-
|
-
|
-
|
-
|
-
|
774,465
|
-
|
775,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
13,802
|
138
|
3,450
|
35
|
17,252
|
173
|
-
|
-
|
-
|
-
|
-
|
-
|
30,827
|
-
|
31,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
issued as compensation for consulting services valued at $10.87 per share
based on a 1996 agreement
|
2,345
|
23
|
828
|
8
|
3,173
|
31
|
-
|
-
|
-
|
-
|
-
|
-
|
34,454
|
-
|
34,485
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
issued in connection with exercise of warrants
|
21,568
|
216
|
-
|
-
|
21,568
|
216
|
-
|
-
|
-
|
-
|
-
|
-
|
234,182
|
-
|
234,398
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, January 16, 1998
|
34,505
|
345
|
-
|
-
|
34,505
|
345
|
-
|
-
|
-
|
-
|
-
|
-
|
499,655
|
-
|
500,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, September 24, 1998
|
3,450
|
35
|
-
|
-
|
3,450
|
35
|
-
|
-
|
-
|
-
|
-
|
-
|
56,965
|
-
|
57,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
returned as a settlement of a dispute with a former director at $1.45 per
share, the price originally paid, April 17, 1998
|
(3,450
|
)
|
(35)
|
-
|
-
|
(3,450
|
)
|
(35
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,965
|
)
|
-
|
(5,000
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
8,626
|
86
|
-
|
-
|
8,626
|
86
|
-
|
-
|
-
|
-
|
-
|
-
|
67,414
|
-
|
67,500
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock (including 5,218 warrants each to purchase one share of common
stock at $14.87), June 30, 1999
|
46,987
|
470
|
-
|
-
|
46,987
|
470
|
-
|
-
|
-
|
-
|
-
|
-
|
775,722
|
-
|
776,192
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares
issued in connection with exercise of warrants
|
2,300
|
23
|
-
|
-
|
2,300
|
23
|
-
|
-
|
-
|
-
|
-
|
-
|
24,975
|
-
|
24,998
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock, April 14, 2000
|
230,873
|
2,309
|
-
|
-
|
230,873
|
2,309
|
-
|
-
|
-
|
-
|
-
|
-
|
499,516
|
-
|
501,825
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
690,910
|
6,909
|
-
|
-
|
690,910
|
6,909
|
-
|
-
|
-
|
-
|
-
|
-
|
992,161
|
(1,498,605
|
)
|
(499,535
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Conversion
of preferred stock
|
833,873
|
8,339
|
-
|
-
|
833,873
|
8,339
|
-
|
-
|
(2,000,000
|
)
|
(20,000
|
)
|
(416,675
|
)
|
(4,167
|
)
|
15,828
|
-
|
-
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale
of stock (including 1,200,000 warrants each to purchase one share of
common stock at $6.60), October 19, 2000
|
1,200,000
|
12,000
|
-
|
-
|
1,200,000
|
12,000
|
-
|
-
|
-
|
-
|
-
|
-
|
5,359,468
|
-
|
5,371,468
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See
Accompanying Notes to these Financial Statements.
DELCATH
SYSTEMS, INC.
(A
Development Stage Company)
Statements
of Stockholders’ Equity
for
the Years Ended December 31, 2008, 2007, and 2006 and Cumulative from Inception
(August 5, 1988) to December 31, 2008
|
Common
stock $.01 par value
|
|||||||||||||||||||||||||||
|
Issued
|
In
Treasury
|
Outstanding
|
Deficit
Accumulated
|
||||||||||||||||||||||||
|
#
of Shares
|
Amount
|
#
of Shares
|
Amount
|
#
of Shares
|
Amount
|
Additional Paid-in capital
|
During
Development Stage
|
Total
|
|||||||||||||||||||
|
Shares issued as compensation
for stock sale
|
85,000
|
850
|
-
|
-
|
85,000
|
850
|
(850)
|
-
|
-
|
||||||||||||||||||
|
1,720
stock options (including 1,720 warrants each to purchase one share of
common stock at $6.00), issued as compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
3,800
|
-
|
3,800
|
||||||||||||||||||
|
Sum
of fractional common shares cancelled after year 2000 stock
splits
|
(36)
|
(1)
|
-
|
-
|
(36)
|
(1)
|
1
|
-
|
-
|
||||||||||||||||||
|
Stock
warrants (150,000 at $7.00 and 150,000 at $6.60) issued as
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
198,000
|
-
|
198,000
|
||||||||||||||||||
|
Sale
of stock on April 3, 2002
|
243,181
|
2,432
|
-
|
-
|
243,181
|
2,432
|
265,068
|
-
|
267,500
|
||||||||||||||||||
|
Repurchases
of stock, November and December 2002
|
(28,100)
|
(281)
|
(28,100)
|
(281)
|
(50,822)
|
-
|
(51,103
|
||||||||||||||||||||
|
Amortization
since inception of compensatory stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
3,760,951
|
-
|
3,760,951
|
||||||||||||||||||
|
Forfeiture
since inception of stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,240,780)
|
-
|
(1,240,780
|
||||||||||||||||||
|
Sale
of stock (including 3,895,155 warrants to purchase one share of common
stock at $0.775) on May 20, 2003 including underwriter's exercise of over
allotment option
|
3,895,155
|
38,952
|
-
|
-
|
3,895,155
|
38,952
|
1,453,696
|
-
|
1,492,648
|
||||||||||||||||||
|
Proceeds
from sale of unit option, 2003
|
-
|
-
|
-
|
-
|
-
|
-
|
68
|
-
|
68
|
||||||||||||||||||
|
Exercise
of warrants, 2003
|
1,730,580
|
17,305
|
-
|
-
|
1,730,580
|
17,305
|
1,273,895
|
-
|
1,291,200
|
||||||||||||||||||
|
Sale
of stock, 2004
|
2,793,975
|
27,940
|
-
|
-
|
2,793,975
|
27,940
|
5,622,690
|
-
|
5,650,630
|
||||||||||||||||||
|
Exercise
of Warrants, 2004
|
20,265
|
203
|
-
|
-
|
20,265
|
203
|
26,547
|
-
|
26,750
|
||||||||||||||||||
|
Stock
options issued as compensation, 2004
|
-
|
-
|
-
|
-
|
-
|
-
|
5,222
|
-
|
5,222
|
||||||||||||||||||
|
Exercise
of warrants, 2005
|
4,841,843
|
48,419
|
-
|
-
|
4,841,843
|
48,419
|
7,637,183
|
-
|
7,878,484
|
||||||||||||||||||
|
Exercise
of stock options, 2005
|
659,000
|
6,590
|
-
|
-
|
659,000
|
6,590
|
569,180
|
-
|
575,770
|
||||||||||||||||||
|
Stock
options issued as compensation, 2005
|
-
|
-
|
-
|
-
|
-
|
-
|
8,270
|
-
|
8,270
|
||||||||||||||||||
|
Sale
of stock, November, 2005
|
753,013
|
7,530
|
-
|
-
|
753,013
|
7,530
|
2,302,471
|
-
|
2,310,001
|
||||||||||||||||||
|
Shares
issued as compensation, 2005
|
36,925
|
369
|
-
|
-
|
36,925
|
369
|
103,056
|
-
|
103,425
|
||||||||||||||||||
|
Deficit accumulated from
inception to December 31, 2005
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(24,336,562)
|
(24,336,562)
|
||||||||||||||||||
|
Balance
at December 31, 2005
|
18,877,753
|
$
|
188,778
|
(28,100)
|
$
|
(281)
|
18,849,653
|
$
|
188,497
|
$
|
38,244,566
|
$
|
(25,835,167)
|
$
|
12,597,896
|
||||||||||||
|
Vesting
of stock options, 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
446,000
|
-
|
446,000
|
||||||||||||||||||
|
Stock
options issued as compensation, 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
505,282
|
-
|
505,282
|
||||||||||||||||||
|
Exercise
of warrants, 2006
|
1,606,928
|
$
|
16,069
|
-
|
-
|
1,606,928
|
$
|
16,069
|
4,877,586
|
-
|
4,893,655
|
||||||||||||||||
|
Exercise
of stock options, 2006
|
104,182
|
1,042
|
-
|
-
|
104,182
|
1,042
|
295,024
|
-
|
296,066
|
||||||||||||||||||
|
Shares
issued in connection with settlement of Consent Solicitation lawsuit,
2006
|
100,000
|
1,000
|
-
|
-
|
100,000
|
1,000
|
305,000
|
-
|
306,000
|
||||||||||||||||||
|
Net
loss, 2006
|
-
|
-
|
-
|
-
|
-
|
-
|
(10,951,605)
|
(10,951,605)
|
|||||||||||||||||||
|
Balance
at December 31, 2006
|
20,688,863
|
$
|
206,889
|
(28,100)
|
$
|
(281)
|
20,660,763
|
$
|
206,608
|
$
|
44,673,458
|
$
|
(36,786,772)
|
$
|
8,093,294
|
||||||||||||
See
Accompanying Notes to these Financial Statements.
DELCATH
SYSTEMS, INC.
(A
Development Stage Company)
Statements
of Stockholders’ Equity
for
the Years Ended December 31, 2008, 2007, and 2006 and Cumulative from Inception
(August 5, 1988) to December 31, 2008
|
Common
stock $.01 par value
|
||||||||||
|
Issued
|
In
Treasury
|
Outstanding
|
||||||||
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
# of Shares
|
Amount
|
Additional
Paid-in
Capital
|
Deficit
Accumulated During Development Stage
|
Accumulated
Other Comprehensive Loss
|
Total
|
|
|
Exercise
of stock options, 2007
|
715,413
|
7,154
|
-
|
-
|
715.413
|
7,154
|
1,793,029
|
-
|
-
|
1,800,183
|
|
Shares
issued as compensation, 2007
|
50,000
|
500
|
-
|
-
|
50,000
|
500
|
210,500
|
-
|
-
|
211,000
|
|
Sale
of stock (including 1,916,554 warrants each to purchase one share of
common stock at $4.53), 2007
|
3,833,108
|
38,331
|
-
|
-
|
3,833,108
|
38,331
|
8,995,936
|
-
|
-
|
9,034,267
|
|
Compensation
expense for issuance of stock options, 2007
|
-
|
-
|
-
|
-
|
-
|
-
|
953,610
|
-
|
-
|
953,610
|
|
Net
loss, 2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,663,506)
|
-
|
(3,663,506)
|
|
Balance
at
December 31, 2007 |
25,287,384
|
$
252,874
|
(28,100)
|
$ (281)
|
25,259,284
|
$ 252,593
|
$
56,626,533
|
$ (40,450,278)
|
$ -
|
$ 16,428,848
|
|
Cashless
exercise of stock options, 2008
|
970
|
10
|
-
|
-
|
970
|
10
|
1,940
|
-
|
-
|
1,950
|
|
Shares
issued as compensation, 2008
|
95,000
|
950
|
-
|
-
|
95,000
|
950
|
205,950
|
-
|
-
|
206,900
|
|
Compensation
expense for restricted stock, 2008
|
-
|
-
|
-
|
-
|
-
|
80,666
|
80,666
|
-
|
-
|
80,666
|
|
Compensation
expense for issuance of stock options, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
377,596
|
-
|
-
|
377,596
|
|
Change
in unrealized loss on investments, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(24,200)
|
(24,200)
|
|
Net
loss, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,864,885)
|
-
|
(6,864,885)
|
|
Balance
at
December 31, 2008 |
25,383,354
|
$
253,834
|
(28,100)
|
$ (281)
|
25,355,254
|
$ 253,553
|
$
57,292,685
|
$ (47,315,163)
|
$ (24,200)
|
$ 10,206,875
|
See
Accompanying Notes to these Financial Statements.
DELCATH SYSTEMS,
INC.
(A Development Stage
Company)
Statements of Cash
Flows
for the Years Ended December 31,
2008, 2007, and 2006 and
Cumulative from Inception (August 5,
1988) to December 31, 2008
|
Cumulative
|
||||||||||||||
|
from
inception
|
||||||||||||||
|
(August
5, 1988)
|
||||||||||||||
|
Year
ended December 31,
|
to
|
|||||||||||||
|
2008
|
2007
|
2006
|
December
31, 2008
|
|||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||
|
Net
loss
|
$
|
(6,864,885)
|
$
|
(3,663,506)
|
$
|
(10,951,605)
|
$
|
(45,816,558)
|
||||||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||||
|
Stock
option compensation expense
|
379,546
|
1,404,610
|
1,042,448
|
5,360,266
|
||||||||||
|
Stock
and warrant compensation expense
|
287,566
|
211,000
|
306,000
|
1,144,278
|
||||||||||
|
Depreciation
expense
|
5,861
|
4,323
|
3,835
|
51,762
|
||||||||||
|
Amortization
of organization costs
|
—
|
—
|
—
|
42,165
|
||||||||||
|
Derivative
liability fair value adjustment
|
(1,103,682)
|
(2,717,000)
|
—
|
(3,820,682)
|
||||||||||
|
Changes
in assets and liabilities:
|
||||||||||||||
|
Increase
in prepaid expenses
|
(5,894)
|
(263,535)
|
(35,000)
|
(331,346)
|
||||||||||
|
Decrease
in interest receivable
|
—
|
—
|
91,574
|
—
|
||||||||||
|
Increase
(decrease) in accounts payable and accrued expenses
|
578,211
|
(545,089)
|
340,297
|
500,988
|
||||||||||
|
Net
cash used in operating activities
|
(6,723,277)
|
(5,569,197)
|
(9,202,451)
|
(42,869,126)
|
||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||
|
Purchase
of equipment, furniture and fixtures
|
(8,313)
|
(15,641)
|
—
|
(69,252)
|
||||||||||
|
Purchase
of short-term investments
|
(200,710)
|
(9,878,700)
|
(5,424,548)
|
(37,571,452)
|
||||||||||
|
Purchase
of marketable equity securities
|
(46,200)
|
—
|
—
|
(46,200)
|
||||||||||
|
Proceeds
from maturities of short-term investments
|
9,878,700
|
2,408,302
|
14,114,036
|
37,370,742
|
||||||||||
|
Organization
costs
|
—
|
—
|
—
|
(42,165)
|
||||||||||
|
Net
cash provided by (used in) investing activities
|
9,623,477
|
(7,486,039)
|
8,689,488
|
(358,327)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||
|
Net
proceeds from sale of stock and exercise of stock options and
warrants
|
—
|
14,652,450
|
5,098,555
|
52,657,764
|
||||||||||
|
Repurchases
of common stock
|
—
|
—
|
—
|
(51,103)
|
||||||||||
|
Dividends
paid on preferred stock
|
—
|
—
|
—
|
(499,535)
|
||||||||||
|
Proceeds
from short-term borrowings
|
—
|
—
|
—
|
1,704,964
|
||||||||||
|
Net
cash provided by financing activities
|
—
|
14,652,450
|
5,098,555
|
53,812,090
|
||||||||||
|
Increase
in cash and cash equivalents
|
2,900,200
|
1,597,214
|
4,585,592
|
10,787,137
|
||||||||||
|
Cash
and cash equivalents at beginning of period
|
7,886,937
|
6,289,723
|
1,704,131
|
—
|
||||||||||
|
Cash
and cash equivalents at end of period
|
$
|
10,787,137
|
$
|
7,886,937
|
$
|
6,289,723
|
$
|
10,787,137
|
||||||
|
Supplemental
cash flow information:
|
||||||||||||||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
171,473
|
||||||
|
Supplemental
non-cash activities:
|
||||||||||||||
|
Cashless
exercise of stock options
|
$
|
1,950
|
$
|
451,000
|
$
|
91,166
|
$
|
544,116
|
||||||
|
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
|
||||||
|
Fair
value of warrants issued
|
$
|
—
|
$
|
4,269,000
|
$
|
—
|
$
|
4,269,000
|
||||||
See
Accompanying Notes to these Financial Statements.
DELCATH
SYSTEMS, INC.
(A
Development Stage Company)
Notes
to Financials Statements
for
the Years Ending December 31, 2008, 2007 and 2006
|
(1)
|
Description
of Business and Summary of Significant Accounting
Policies
|
|
(a)
|
Description
of Business
|
Delcath
Systems, Inc. (the “Company”) is a development stage company that develops and
manufactures an innovative device designed to administer high dose chemotherapy
and other therapeutic agents to diseased organs or regions of the body.
The Company was incorporated in the State of Delaware in 1988 and since
its inception has focused its efforts on the development of a single product,
the Delcath PHP System™, for the treatment of tumors of the liver.
In 2006,
the Company began a Phase III clinical trial to support a pre-market approval
application for use of the Delcath PHP System™ with melphalan, a chemotherapy
agent, for the treatment of metastatic melanoma that has spread to the liver.
The trial is ongoing, and the Company hopes to complete enrollment of the
trial in 2009. In 2004, the Company began a multi-arm Phase II clinical trial
for use of the Delcath PHP System™ with certain other cancers that have spread
to the liver and metastatic melanomas that have spread to the liver and have
received certain prior regional treatment. The Company is focusing on
enrolling patients in the neuroendocrine arm of that study. The other
two arms treating metastatic colorectal cancer and primary liver cancer will be
refocused so as to optimize the progress of those arms of the trial. The
Company has entered into a dialogue with the FDA concerning a clinical trial
that will focus on the effectiveness of the Delcath PHP System™ in administering
high-dose doxorubicin as compared with standard systemic treatment with
sorafenib for the treatment of primary liver cancer. In September the
Company received a conditional approval from the FDA to begin working on that
trial. To date, the
Delcath PHP System™ has not been approved by the FDA.
|
(b)
|
Basis
of Financial Statement Presentation
|
The
accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (“GAAP”). The
preparation of financial statements in conformity with GAAP requires management
to make assumptions and estimates that impact the amounts reported in those
statements. Such assumptions and estimates are subject to change in the future
as additional information becomes available or as circumstances are modified.
Actual results could differ from these estimates.
|
(c)
|
Property
and Equipment
|
Property
and equipment (primarily furniture and fixtures) are recorded at cost and are
being depreciated on a straight line basis over the estimated useful lives of
the assets of five years. Accumulated depreciation totaled $51,665 at December
31, 2008 and $45,804 at December 31, 2007. Depreciation expense for the years
ended December 31, 2008, 2007 and 2006 was $5,861, $4,323, and $3,835,
respectively. Maintenance and repairs are charged to operations as incurred.
Expenditures which substantially increase the useful lives of the related assets
are capitalized.
|
(d)
|
Income
Taxes
|
In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109 (“FIN No. 48”). The
interpretation contains a two step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with FASB Statement 109. The
first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. The Company adopted FIN No. 48 as of January 1, 2007. The adoption
of FIN No. 48 did not have any material impact on the Company’s financial
statements
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. See Note 4 for additional information.
|
(e)
|
Stock
Option Plan
|
The
Company accounts for its share-based compensation in accordance with the
provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment” (“SFAS 123R”). SFAS 123R establishes accounting
for equity instruments exchanged for employee services. Under the
provisions of SFAS 123R, share-based compensation is measured at the grant date,
based upon the fair value of the award, and is recognized as an expense over the
option holders’ requisite service period (generally the vesting period of the
equity grant). The Company is required to record compensation cost for all
share-based payments granted based upon the grant date fair value, estimated in
accordance with the provisions of SFAS 123R. The Company has expensed its
share-based compensation for share-based payments granted under the ratable
method, which treats each vesting tranche as if it were an individual
grant.
The
Company periodically grants stock options for a fixed number of shares of common
stock to its employees, directors and non-employee contractors, with an exercise
price greater than or equal to the fair market value of our common stock at the
date of the grant. The Company estimates the fair value of stock
options using a Black-Scholes valuation model. Key inputs used to
estimate the fair value of stock options include the exercise price of the
award, the expected post-vesting option life, the expected volatility of our
stock over the option’s expected term, the risk-free interest rate over the
option’s expected term, and our expected annual dividend
yield. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by persons who receive equity
awards. See Note 3 for additional information.
(f) Derivative Instrument
Liability
The
Company accounts for derivative instruments in accordance with SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities,” as amended,
which establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments embedded in
other financial instruments or contracts and requires recognition of all
derivatives on the balance sheet at fair value, regardless of the hedging
relationship designation. Accounting for changes in the fair value of the
derivative instruments depends on whether the derivatives qualify as hedge
relationships and the types of relationships designated are based on the
exposures hedged. At December 31, 2008 and 2007, the Company did not have any
derivative instruments that were designated as hedges.
Derivative
instrument income of $1,103,682 and $2,717,000 for the years ended December 31,
2008 and 2007, respectively, reflect a non-cash mark-to-market adjustment for
the derivative instrument liability resulting from warrants issued in connection
with the private placement. See Note 7 for additional
information.
(g) Fair Value
Measurements
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 applies to reported balances
that are required or permitted to be measured at fair value under existing
accounting pronouncements; accordingly, the standard does not require any new
fair value measurements of reported balances. The FASB has partially delayed the
effective date for one year for certain fair value measurements when those
measurements are used for financial statement items that are not measured at
fair value on a recurring basis.
SFAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability. As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which is typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115 (“SFAS 159”). This statement permits all entities to
choose, at specified election dates, to measure eligible items at fair value
(the “fair value option”). A business entity must report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. Upfront costs and fees related to items
for which the fair value option is elected must be recognized in earnings as
incurred and not deferred. This statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company
has concluded there is no impact resulting from the adoption of SFAS
159.
In
October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active”
(FSP 157-3). FSP 157-3 clarifies the application of SFAS 157, which the Company
adopted as of January 1, 2008, in cases where a market is not active. The
Company has considered the guidance provided by FSP 157-3 in its determination
of estimated fair values as of December 31, 2008.
|
(h)
|
Net
Loss per Common Share
|
For the
years ended December 31, 2008, 2007 and 2006 potential common shares from the
exercise of options and warrants and the vesting of restricted stock were
excluded from the computation of diluted earnings per share (“EPS”) because
their effects would be antidilutive. In addition, common stock purchase rights
issuable only in the event that a non-affiliated person or group acquires 20% of
the Company’s then outstanding common stock have been excluded from the EPS
computation.
|
(i)
|
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.
|
(j)
|
Cash
Equivalents
|
The
Company considers highly liquid debt instruments with original maturities of
three months or less at date of acquisition to be cash equivalents.
|
(k)
|
Investments
|
In
January 2008, the Company entered into a research and development agreement with
Aethlon Medical, Inc., (“AEMD”) a publicly traded company whose securities are
quoted on the Over the Counter Bulletin Board. As part of this
agreement, the Company received 100,000 shares of restricted common stock of
AEMD. The Company allocated $46,200 of the cost of the
agreement to the fair value of the common stock acquired, using the closing
stock price at the date of the agreement and then discounting that value due to
certain sale restrictions on the stock being held. At September 30,
2008 the sale restriction on the stock being held had lapsed and as a result the
fair value of the stock is no longer being discounted. The investment
is classified as an available for sale security and had a fair value on
September 30, 2008 of $38,000 which included a gross unrealized loss of $8,200,
which is included as a component of comprehensive loss.
The
Company accounts for its investments in debt and equity instruments under
Statement of Financial Accounting Standards, or SFAS, No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” and FASB Staff Position, or
FSP, No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” or FSP 115-1. The Company classified its
investments as available-for-sale. Management determines the appropriate
classification of such securities at the time of purchase and reevaluates such
classification as of each balance sheet date.
In 2008,
marketable securities are reported at fair value with the related unrealized
gains and losses included in accumulated other comprehensive income (loss), a
component of shareholders’ equity. We follow the guidance provided by FSP 115-1,
to assess whether our investments with unrealized loss positions are other than
temporarily impaired. Realized gains and losses and declines in value judged to
be other than temporary are determined based on the specific
identification.
|
(l)
|
Reclassifications
|
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
|
(m)
|
Accounting
Pronouncements Not Yet Adopted
|
Disclosures
about Derivative Instruments and Hedging Activities
In
March 2008, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" (“SFAS 161”), which changes the disclosure
requirements for derivative instruments and hedging activities. SFAS 161
requires enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company has not yet determined the effect, if any, that SFAS 161
will have on its financial statements.
Accounting
for Collaborative Arrangements
In
December 2007, the EITF of the FASB reached a consensus on Issue
No. 07-1, Accounting for
Collaborative Arrangements (EITF 07-1). The EITF concluded on the
definition of a collaborative arrangement and that revenues and costs incurred
with third parties in connection with collaborative arrangements would be
presented gross or net based on the criteria in EITF 99-19 and other accounting
literature. Companies are also required to disclose the nature and
purpose of collaborative arrangements along with the accounting policies and the
classification and amounts of significant financial-statement amounts related to
the arrangements. Activities in the arrangement conducted in a
separate legal entity should be accounted for under other accounting literature;
however, required disclosure under EITF 07-1 applies to the entire collaborative
agreement. This issue is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the effective date.
EITF 07-1 will be effective for the Company on January 1, 2009. The
Company has not yet determined the effect, if any, that EITF 07-1 will have on
its financial statements.
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
In
June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the
computation of earnings per share under the two-class method as described in
FASB Statement of Financial Accounting Standards No. 128, “Earnings per
Share.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008 and earlier adoption is
prohibited. The Company has not yet determined the effect, if any, that FSP EITF
03-6-1 will have on its financial statements.
Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)
In May
2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 specifies that
issuers of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. The amount allocated to the equity component represents a
discount to the debt, which is amortized into interest expense using the
effective interest method over the life of the debt. FSP APB 14-1 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is not permitted. The Company has not yet determined the
effect, if any, that FSP APB 14-1 will have on its financial
statements.
Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an entity's Own
Stock
In
June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether
an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock"
(EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. It also clarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008. The Company has not yet determined the
effect, if any, that EITF 07-5 will have on its financial
statements.
|
(2)
|
Investments
|
In
accordance with SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, investments are reported at fair value on the
Company’s balance sheet. Unrealized holding gains and losses are reported within
accumulated other comprehensive income/ (loss) as a separate component of
stockholders’ (deficiency) equity. If a decline in the fair value of a
marketable security below the Company’s cost basis is determined to be other
than temporary, such marketable security is written down to its estimated fair
value as a new cost basis and the amount of the write-down is included in
earnings as an impairment charge. To date, only temporary impairment charges
have been recorded.
The
Company’s investments are recorded at fair value and consist of one United
States Treasury Bill with an original maturity of six months, various
certificates of deposit and common stock in Aethlon Medical, Inc.
In
January 2008, the Company entered into a research and development agreement with
Aethlon Medical, Inc., (“AEMD”) a publicly traded company whose securities are
quoted on the Over the Counter Bulletin Board. As part of this
agreement, the Company received 100,000 shares of restricted common stock of
AEMD. The Company allocated $46,200 of the cost of the agreement to the fair
value of the common stock acquired, using the closing stock price at the date of
the agreement and then discounting that value due to certain sale restrictions
on the stock being held. In September 2008 the sale restriction on
the stock being held lapsed and as a result the fair value of the stock is no
longer being discounted. The investment is classified as an available
for sale security and had a fair value on December 31, 2008 of $22,000 which
included a gross unrealized loss of $24,200, which is included as a component of
comprehensive loss.
The
Company’s investments have not been significantly, adversely impacted by the
recent disruption in the credit markets. However, if there is continued and
expanded disruption in the credit markets, there can be no assurance that the
Company’s investments will not continue to be adversely affected in the
future.
|
(3)
|
Stockholders’
Equity
|
|
(a)
|
Stock
Issuances
|
On
October 30, 2001, the Company entered into a Rights Agreement with American
Stock Transfer & Trust Company (the “Rights Agreement”) in connection with
the implementation of the Company’s stockholder rights plan (the “Rights Plan”).
The purposes of the Rights Plan are to deter, and protect the Company’s
shareholders from, certain coercive and otherwise unfair takeover tactics and to
enable the Board of Directors to represent effectively the interests of
shareholders in the event of a takeover attempt. The Rights Plan does not deter
negotiated mergers or business combinations that the Board of Directors
determines to be in the best interests of the Company and its shareholders. To
implement the Rights Plan, the Board of Directors declared a dividend of one
Common Stock purchase right (a “Right”) for each share of Common Stock of the
Company, par value $0.01 per share (the “Common Stock”) outstanding at the close
of business on November 14, 2001 (the “Record Date”) or issued by the Company on
or after such date and prior to the earlier of the Distribution Date, the
Redemption Date or the Final Expiration Date (as such terms are defined in the
Rights Agreement). The rights expire October 30, 2011. Each Right entitles the
registered holder, under specified circumstances, to purchase from the Company
for $5.00, subject to adjustment (the “Purchase Price”), a number of shares
determined by dividing the then applicable Purchase Price by 50% of the then
current market price per share in the event that a person or group announces
that it has acquired, or intends to acquire, 15% or more of the Company’s
outstanding Common Stock. On April 9, 2007 the Board of Directors voted to
increase the threshold level to 20%.
During
2006, the Company received net proceeds of $4,893,655 upon the exercise of
1,606,928 Common Stock Warrants that resulted in the issuance of 1,606,928
shares of common stock.
The
Company received a net amount of $204,900 upon the exercise of 220,000 in stock
options during 2006. 70,000 options were exercised at a price of $2.78 per
share; 10,000 were exercised at a price of $1.03 per share; and a cashless
exercise of 70,000 options with an exercise price of $2.78 per share and 70,000
options with an exercise price of $3.59 per share collectively resulting in the
issuance of 24,182 shares of common stock.
During
2006, the Company issued 100,000 shares of common stock having a value of $3.06
per share on the date of issuance to Laddcap Value Partners LP as partial
reimbursement for its expenses associated with the settlement of a lawsuit
relating to its solicitation of written consents from the Company’s
stockholders.
The
Company received a net amount of $1,349,184 upon the exercise of stock options
for 617,850 shares of common stock, $0.01 par value per share during 2007. Of
those options: (i) 100,000 were exercised at a price of $0.71 per share, (ii)
126,000 were exercised at a price of $1.03 per share, (iii) 20,000 were
exercised at a price of $1.32 per share, (iv) 200,000 were exercised at a price
of $2.78 per share, (v) 100,000 were exercised at a price of $3.28 per share,
and (vi) 71,850 were exercised at a price of $3.31 per share.
During
2007, a cashless exercise of 70,000 options with an exercise price of $2.78 per
share, 140,000 options with an exercise price of $3.59 per share, 80,000 options
with an exercise price of $3.28 per share, and 60,300 options with an exercise
price of $3.31 per share collectively resulted in the issuance of 97,563 shares
of common stock.
During
2007, the Company issued 50,000 shares of common stock to its Chief Executive
Officer that had an issuance value of $3.95 per share for the 25,000 issued on
May 24, 2007 and $4.49 for the 25,000 shares issued on July 2, 2007. The Company
recorded compensation expense of $211,000 relating to the stock
issuance.
In
September 2007, the Company completed the sale of 3,833,108 shares of its common
stock and the issuance of warrants to purchase 1,916,554 common shares in a
private placement to institutional and accredited investors. The Company
received net proceeds of $13,303,267 in this transaction. The Company allocated
$4,269,000 of the total proceeds to warrants (see below). The warrants are
exercisable at $4.53 per share beginning six months after the issuance thereof
and on or prior to the fifth anniversary of the issuance thereof. The shares
were offered by the Company pursuant to an effective shelf registration
statement on Form S-3, which was filed with the Securities and Exchange
Commission on May 25, 2007 and was declared effective on June 7, 2007 (File No.
333-143280).
The
$4,269,000 in proceeds allocated to the warrants was classified as a liability
in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s own Stock.” The warrants may
require cash settlement in the event of certain circumstances, including its
inability to deliver registered shares upon the exercise of the warrants by such
warrant holders. The warrants also contain a cashless exercise feature.
Accordingly, the warrants have been accounted for as derivative instrument
liabilities which are subject to mark-to-market adjustment in each period. As a
result, for the year ended December 31, 2008, the Company recorded pre-tax
derivative instrument income of $1,103,682. The resulting derivative instrument
liability totaled $448,318 at December 31, 2008. Management believes that the
possibility of an actual cash settlement with a warrant holder of the recorded
liability is quite remote, and expects that the warrants will either be
exercised or expire worthless, at which point the then existing derivative
liability will be credited to equity. The fair value of the warrants was
determined by using the Black-Scholes model assuming a risk free interest rate
of 1.20%, volatility of 68.97% and an expected life equal to the September 24,
2012 contractual life of the warrants.
During
2008, the Company issued 95,000 shares of common stock to senior management and
the Board of Directors at the fair market value of the stock at the date of
issuance, resulting in the Company recording compensation expense of
$206,900.
In July
2008, the Company granted 200,000 restricted shares of common stock to a member
of senior management that will vest in equal increments over three years on the
anniversary date of the agreement. Total compensation expense of
$484,000 will be expensed over the three year vesting period. The Company
recorded $80,666 of compensation expense relating to the restricted stock
agreement during 2008. The remaining compensation expense of $403,334
as of December 31, 2008 is expected to be recognized over the remaining 2.5 year
vesting period.
In
September 2008, a cashless exercise of 15,000 options with an exercise price of
$1.88 per share resulted in the issuance of 970 shares of common stock and
compensation expense of $1,950.
|
(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 had been authorized by the Board of Directors to purchase up to
seven percent of its then outstanding common stock (290,289).
|
(c)
|
Stock
Option Plans
|
The
Company established the 2000 Stock Option Plan, the 2001 Stock Option Plan and
the 2004 Stock Incentive Plan (collectively, the “Plans”) under which 300,000,
750,000 and 3,000,000 shares, respectively, were reserved for the issuance of
stock options, stock appreciation rights, restricted stock, and stock grants. A
stock option grant allows the holder of the option to purchase a share of the
Company’s Common Stock in the future at a stated price. The Plans are
administered by the Compensation and Stock Option Committee of the Board of
Directors which determines the individuals to whom awards shall be granted as
well as the terms and conditions of each award, the option price and the
duration of each award.
During
2000, 2001 and 2004, respectively, the 2000 and 2001 Stock Option Plans and the
2004 Stock Incentive Plan, became effective. Options granted under the Plans
vest as determined by the Company and expire over varying terms, but not more
than five years from the date of grant. Stock option activity for 2008, 2007,
and 2006 is as follows:
|
The
Plans
|
|||||||||||||
|
Stock Options
|
Exercise Price
per
Share
|
Weighted Average
Exercise Price
|
Weighted
Average
Remaining
Life
(Years)
|
||||||||||
|
Outstanding
at December 31, 2005
|
1,385,800
|
$
|
0.71–3.59
|
$
|
2.51
|
4.17
|
|||||||
|
Granted
|
340,000
|
3.28
|
3.28
|
||||||||||
|
Expired
|
(40,150)
|
2.78–3.59
|
3.33
|
||||||||||
|
Exercised
|
(220,000)
|
1.03–3.59
|
2.96
|
||||||||||
|
Outstanding
at December 31, 2006
|
1,465,650
|
$
|
0.71–3.59
|
$
|
2.87
|
3.57
|
|||||||
|
Granted
|
845,000
|
1.88–7.14
|
4.98
|
||||||||||
|
Expired
|
(202,500)
|
3.59
|
3.59
|
||||||||||
|
Exercised
|
(968,150)
|
0.71–3.59
|
2.59
|
||||||||||
|
Outstanding
at December 31, 2007
|
1,140,000
|
$
|
1.88–7.14
|
$
|
4.54
|
3.96
|
|||||||
|
Granted
|
525,000
|
1.23–3.45
|
1.76
|
||||||||||
|
Expired
|
(190,000)
|
1.88–7.14
|
5.54
|
||||||||||
|
Exercised
|
(15,000)
|
1.88
|
1.88
|
||||||||||
|
Outstanding
at December 31, 2008
|
1,460,000
|
$
|
1.23–6.18
|
$
|
3.44
|
3.68
|
|||||||
At
December 31, 2008, 2007 and 2006, options for 1,286,666, 1,023,333, and
1,465,650, respectively, were exercisable at a weighted average exercise price
of $3.42, $4.52, and $2.87 per share, respectively. The aggregate intrinsic
value of options outstanding and exercisable at December 31, 2008 is $0.00. The
aggregate intrinsic value represents the total pretax intrinsic value, based on
options with an exercise price less than the Company’s closing stock price of
$1.19 as of December 31, 2008, which would have been received by the option
holders had those option holders exercised their options as of that
date.
The
estimated fair value of each option award granted was determined on the date of
grant using the Black-Scholes option valuation model with the following
weighted-average assumptions for option grants during the years ended
December 31, 2008, 2007 and 2006:
|
Years Ended
December 31,
|
||||||
|
2008
|
2007
|
2006
|
||||
|
Risk-free
interest rate
|
1.97%
|
4.60%
|
4.69%
|
|||
|
Expected
volatility of common stock
|
70.72%
|
57.56%
|
59.78%
|
|||
|
Dividend
yield
|
0.00%
|
0.00%
|
0.0%
|
|||
|
Expected
option term (in years)
|
2.60
|
2.58
|
2.50
|
|||
No
dividend yield was assumed because the Company has never paid a cash dividend.
Volatilities were developed using the Company’s historical
volatility. The risk-free interest rate was developed using the U.S.
Treasury yield for periods equal to the expected life of the stock options on
the grant date. The expected holding period was developed based on the mid-point
between the vesting date and the expiration date of each respective grant as
permitted under the Securities and Exchange Commission’s Staff Accounting
Bulletin No. 107, “Share-Based Payment.” This method of determining the expected
holding period was utilized because the Company does not have sufficient
historical experience from which to estimate the period.
340,000
options were issued to the Board of Directors in November 2006. These options
have an exercise price of $3.28, an expiration date of November 14, 2011 and
vested immediately upon grant of the options.
200,000
options were issued to incoming members of the Board of Directors in May 2007.
These options have an exercise price of $5.85 (150% of the common stock price at
the date of grant), an expiration date of May 24, 2012 and vested immediately
upon grant. An additional 150,000 options were issued under the same terms with
the exception of an exercise price of $3.90.
100,000
options were issued to a new member of the Board of Directors in June 2007.
These options have an exercise price of $7.14 (150% of the common stock price at
the date of grant), an expiration date of June 4, 2012 and vested immediately
upon issuance. An additional 50,000 options were issued under the same terms
with the exception of an exercise price of $4.76.
125,000
options were issued to a two new employees in June 2007. The exercise prices for
the options are $6.18 (25,000 options), $4.52 (50,000 options) and $4.12 (50,000
options). These options have an expiration date of June 1, 2012 and a vesting
period of 36 months from the date of issuance. The Company has recognized
compensation expense of $71,333 in 2008 relating to these option
grants.
150,000
options were issued to the President and Chief Executive Officer in July 2007.
The exercise prices for the options are $5.85, which represents 150% of the
common stock price at the date of grant (100,000 options) and $3.90 (50,000
options). These options have an expiration date of July 2, 2012 and vested
immediately upon issuance.
70,000
options were issued to four employees in November 2007. These options have an
exercise price of $1.88, an expiration date of November 30, 2012 and vested
immediately upon issuance.
50,000
options were issued to the President and Chief Executive Officer in January
2008. These options have an exercise price of $1.74, an expiration date of
January 2, 2013 and vested immediately upon issuance. The Company recognized
compensation expense totaling $33,873 upon grant of these fully vested
options.
20,000
options were issued to an employee in May 2008. These options have an exercise
price of $1.87, an expiration date of May 1, 2013 and a vesting period of 36
months from the date of issuance. The Company has recognized compensation
expense of $4,180 in 2008 relating to these option grants.
70,000
options were issued to a new employee in June 2008. The exercise prices for the
options are $3.45, which represents 150% of the common stock price at the date
of grant (20,000 options) and $2.30 (50,000 options). These options have an
expiration date of June 23, 2012 and a vesting period of 12 months from the date
of issuance. The Company has recognized compensation expense of $35,055 in 2008
relating to these option grants.
50,000
options were issued to the President and Chief Executive Officer in July 2008.
These options have an exercise price of $2.44, an expiration date of July 2,
2013 and vested immediately upon issuance. The Company has recognized
compensation expense totaling $54,031 upon the grant of these full vested
options.
150,000
options were issued to a new member of the Board of Directors in October 2008.
The exercise prices for the options are $1.845 (100,000 options) and $1.23
(50,000) options. These options have an expiration date of October 14, 2013 and
vested immediately upon issuance. The Company has recognized compensation
expense totaling $67,713 upon the grant of these fully vested
options.
150,000
options were issued to two new members of the Board of Directors in December
2008. The exercise prices for the options are $1.40 (75,000 options) and $1.25
(75,000 options). These options have expiration dates of December 5, 2013 and
December 11, 2013 and vested immediately upon issuance. The Company has
recognized compensation expense totaling $88,975 upon the grant of these fully
vested options.
35,000
options were issued to two employees in December 2008. These options have an
exercise price of $1.43, an expiration date of December 15, 2013 and vested
immediately upon issuance. The Company has recognized compensation expense
totaling $22,434 upon the grant of these fully vested options.
A
summary of the Company’s non-vested shares as of December 31, 2008 and changes
during the twelve months ended December 31, 2008 is presented
below:
|
Non-Vested
Options
|
||||||
|
Number
of Shares
|
Weighted
Average
Fair
Value
|
|||||
|
|
||||||
|
Non-vested
at January 1, 2008
|
116,667
|
$
|
1.70
|
|||
|
Granted
|
90,000
|
0.99
|
||||
|
Vested
|
(33,333)
|
1.66
|
||||
|
Forfeited
|
–
|
–
|
||||
|
Non-vested
at December 31, 2008
|
173,334
|
$
|
1.34
|
|||
Total
compensation expense recognized relating to stock option grants totaled
$377,596, $953,610 and $505,282 in 2008, 2007 and 2006,
respectively.
Additional
compensation expense of $150,742, relating to the unvested portion of stock
options granted, is expected to be recognized over a remaining average period of
1.5 years.
|
(d)
|
Warrants
|
A summary
of warrant activity is as follows:
|
The
Plans
|
|||||||||||||
|
Warrants
|
Exercise
Price
per
Share
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Life
(Years)
|
||||||||||
|
Outstanding
at December 31, 2005
|
2,170,961
|
$
|
1.02–3.91
|
$
|
3.14
|
3.27
|
|||||||
|
Issued
|
–
|
||||||||||||
|
Exercised
|
(1,606,928)
|
1.02–3.91
|
3.05
|
||||||||||
|
Expired
|
–
|
||||||||||||
|
Outstanding
at December 31, 2006
|
564,033
|
$
|
1.02–3.91
|
$
|
3.41
|
3.04
|
|||||||
|
Issued
|
1,916,554
|
4.53
|
4.53
|
||||||||||
|
Exercised
|
–
|
||||||||||||
|
Expired
|
–
|
||||||||||||
|
Outstanding
at December 31, 2007
|
2,480,587
|
$
|
1.02–4.53
|
$
|
4.27
|
4.13
|
|||||||
|
Issued
|
–
|
4.53
|
4.53
|
||||||||||
|
Exercised
|
–
|
||||||||||||
|
Expired
|
(16,500)
|
1.02–1.28
|
1.15
|
||||||||||
|
Outstanding
at December 31, 2008
|
2,464,087
|
$
|
3.01–4.53
|
$
|
4.30
|
3.15
|
|||||||
|
(4)
|
Income
Taxes
|
The
provision for income taxes differs from the amount computed by applying the
statutory rate as follows:
|
Year
Ended
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||
|
Income
taxes using U.S. federal statutory rate
|
$
|
(2,334,061)
|
$
|
(1,245,592)
|
$
|
(3,723,546)
|
||||
|
State
income taxes, net of federal benefit
|
(410,495)
|
(46,582)
|
(789,599)
|
|||||||
|
Valuation
allowance
|
3,226,441
|
1,813,480
|
4,483,576
|
|||||||
|
Derivative
charge
|
(375,252)
|
(923,780)
|
-
|
|||||||
|
Expiration
of net operating losses
|
–
|
207,061
|
96,959
|
|||||||
|
Research
and development credits
|
(211,208)
|
–
|
–
|
|||||||
|
Other
|
104,575
|
195,413
|
(67,390)
|
|||||||
|
$
|
–
|
$
|
–
|
$
|
–
|
|||||
Significant
components of the Company’s deferred tax assets are as follows:
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
|
||||||
|
Employee
compensation accruals
|
$
|
861,000
|
$
|
694,000
|
|||
|
Accrual
to cash
|
145,000
|
–
|
|||||
|
Research
tax credits
|
211,000
|
–
|
|||||
|
Net
operating losses
|
12,369,000
|
9,743,000
|
|||||
|
Total
deferred tax assets
|
13,586,000
|
10,437,000
|
|||||
|
Deferred
tax liability:
|
|||||||
|
Accrual
to cash
|
–
|
78,000
|
|||||
|
Valuation
allowance
|
13,586,000
|
10,359,000
|
|||||
|
Net
deferred tax assets
|
$
|
–
|
$
|
–
|
|||
As of
December 31, 2008 and December 31, 2007, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $42,887,000 and
$35,969,000, respectively. A portion of the federal amount, $12,557,000, is
subject to an annual limitation of approximately $123,000 as a result of a
change in the Company’s ownership through May 2003, as defined by federal income
tax regulations (Section 382). As a result of the limitation, $32,739,000 is
available to offset future federal taxable income which expires through 2028. As
of December 31, 2008 and December 31, 2007, the Company had net operating loss
carryforwards for state income tax purposes of approximately $35,457,000 and
$28,742,000, respectively, which expire through 2028.
Management
has established a 100% valuation allowance against the deferred tax assets as
management does not believe it is more likely than not that these assets will be
realized. The Company’s valuation allowance increased by approximately $3.2
million, $1.8 million and $4.5 million in 2008, 2007, and 2006,
respectively.
The
Company has a tax benefit of approximately $338,000 related to the exercise of
non qualified stock options. Pursuant to SFAS No. 123(R), the benefit will be
recognized and recorded to APIC when the benefit is realized through the
reduction of taxes payable.
The
Company complies with the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (“FIN No. 48”). FIN
48 addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely that not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The Company has determined that the Company has no significant
uncertain tax positions requiring recognition under FIN No. 48.
The
Company is subject to U.S. federal income tax as well as income tax of certain
state jurisdictions. The Company has not been audited by the U.S. Internal
Revenue Service or any states in connection with income taxes. The periods from
December 31, 2002 to December 31, 2008 remain open to examination by the U.S.
Internal Revenue Service and state authorities.
We
recognize interest accrued related to unrecognized tax benefits and penalties,
if incurred, as a component of income tax expense.
|
(5)
|
Commitments
|
|
(a)
|
Operating
Lease
|
The
Company currently occupies office space under a sublease that expires in July
2010. Annual fixed rent during the term of the lease is $221,000 per annum plus
a pro-rata share of common area maintenance, property taxes and insurance. Rent
expense totaled $221,000, $98,584 and $87,376 for the years ended December 31,
2008, 2007 and 2006, respectively.
|
(b)
|
Cooperative
Research and Development Agreement
|
The
Company’s five year Cooperative Research and Development Agreement (“CRADA”) for
the development of the Delcath PHP System™ with the National Cancer Institute
(“NCI”) expired on December 14, 2006 and has been extended for an additional
five years to December 14, 2011. The principal goal of the CRADA is to continue
the development of a novel form of regional cancer therapy by designing clinical
protocols utilizing the Delcath PHP System™ to regionally deliver
chemotherapeutics to patients with unresectable malignancies confined to an
organ or region of the body. Under the five year extension, Delcath will pay
$1,000,000 per year for clinical support. These funds are payable in quarterly
amounts of $250,000 and will be used for material support of the CRADA
(including equipment, supplies, travel, and other related CRADA support), as
well as for support of existing or new scientific or clinical staff to be hired
by NCI who are to perform work under the CRADA. The Company incurred $1,000,000,
$1,000,000, and $195,000 in expenses related to this agreement for the years
ended December 31, 2008, 2007 and 2006, respectively.
|
(6)
|
Contingencies
|
The
Company is involved in certain legal proceedings and is subject to certain
lawsuits, claims and regulations in the ordinary course of its business.
Although the ultimate effect of these matters is often difficult to predict,
management believes that their resolution will not have a material adverse
effect on the Company’s financial statements.
|
(7)
|
Assets
and Liabilities Measured at Fair
Value
|
(a) Derivative
Financial Instruments
Currently,
the Company has allocated proceeds of warrants issued in connection with a
private placement that were classified as a liability and accounted for as a
derivative instrument in accordance with EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s own
Stock”. The valuation of the
warrants is determined using the Black-Scholes model. This model uses inputs
such as the underlying price of the shares issued when the warrant is exercised,
volatility, risk free interest rate and expected life of the
instrument. The Company has determined that the inputs
associated with fair value determination are readily observable and as a result
the instrument is classified within Level 2 of the fair-value
hierarchy.
(b) Marketable
Equity Securities
The
Company owns 100,000 shares of common stock of AEMD. At December 31,
2008, the valuation of such stock is determined utilizing the current quoted
market price of AEMD due to the selling restrictions as stated in the agreement
to purchase these shares having lapsed during the year. The Company
has determined that the inputs associated with the fair value determination are
readily observable and as a result the instrument was classified within Level 1
of the fair-value hierarchy.
(c) Money
Market Funds and Treasury Bills
Cash and
cash equivalents includes a money market account valued at approximately $6.9
million and certificates of deposit valued at approximately $3.8
million. The Company also has a U.S. treasury bill totaling
$200,710.
The
Company has determined that the inputs associated with the fair value
determination are based on quoted prices (unadjusted) and as a result the
investments are classified within Level 1 of the fair value
hierarchy.
The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008, aggregated by the level in the fair
value hierarchy within which those measurements fall.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at December 31,
2008
|
Level
1
|
Level 2
|
Level 3
|
Balance
at
December
31, 2008
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Marketable
equity securities
|
$
|
$22,000
|
$
|
—
|
$
|
—
|
$
|
22,000
|
||||||||
|
Money
market funds
|
6.926,612
|
—
|
—
|
6,926,612
|
||||||||||||
|
Certificates
of deposit
|
3,847,904
|
—
|
—
|
3,847,904
|
||||||||||||
|
Treasury
bills
|
200,710
|
—
|
—
|
200,710
|
||||||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative
financial instruments
|
$
|
—
|
$
|
448,318
|
$
|
—
|
$
|
448,318
|
||||||||
The
Company does not have any fair value measurements using significant unobservable
inputs (Level 3) as of December 31, 2008.
|
(8)
|
Quarterly
Financial Data (Unaudited)
|
Set forth
below is selected quarterly financial data for each of the quarters in the years
ended December 31, 2008 and 2007.
|
2008 Quarters Ended
|
||||||||||||||
|
(in thousands except per share
amounts)
|
March 31
|
June 30
|
September 30
|
December 31
|
||||||||||
|
Net
sales
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Gross
profit
|
—
|
—
|
—
|
—
|
||||||||||
|
Operating
loss
|
(1,430)
|
(1,799)
|
(2,214)
|
(2,825)
|
||||||||||
|
Derivative
instrument income (expense)
|
198
|
(671)
|
1,281
|
296
|
||||||||||
|
Net
income (loss)
|
(1,058)
|
(2,420)
|
(878)
|
(2,509)
|
||||||||||
|
Basic
and diluted income (loss) per share
|
(0.04)
|
(0.10)
|
(0.03)
|
(0.10)
|
||||||||||
|
2007 Quarters Ended
|
|||||||||||||
|
(in thousands except per share
amounts)
|
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||
|
Net
sales
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
|
Gross
profit
|
—
|
—
|
—
|
—
|
|||||||||
|
Operating
loss
|
(1,340)
|
(2,267)
|
(1,735)
|
(1.521)
|
|||||||||
|
Derivative
instrument income (expense)
|
—
|
—
|
(78)
|
2,795
|
|||||||||
|
Net
income (loss)
|
(1,274)
|
(2,179)
|
(1,712)
|
1,501
|
|||||||||
|
Basic
and diluted income (loss) per share
|
(0.06)
|
(0.10)
|
(0.08)
|
0.08
|
|||||||||
None.
Disclosure
Controls and Procedures
Based on
an evaluation of the Company’s disclosure controls and procedures performed by
the Company’s Chief Executive Officer and Controller as of the end of the period
covered by this report, the Company’s Chief Executive Officer and Controller
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 of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms issued by the SEC. 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 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.
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation described above that occurred
during the period covered by this report that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board
of directors, management and other personnel, to provide reasonable assurance
regarding reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, it used the
criteria set forth in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on such assessment, management has concluded that, as of December 31, 2008, our
internal control over financial reporting was effective based on those
criteria.
CCR LLP
(“CCR”), our Independent Registered Public Accounting Firm, audited the
effectiveness of our Company’s internal control over financial reporting as of
December 31, 2008, and CCR’s report is included under Item 8 in this Annual
Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting occurred during the fiscal
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
There was
no information required to be disclosed in this Annual Report on Form 10-K
during the fourth quarter of the year ended December 31, 2008 that was not so
reported.
Item
10. Directors,
Executive Officers of the Registrant and Corporate
Governance
The
information required by Items 401, 405, 406, and 407(c)(3), (d)(4) and (d)(5) of
Regulation S-K, regarding the Company’s directors and executive officers,
compliance with Section 16(a) of the Exchange Act, Code of Ethics,
procedures by which security holders may recommend nominees to the Company’s
Board of Directors, and Audit Committee and Audit Committee Financial Expert, is
incorporated by reference into this Form 10-K by reference to the Company’s
definitive proxy statement (the “Definitive Proxy Statement”) for its 2009
Annual Meeting of Stockholders.
Item
11. Executive
Compensation
The
information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of
Regulation S-K, regarding executive compensation, Compensation Committee
Interlocks and Insider Participation and the report of the Compensation and
Stock Option Committee of the Company’s Board of Directors, is incorporated into
this Form 10-K by reference to the Definitive Proxy Statement.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by Item 201(d) of Regulation S-K is included in this Form
10-K under Item 5. The information required by Item 403 of Regulation S-K,
regarding the security ownership of certain beneficial owners of the Company’s
common stock and the Company’s management, is incorporated into this Form 10-K
by reference to the Definitive Proxy Statement.
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
The
information required by Item 404 of Regulation S-K, regarding certain
relationships and related transactions, if any, and director independence, is
incorporated into this Form 10-K by reference to the Definitive Proxy
Statement.
Item 14. Principal Accounting Fees and
Services
The
information required by Item 9(e) of Schedule 14A, regarding the Company’s
principal accounting fees and services, is incorporated into this Form 10-K by
reference to the Definitive Proxy Statement.
Item
15. Exhibits,
and Financial Statement Schedules
|
1.
|
Financial
Statements: See “Financial Statements and Supplementary
Data”
|
|
2.
|
Financial
Statement Schedule: See “Schedule II – Valuation and Qualifying Accounts”
in this section of this Form 10-K.
|
|
3.
|
Exhibits:
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Form
10-K.
|
Delcath
Systems, Inc.
Schedule
II – Valuation and Qualifying Accounts
Years
ended December 31, 2008, 2007 and 2006
(in
millions)
|
Additions
|
||||||||||||||||
|
Balance
at beginning
|
Charged
to costs and expenses
|
Charged
to revenue
|
Balance
at end of period
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
10.4
|
3.2 | — |
$
|
13.6 | |||||||||||
|
2007
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
8.5 | 1.9 | — | $ | 10.4 | |||||||||||
|
2006
|
||||||||||||||||
|
Deferred
tax asset valuation allowance
|
4.0 | 4.5 | — | $ | 8.5 | |||||||||||
|
|
Exhibits
|
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of Delcath Systems, Inc., as
amended to June 30, 2005 (incorporated by reference to Exhibit 3.1 to
Company’s Current Report on Form 8-K filed June 5, 2006 (Commission File
No. 001-16133).
|
|
|
3.2
|
Amended
and Restated By-Laws of Delcath Systems, Inc. (incorporated by reference
to Exhibit 3.2 to Amendment No. 1 to Company’s Registration Statement on
Form SB-2 (Registration No. 333-39470)).
|
|
|
4.1
|
Rights
Agreement, dated October 30, 2001, by and between Delcath Systems, Inc.
and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.7 to the Company’s Form 8-A filed
November 14, 2001 (Commission File No. 001-16133)).
|
|
|
4.2
|
Form
of Underwriter’s Unit Option Agreement between Delcath Systems, Inc. and
Roan/Meyers Associates, L.P. (incorporated by reference to Exhibit 4.1 to
Amendment No. 1 to the Company’s Registration Statement on Form SB-2
(Registration No. 333-101661)).
|
|
|
4.3
|
Form
of Warrant to Purchase Shares of Common Stock issued pursuant to the
Common Stock Purchase Agreement dated as of March 19, 2004 (incorporated
by reference to Exhibit 4 to the Company’s Current Report on Form 8-K
filed March 22, 2004 (Commission File No,. 001-16133)).
|
|
|
4.4
|
Form
of 2005 Series A Warrant to Purchase Shares of Common Stock issued
pursuant to the Common Stock Purchase Agreement dated as of November 27,
2005 (incorporated by reference to Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed November 30, 2005 (Commission File No.
011-16133)).
|
|
|
4.5
|
Form
of 2005 Series C Warrant to Purchase Shares of Common Stock issued
pursuant to the Common Stock Purchase Agreement dated as of November 27,
2005 (incorporated by reference to Exhibit 4.3 to the Company’s Current
Report on Form 8-K filed November 30, 2005 (Commission File No.
011-16133)).
|
|
|
10.1
|
2000
Stock Option Plan (incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form SB-2 (Registration No.
333-39470)).
|
|
|
10.2
|
2001
Stock Option Plan (incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2001 (Commission File No. 001-16133)).
|
|
|
10.3
|
2004
Stock Incentive Plan (incorporated by reference to Appendix B to the
Company’s definitive Proxy Statement dated April 29, 2004 (Commission File
No. 001-16133)).
|
|
|
10.4
|
Common
Stock Purchase Agreement dated as of March 19, 2004 by and among Delcath
Systems, Inc. and the Purchasers Listed on Exhibit A thereto (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 22, 2004 (Commission File No. 001-16133)).
|
|
|
10.5
|
Registration
Rights Agreement dated as of March 19, 2004 by and among Delcath Systems,
Inc. and the Purchasers Listed on Schedule I thereto (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed March 22, 2004 (Commission File No. 001-16133)).
|
|
|
10.6
|
Common
Stock Purchase Agreement dated as of November 27, 2005 by and among
Delcath Systems, Inc. and the Purchasers Listed on the Exhibit A thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed November 30, 2005 (Commission File No.
001-16133)).
|
|
Exhibit
No.
|
Description
|
|
|
10.7
|
Registration
Rights Agreement dated as of November 27, 2005 by and among Delcath
Systems, Inc. and the Purchasers Listed on the Schedule I thereto
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed November 30, 2005 (Commission File No.
001-16133)).
|
|
|
10.8
|
Voting
Agreement dated as of November 27, 2005 by and between Delcath Systems,
Inc., the purchasers listed on Exhibit A to the Common Stock Purchase
agreement dated as of November 27, 2005 and Vertical Ventures LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed November 30, 2005 (Commission File No.
001-16133)).
|
|
|
10.9
|
Form
of Incentive Stock Option Agreement under the Company’s 2004 Stock
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005
(Commission File No. 001-16133)).
|
|
|
10.10
|
Form
of Nonqualified Stock Option Agreement under the Company’s 2004 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005
(Commission File No. 001-16133)).
|
|
|
10.11
|
Form
of Stock Grant Agreement under the Company’s 2004 Stock Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2005 (Commission File
No. 001-16133)).
|
|
|
10.12
|
Settlement
Agreement, dated as of October 8, 2006, by and between Delcath Systems,
Inc., Laddcap Value Partners LP, Laddcap Value Advisors LLC, Laddcap Value
Associates LLC, any affiliate of the foregoing, and Robert B. Ladd
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed October 12, 2006 (Commission File No.
001-16133)).
|
|
|
10.13
|
Modification
Agreement dated April 9, 2007 between the Company, Laddcap Value Partners,
LP, Laddcap Associates, LLC (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed April 16, 2007 (Commission
File No. 001-16133)).
|
|
|
10.14
|
Settlement
Agreement, dated as of December 15, 2006 between Delcath Systems, Inc. and
M. S. Koly (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed December 21, 2006 (Commission File No.
001-16133)).
|
|
|
10.15
|
Employment
Agreement dated as of July 2, 2007 between Delcath Systems, Inc. and
Richard L. Taney (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed July 5, 2007 (Commission File
No. 001-16133)).
|
|
|
10.16
|
Lease
Agreement between Rockbay Capital Management, L.P. and the Company, dated
as of July 9, 2007 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed August 30, 2007 (Commission
File No. 001-16133)).
|
|
|
10.17
|
Consent
of Master Landlord to the Sublease, dated August 21, 2007 (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed August 30, 2007 (Commission File No.
001-16133)).
|
|
Exhibit
No.
|
Description
|
|
|
10.18
|
Placement
Agency Agreement dated September 18, 2007 by and among Delcath Systems,
Inc., Canaccord Adams Inc. and Think Equity Partners LLC (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed September 24, 2007 (Commission File No.
001-16133)).
|
|
|
10.19
|
Form
of Subscription Agreement in connection with the Company’s September 2007
registered direct offering (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed September 24, 2007
(Commission File No. 001-16133)).
|
|
|
10.20
|
Form
of Warrant issued to investors in connection with the Company’s September
2007 registered direct offering (incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed September 24, 2007
(Commission File No. 001-16133)).
|
|
|
Escrow
Agreement dated September 18, 2007 between Delcath Systems, Inc.,
Canaccord Adams Inc., Think Equity Partners LLC and JPMorgan Chase Bank,
N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Current
Report on Form 8-K filed September 24, 2007 (Commission File No.
001-16133)).
|
||
|
14
|
Code
of Business Conduct (incorporated by reference to Exhibit 14 to the
Company’s Annual Report on Form 10-KSB for the year ended December 31,
2003 (Commission File No. 001-16133)).
|
|
|
23
|
Consent
of CCR LLP
|
|
|
24
|
Power
of Attorney (included on the signature page hereto).
|
|
|
31.1
|
Certification
by principal executive officer Pursuant to Rule 13a 14.
|
|
|
31.2
|
Certification
by principal financial officer Pursuant to Rule 13a 14.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of principal financial officer Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
DELCATH SYSTEMS, INC.
|
|
/s/
Richard Taney
|
|
Richard
Taney
|
|
Chief Executive Officer
|
|
Dated: March
2, 2009
|
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below does
hereby constitute and appoint Richard L. Taney as his attorney-in-fact, with
full power of substitution and resubstitution for him in any and all capacities
to sign any and all amendments to this report on Form 10-K 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.
Pursuant
to the requirements of the Securities Exchange Act of 1934, 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/
Richard Taney
|
Chief
Executive Officer, and Director (principal executive
officer)
|
March
2, 2009
|
||
|
Richard
Taney
|
||||
|
/s/
Barbra C. Keck
|
Controller
(principal financial officer)
|
March
2, 2009
|
||
|
Barbra
C. Keck
|
||||
|
/s/
Harold S. Koplewicz
|
Chairman
of the Board
|
March
2, 2009
|
||
|
Harold
S. Koplewicz, M.D.
|
||||
|
/s/
Laura Philips
|
Director
|
March
2, 2009
|
||
|
Laura
Philips, PhD
|
||||
|
/s/
Eamonn Hobbs
|
Director
|
March
2, 2009
|
||
|
Eamonn
Hobbs
|
||||
|
/s/
Robert Ladd
|
Director
|
March
2, 2009
|
||
|
Robert
Ladd
|
||||
|
|
||||
|
/s/
Pamela Contag
|
Director
|
March
2, 2009
|
||
|
Pamela
Contag
|
||||
|
/s/
Roger Stoll
|
Director
|
March
2, 2009
|
||
|
Roger
Stoll
|
||||
34