PROPOSAL 1:  TO APPROVE AN AMENDMENT TO OUR AMENDED AND RESTATE D CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOC K SPLIT

Overview

The Board of Directors of Delcath Systems, Inc. (“Delcath” or the “Company”) has unanimously approved, and is seeking stockholder approval of, a Proposal to permit the Board of Directors (in the event that it is deemed by the Board to be advisable) to file a Certificate of Amendment to our amended and restated certificate of incorporation, in substantially the form set forth in Annex A to this Proxy Statement, to effect a reverse stock split of our authorized, issued and outstanding Common Stock at a ratio within a range from 1-for-50 to 1-for-1,200, on or prior to the first anniversary of stockholder approval of this proposal, in the discretion of the Board of Directors. If the stockholders approve this proposal, the Board of Directors will have the authority to decide, at any time prior to the first anniversary of stockholder approval of this proposal, whether to effect the reverse stock split and the precise ratio of reverse stock split within the range specified.  If the Board of Directors decides to effect the reverse stock split, the reverse stock split will become effective upon the filing of the Certificate of Amendment with the Secretary of State of Delaware.  The Board of Directors has determined that the amendment is advisable and in the best interests of the Company and our stockholders and recommends that our stockholders approve the amendment.  The text of Annex A remains subject to modification to include such changes as may be required by the Secretary of State of the State of Delaware and as the Board of Directors deems necessary or advisable to effect a reverse stock split at an authorized ratio as described above.

The Board of Directors reserves the right, even after receipt of stockholder approval of this proposal, to abandon or postpone, the reverse stock split if it determines, in its sole discretion, that the reverse stock split is not in the best interests of the Company or the stockholders.

Purpose of the Reverse Stock Split

As of [August 15], 2019, we had 18,277,807 shares of Common Stock outstanding and 1.1 billion shares of Common Stock reserved for issuance upon the conversion of Series E Convertible Preferred Stock, or the exercise of options and warrants we have outstanding, and 32,572 shares of Series E Convertible Preferred Stock.

The Board of Directors wishes to increase the number of unused authorized shares of Common Stock by decreasing the outstanding number of shares through the reverse stock split without a corresponding decrease in the number of authorized shares. This increase in unused authorized shares of Common Stock will provide us with greater flexibility with respect to our capital structure for various purposes as the need may arise from time to time. These purposes may include: raising capital, establishing strategic relationships with other companies, expanding our business through the acquisition of other businesses or products and providing equity incentives to employees, officers or directors. As we expect that we will seek to raise significant additional capital in future years to fund our clinical trials, we may need to issue a substantial number of shares of Common Stock in connection therewith.

Additionally, in July 2019, Delcath effected the July 2019 PIPE Financing described below.  Pursuant to the terms of the Securities Purchase Agreement entered into in connection with the July 2019 PIPE Financing, the Company is obligated to hold a stockholders meeting no later than October 7, 2019 in order to seek approval to a reverse stock split.

The Board of Directors also believes that the increased market price of the Common Stock expected as a result of effecting a reverse stock split could improve the marketability and liquidity of the Common Stock and may encourage interest and trading in the Common Stock. A reverse stock split could allow a broader range of institutions to invest in our stock (namely, funds that are prohibited from buying stocks whose price is below a certain threshold), potentially increasing trading volume and liquidity of our Common Stock. A reverse stock split could help increase analyst and broker interest in our stock as their policies can discourage them from following or recommending companies with low stock prices. Because of the trading volatility often associated with low-priced stocks, many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Some of those policies and practices may make the processing of trades in low-priced stocks economically unattractive to brokers. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, a low average price per share of Common Stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were higher.

The Board of Directors does not intend for this transaction to be the first step in a series of plans or proposals of a “going private transaction” within the meaning of Rule 13e-3 of the Securities Exchange Act.

The Board of Directors strongly believes that the reverse stock split is necessary to improve our ability to “uplist” our Common Stock from the OTC Marketplace to The Nasdaq Capital Market, or an equivalent national exchange, and to help attract institutional investors with minimum trading price requirements .   The plan being pursued by the Company includes an uplist to a national exchange,

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and securing capital to grow the business through a fully underwritten and nationally syndicated public offering. We believe increasing the trading price of our Common Stock will assist in our capital-raising efforts by making our Common Stock more attractive to a broader range of investors. In addition, Management believes that by listing our shares of Common Stock on a national exchange like the Nasdaq Capital Market will offer a series of benefits to both th e Company and its stockholders including: that the Company’s Common Stock will be more attractive to a larger pool of investors that it will remove restrictions that currently prohibit many investors from investing in companies like ours that are traded on the OTC Marketplace that improved regulatory oversight of broker/dealer market will reduce the risk of potential trading violations, and that the enhanced financial and governance requirements enhance the Company’s profile to potential investors. If succe ssful, the Company’s stockholders will also benefit from expanded awareness by inclusion in a number of indexes that are tracked by buy-side institutions and that will increase the likelihood of analyst coverage. Accordingly, we believe that the reverse st ock split is in our stockholders’ best interests.

You should consider that, although our Board of Directors believes that a reverse stock split will in fact increase the price of our Common Stock, in many cases, because of variables outside of a company’s control (such as market volatility, investor response to the news of a proposed reverse stock split and the general economic environment), the market price of a company’s shares of Common Stock may in fact decline in value after a reverse stock split.  You should also keep in mind that the implementation of a reverse stock split does not have an effect on the actual or intrinsic value of our business or a stockholder’s proportional ownership in our Company.  However, should the overall value of our Common Stock decline after the proposed reverse stock split, then the actual or intrinsic value of the shares of our Common Stock held by you will also proportionately decrease as a result of the overall decline in value.

Should we receive the required stockholder approval for the reverse stock split, the Board of Directors will have the sole authority to elect, without the need for any further action on the part of our stockholders: (1) whether or not to effect a reverse stock split, and (2) if so, the number of whole shares, from 50 through 1,200, in the discretion of the Board of Directors, which will be combined into one share of our Common Stock. Notwithstanding approval of the reverse stock split by the stockholders, the Board of Directors may, in its sole discretion, abandon the proposed amendment and determine prior to the effectiveness of any filing with the Secretary of State of the State of Delaware not to effect the reverse stock split as permitted under Section 242(c) of the Delaware General Corporation Law. If the Board of Directors does not effect a reverse stock split prior to the first anniversary of stockholder approval of this proposal, stockholder approval again would be required prior to effecting any future reverse stock split.

In determining which reverse stock split ratio to effect, if any, following receipt of stockholder approval, the Board of Directors may consider, among other things, various factors, such as:

Failure to approve the amendment may have serious, adverse effects on us and our stockholders.

Without a sufficient number of authorized shares available for issuance for future equity investments, we will be unable to raise additional capital for operations and to grow our business either through establishment of strategic relationships with other companies or through acquisitions.  If we do not effect a reverse stock split, we will be likely to have insufficient cash to fund our operations and clinical trials, and our business will likely fail, and among other things, the outstanding shares of our Common Stock may become both illiquid and worthless and result in a delisting from OTC among other consequences. Furthermore, if we have insufficient cash to fund our operations and clinical trials, we may have no alternative to filing for bankruptcy protection. If we file a bankruptcy petition, our creditors will have priority over holders of shares of our Common Stock. It is likely that holders of shares of our Common Stock would receive little or no value for their shares as a result of any bankruptcy proceeding.

The text of the form of the proposed amendment to our amended and restated certificate of incorporation, which assumes the approval of this Proposal and that the Board of Directors decides to effect the reverse stock split, is attached hereto as Annex A. By approving this Proposal, stockholders will approve a series of amendments to our amended and restated certificate of incorporation pursuant to which any whole number of outstanding shares between and including a number from 10 shares to 500 shares, could be combined into one share of Common Stock, and authorize the Board of Directors to file only one such amendment, as determined by the Board of Directors in the manner described herein, and to abandon each amendment not selected by the Board of Directors. The Board of Directors may also elect not to undertake any reverse stock split.

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Certain of our officers and directors have an interest in the reverse stock split as a result of their ownership of our Common Stock, as set forth in the section entitled “Security Ownersh ip of Certain Beneficial Owners and Management.”

The Board of Directors has unanimously approved a resolution proposing an amendment to our amended and restated certificate of incorporation to allow for the reverse stock split and directed that it be submitted for approval at the Annual Meeting.

The Board of Directors believes that it is critical to the future viability of the Company that you vote “FOR” this Proposal. Failure to effect a reverse stock split will have a material adverse effect on the Company and its capital structure, including its ability to issue any Common Stock. We expect to need at least $20.0 million of cash to fund our operations and clinical trials through 2020. Even with the net $18.4 million we just received from our recent financing, it is unclear whether we will be able to continue as a going concern after 2019. Without the implementation of a reverse stock split or increasing the number of authorized and unissued shares of our Common Stock, we are unable to raise a significant amount of equity financing.

Risks of the Proposed Reverse Stock Split

We cannot assure you that the proposed reverse stock split will increase our stock price or that any increase will be maintained over any significant period of time . The Board of Directors expects that a reverse stock split of our Common Stock will increase the market price of our Common Stock. However, the effect of a reverse stock split upon the market price of our Common Stock cannot be predicted with any certainty, and the history of similar stock splits for companies in like circumstances does not indicate a likelihood that our stock price will be maintained at any higher level. Our own 2016 reverse stock split enabled us to regain compliance with the NASDAQ $1.00 minimum bid price requirement for less than a year and to effectively raise additional capital for a period of similarly short duration; however, on December 27, 2016, our stock closed below $1.00 for the first time since the 2016 reverse stock split and did not close over $1.00 since that time. We effected a 1:350 reverse stock split on November 6, 2017 (the “2017 Reverse Stock Split”) and our closing price per share that day was $6.69. On November 16, 2017, our closing price per share was $0.86, and continued to decline from that point. We effected a 1:500 reverse stock split on May 2, 2018 (the “2018 Reverse Stock Split”) and our closing price that day was $1.75. Our closing price as of July 29, 2019 was $0.07.  It is possible that the per share price of our Common Stock after the reverse stock split will not rise in proportion to the reduction in the number of shares of our Common Stock outstanding resulting from the reverse stock split, and the market price per post-reverse stock split share may not exceed or remain at any specified level for a sustained period of time, and the reverse stock split may not result in a per share price that would attract brokers and investors who do not trade in lower priced stocks. Even if we effect a reverse stock split, the market price of our Common Stock may decrease due to factors unrelated to the stock split. In any case, the market price of our Common Stock may also be based on other factors which may be unrelated to the number of shares outstanding, including our future performance. If the reverse stock split is consummated and the trading price of the Common Stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the reverse stock split.

Current stockholders will likely experience dilution as a result of the reverse stock split.  There is a trend for our stock price to decrease after a reverse stock split. This is likely as a result of the availability of more shares issued as a result of our anticipated future financing needs. As the number of shares available in the market increases, the price tends to decrease. We are unable to predict if, when and to what magnitude dilution will occur; however, there is a substantial likelihood that significant dilution will occur based on historical data.

The proposed reverse stock split may decrease the liquidity of our stock . The liquidity of our capital stock may be harmed by the proposed reverse stock split given the reduced number of shares that would be outstanding after the reverse stock split, particularly if the stock price does not increase as a result of the reverse stock split.

In addition, investors might consider the increased proportion of unissued authorized shares to issued shares to have an anti-takeover effect under certain circumstances, since the proportion allows for dilutive issuances which could prevent certain stockholders from changing the composition of the Board of Directors or render tender offers for a combination with another entity more difficult to successfully complete. The Board of Directors does not intend for the reverse stock split to have any anti-takeover effects.

Recent Prior Reverse Stock Splits and Other Transactions

On July 19, 2016, at our 2016 annual meeting of stockholders, our stockholders approved a reverse stock split at one of six ratios of 1-for-10, 1-for-12, 1-for-14, 1-for-16, 1-for-18 or 1-for-20, in the discretion of our Board of Directors. On the same date, the Board of Directors determined to effect a reverse stock split of the Company’s Common Stock at a 1-for-16 ratio (the “2016 Reverse Stock Split”). The 2016 Reverse Stock Split became effective as of 9:00 a.m. on July 21, 2016. At the same meeting, our stockholders approved an amendment to our Certificate of Incorporation to increase the number of our authorized shares of Common Stock to 500,000,000.

The Company effected the 2016 Reverse Stock Split for Nasdaq share price maintenance requirements and also some of the same reasons for which the Board of Directors is recommending the currently proposed reverse stock split. The trading price of the Common

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Stock was below the $1.00 minimum bid price required under the NASDAQ Marketplace Rules for 30 consecutive business days. On July 22, 2016, the first trading day after the effectiveness of the 2016 Reverse Stock Split, the closing price of t he Common Stock on the NASDAQ Capital Market was $3.60 per share.

On September 29, 2016, the closing price of the Common Stock on the NASDAQ Capital Market was $3.45 per share. On September 30, 2016, the Company announced the pricing of a public offering of 425,000 shares of Common Stock and 148,750 warrants to purchase shares of Common Stock at an exercise price of $3.00 per share, with such shares of Common Stock and warrants sold at a combined price of $3.00 per share and accompanying warrant. The trading price of the Common Stock has remained below $3.00 per share thereafter. However, the warrants have certain anti-dilution provisions resulting in the reduction of the exercise price thereof. As of February 9, 2018, the warrants had an exercise price of $0.02 and there were 225 warrants outstanding.

As a result of conversions of the Company’s July 2016 senior secured convertible notes, we issued 496,631,935 shares of our Common Stock between January 1, 2017 and November 5, 2017 on a pre-2017 Reverse Stock Split basis, and the closing price of the Common Stock was less than $0.80 per share on each trading day since January 6, 2017 until the 1:350 reverse split was effected on November 6, 2017. On November 6, 2017, the first day on which our Common Stock traded, post 2017 Reverse Stock Split, our closing price per share was $6.69, and on November 16, 2017, our closing price per share was $0.86, and continued to decline from that point. Between November 6, 2017 and December 28, 2017, the date on which we consummated the full conversion of those notes into stock or rights to issues shares of Common Stock, we issued 221,156,807 additional shares of our Common Stock (post 2017 Reverse Stock Split numbers) as a result of those full satisfactions of the notes.

Following the full conversion of the notes, we completed the sale of 212.0 million shares of its common stock, 38.0 million pre-funded warrants and the issuance of warrants to purchase 500.0 million common shares (the “February 2018 Warrants”), on a pre-2018 Reverse Stock Split basis, We effected a 1:500 reverse stock split on May 2, 2018 (the “2018 Reverse Stock Split”) and our closing price that day was $1.75. Our closing price as of July 29, 2019 was $0.07.  

Accordingly, the 2016 Reverse Stock Split, 2017 Reverse Stock Split, and 2018 Reverse Stock Split are the most significant contributing factors to the Company’s ability to consummate the dilutive issuances described above.

In addition, the 2016 Reverse Stock Split, 2017 Reverse Stock Split and 2018 Reverse Stock Split did not, and the proposed reverse stock split, if approved by our stockholders, will not, affect our total number of authorized shares of Common Stock. As of [August 15], 2019, we had 18,277,807 shares of Common Stock outstanding and 1.1 billion shares of Common Stock reserved for issuance upon the conversion of Series E Convertible Preferred Stock, or the exercise of options and warrants we have outstanding, and 32,572 shares of Series E Convertible Preferred Stock.

Although we do not have any specific capital raising transaction planned, we expect to continue to explore opportunities to raise capital to fund our operations. The Board of Directors believes that the consummation of the proposed reverse stock split is essential to our ability to raise sufficient capital to satisfy our liquidity requirements. Nevertheless, such capital raising transactions could include the issuance of shares of Common Stock and/or securities convertible, exchangeable or exercisable for shares of Common Stock at a discount to prevailing market prices. Such transactions are likely to result in substantial further dilution to current holders of shares of Common Stock and erosion of our stock price.

Principal Effects of the Reverse Stock Split

After the effective date of the proposed reverse stock split, if effected, each stockholder will own a reduced number of shares of Common Stock. Except to the extent that whole shares will be exchanged in lieu of fractional shares as described below, the proposed reverse stock split will affect all stockholders uniformly and will not affect any stockholder’s percentage ownership interest in us and proportionate voting rights and other rights and preferences of the holders of Common Stock will not be affected by the proposed reverse stock split. The number of stockholders of record also will not be affected by the proposed reverse stock split, except to the extent that whole shares will be exchanged in lieu of fractional shares as described below.

The following table contains approximate information relating to the Common Stock under the low end, high end and midpoint of the proposed range of reverse stock split ratios, without giving effect to any adjustments for fractional shares of Common Stock, as of July 31, 2019:

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We maintain a 2018 Stock Incentive Plan (the “Plan”) pursuant to which we have granted stock options that are presently outstanding, and additional equity incentive compensation awards may be granted in the future under the Plan. Pursuant to the terms of the Plan, the Board of Directors or a committee thereof, as applicable, will adjust the number of shares available for future grant under the Plan, the number of shares underlying outstanding awards, the exercise price per share of outstanding stock options and other terms of outstanding awards issued pursuant to the Plan to equitably reflect the effects of the reverse stock split.

June 2019 Bridge Financing

As part of its continuing efforts to simplify our capital structure, on June 6, 2019, Delcath entered into an agreement (the “Warrant Purchase Agreement”) with Rosalind Opportunities Fund I LP and Rosalind Master Fund LP (together, the “Warrant Sellers”), pursuant to which the Warrant Sellers agreed to transfer and surrender to Delcath for cancellation certain warrants (the “Warrants”) to purchase shares of Common Stock of Delcath held by the Warrant Sellers, including Warrants which Delcath did not have the right to repurchase. Under the terms of the Warrant Purchase Agreement, the Warrant Sellers agreed to defer the payment of the purchase price for the Warrants and, accordingly, Delcath agreed to issue to the Warrant Sellers 8% Senior Secured Promissory Notes (“Notes”) in an aggregate principal amount of $2 million (the “Subscription Amount”) in full payment and satisfaction of the purchase price for the Warrants. The Warrants repurchased consisted of (i) Warrants to purchase 53,374,624 shares of Common Stock of Delcath at a purchase price of $0.01 per share, issued by Delcath on June 4, July 20 and August 29, 2018, (ii) Warrants to purchase 1,901,993 shares of Common Stock of Delcath at a purchase price of $4.00 per share, issued by Delcath on June 4 and July 20, 2018 and (iii) Warrants to purchase 2,021,410 shares of Common Stock of Delcath at a purchase price of $1.75 per share, issued by Delcath on August 29, 2018.

In connection with the July 2019 PIPE Financing described below, Delcath and the holders of such Notes entered into an Exchange Agreement providing for the exchange of such Notes and certain accompanying warrants for preferred stock and warrants on the same terms and conditions set forth in the July 2019 securities purchase agreement, the terms of which are described below.

Proportionate adjustments will be made to the per share exercise price of shares of Common Stock reserved for the purpose of enabling Delcath to issue shares pursuant to the terms of Series E Convertible Preferred Stock and all outstanding warrants to purchase shares of our Common Stock.  

July 2019 PIPE Financing

On July 11, 2019, Delcath and certain accredited investors entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Delcath sold to investors an aggregate of 20,000 shares of Series E convertible preferred stock, par value $0.01 per share (the “Series E Convertible Preferred Stock”), having the rights and privileges described in the Company’s certificate of designations for such Series E Convertible Preferred Stock, at a price of $1,000 per share.  Pursuant to the Securities Purchase Agreement, the Company also issued to each Investor a warrant (the “2019 Warrant”) to purchase a number of shares of common stock of the Company, equal to the number of shares of common stock issuable upon conversion of the Series E Convertible Preferred Stock purchased by the investor.  Each 2019 Warrant has an exercise price of $0.06, subject to adjustment in accordance with the terms of the 2019 Warrants, and is exercisable at any time from the date that Delcath effects a reverse stock split until 5:00 p.m. (NYC time) on the fifth anniversary of the date of the reverse stock split.  

Each share of the Series E Convertible Preferred Stock has a stated value equal to $1,000 (the “Stated Value”) and is convertible at any time at the option of the holder into the number of shares of the Company’s Common Stock determined by dividing the stated value by the conversion price of $0.06, subject to certain limitations and adjustments (the “Conversion Price”).  Except for certain adjustments, the holders of Series E Convertible Preferred Stock will be entitled to receive dividends on shares of Series E Convertible Preferred Stock equal (on an as if converted basis) to and in the same form as dividends paid on shares of the Common Stock. Any such dividends that are not paid to the holders of the Series E Convertible Preferred Stock will increase the Stated Value.  No other dividends will be paid on shares of Series E Convertible Preferred Stock.  Holders of shares of Series E Convertible Preferred Stock are entitled to vote with the holders of shares of Common Stock, and not as a separate class, on an as-converted basis. The shares of Series E Convertible Preferred Stock are currently convertible into an aggregate of 542,866,333 million shares of Common Stock. The affirmative vote of the holders of a majority of the then outstanding shares of the Series E Convertible Preferred Stock is required to increase the number of authorized shares of Series E Convertible Preferred Stock or to alter or change adversely the powers, preferences or rights given to the Series E Convertible Preferred Stock, or to amend the Company’s organizational documents in any manner that adversely

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affects the rights of the holders of the Series E Convertible Preferred Stock.  Upon any liquidation of the Company, the holders of the Series E Convertible Preferred Stock will be entitled to receive out of the assets of the Company an amount equal to the Stated Value plus any accrued an d unpaid dividends thereon for each share of Series E Convertible Preferred Stock before any distribution or payment will be made to the holders of the Common Stock.  

The Conversion Price and the exercise price relating to the 2019 Warrants may, upon each of (i) the third trading day following the date that the Company effects a reverse stock split, (ii) the date that the initial registration statement to be filed pursuant to the registration rights agreement (as further discussed below) is declared effective by the Securities and Exchange Commission (the “SEC”), and (iii) in the event that all of the registrable securities (as defined in the registration rights agreement) are not then registered on an effective registration statement, the date that all of the shares underlying the Series E Convertible Preferred Stock and 2019 Warrants may be sold pursuant to Rule 144, be reduced, and only reduced, to equal the lesser of (x) the then effective Conversion Price or exercise price, as applicable, and (y) 90% of the average of the five daily volume weighted average prices of the Common Stock immediately prior to such dates. In the event of a reduction in the exercise price, the aggregate number of Warrant Shares shall be increased such that the aggregate exercise price of the Warrants on the day immediately following such reduction in the Exercise Price is equal to the aggregate Exercise Price immediately prior to such adjustment.  In addition, from the date of issuance of the Series E Convertible Preferred Stock and 2019 Warrants until such time that the Company’s Common Stock is listed or quoted on a national exchange, the Conversion Price and the Exercise Price are subject to price-based anti-dilution protections.  

Proportionate adjustments will be made to the per share exercise price of shares of Common Stock reserved for the purpose of enabling Delcath to issue shares pursuant to the terms of Series E Convertible Preferred Stock and all outstanding 2019 Warrants to purchase shares of our Common Stock.  

Effective Date; Effect

The proposed reverse stock split, if effected, would become effective on the date of filing of a certificate of amendment to our amended and restated certificate of incorporation with the office of the Secretary of State of the State of Delaware. On the effective date, shares of Common Stock issued and outstanding and the shares of Common Stock held in treasury, in each case, immediately prior thereto will be combined and converted, automatically and without any action on the part of the stockholders, into new shares of Common Stock in accordance with the reverse stock split ratio determined by the Board of Directors within the limits set forth in this proposal.

If the proposed reverse stock split is implemented, it will increase the number of our stockholders who own “odd lots” of fewer than 100 shares of Common Stock. Brokerage commission and other costs of transactions in odd lots are generally higher than the costs of transactions of more than 100 shares of Common Stock.

After the effective date of the reverse stock split, our Common Stock would have a new committee on uniform securities identification procedures (“CUSIP”) number, a number used to identify our Common Stock.

The Common Stock is currently registered under Section 12(b) of the Securities Exchange Act, and we are subject to the periodic reporting and other requirements of the Securities Exchange Act. The proposed reverse stock split will not affect the registration of the Common Stock under the Securities Exchange Act. Our Common Stock would continue to be reported on the OTC under the symbol “DCTH,” although the OTC will add the letter “D” to the end of the trading symbol for a period of twenty trading days after the effective date of the reverse stock split to indicate that the reverse stock split had occurred.

Treatment of Fractional Shares

No fractional shares would be issued if, as a result of the reverse stock split, a registered stockholder would otherwise become entitled to a fractional share. Instead, stockholders who otherwise would be entitled to receive fractional shares because they hold a number of shares not evenly divisible by the ratio of the reverse stock split will automatically be entitled to receive an additional share of Common Stock. In other words, any fractional share will be rounded up to the nearest whole number.

Record and Beneficial Stockholders

If the reverse stock split is authorized by the stockholders and the Board of Directors elects to effect the reverse stock split, stockholders of record holding some or all of their shares of our Common Stock electronically in book-entry form under the direct registration system for securities will receive a transaction statement at their address of record indicating the number of shares of our Common Stock they hold after the reverse stock split. Non-registered stockholders holding Common Stock through a bank, broker or other nominee should note that such banks, brokers or other nominees may have different procedures for processing the consolidation than those that would be put in place by us for registered stockholders. If you hold your shares with such a bank, broker or other nominee and if you have questions in this regard, you are encouraged to contact your nominee.

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If the reverse stock split is authorized by the stockholders and the Board of Directors elects to effect th e reverse stock split, stockholders of record holding some or all of their shares in certificate form will receive a letter of transmittal, as soon as practicable after the effective date of the reverse stock split. Our transfer agent will act as “exchange agent” for the purpose of effec ting the exchange of stock certificates. Holders of pre-reverse stock split shares will be asked to surrender to the exchange agent certificates representing pre-reverse stock split shares in exchange for post-reverse stock split shares, including whole shares to be issued in lieu of fractional shares (if any) in accordance with the procedures to be set forth in the letter of transmittal. Until surrender, each certificate representing shares before the reverse stock split wou ld continue to be valid and would represent the adjusted number of shares based on the exchange ratio of the reverse stock split rounded up to the nearest whole share. No new post-reverse stock split share certificates, including those representing whole s hares to be issued in lieu of fractional shares, will be issued to a stockholder until such stockholder has surrendered such stockholder’s outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange ag ent.

STOCKHOLDERS SHOULD NOT DESTROY ANY PRE-SPLIT STOCK CERTIFICATE AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL THEY ARE REQUESTED TO DO SO.

Accounting Consequences

In the event that the reverse stock split is effected, the par value per share of Common Stock would remain unchanged at $0.01 per share after the reverse stock split. As a result, on the effective date of the reverse stock split, the stated capital on our balance sheet attributable to the Common Stock will be reduced proportionally, based on the exchange ratio of the reverse stock split, from its present amount, and the additional paid-in capital account shall be credited with the amount by which the stated capital is reduced. The per share Common Stock net income or loss and net book value will be increased because there will be fewer shares of Common Stock outstanding. In such event, we would reclassify prior period per share amounts and the Consolidated Statements of Stockholders’ Equity for the effect of the reverse stock split for any prior periods in our financial statements and reports such that prior periods are comparable to current period presentation. We do not anticipate that any other accounting consequences would arise as a result of the reverse stock split.

No Appraisal Rights

Our stockholders are not entitled to dissenters’ or appraisal rights under the Delaware General Corporation Law with respect to the proposed amendment to our amended and restated certificate of incorporation to allow for the reverse stock split and we will not independently provide the stockholders with any such right if the reverse stock split is effected.  

Certain Material U.S. Federal Income Tax Consequence of the Reverse Stock Split

The following is a summary of certain material United States federal income tax consequences of the reverse stock split to our stockholders who are United States holders, as defined below. This summary is general in nature and does not purport to be a complete discussion of all of the possible federal income tax consequences of the reverse stock split and is included for general information only. Further, it does not address any U.S. federal non-income, state, local or foreign income or other tax consequences. Also, it does not address the tax consequences to stockholders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, real estate investment trusts, real estate mortgage investment conduits, foreign entities, nonresident alien individuals, broker-dealers, stockholders whose functional currency is not the U.S. dollar, partnerships (or other entities classified as partnership for U.S. federal income tax purposes, S corporations or other flow-through entities for U.S. federal income tax purposes, and tax-exempt entities. Other stockholders may also be subject to special tax rules, including but not limited to: stockholders that received Common Stock as compensation for services or pursuant to the exercise of an employee stock option, or stockholders who have held, or will hold, stock as part of a straddle, hedging constructive sale or conversion transaction for federal income tax purposes. This summary also assumes that you are a United States holder (defined below) who has held, and will hold, shares of Common Stock as a “capital asset,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”), i.e., generally, property held for investment. Finally, the following discussion does not address the tax consequences of transactions occurring prior to or after the reverse stock split (whether or not such transactions are in connection with the reverse stock split), including, without limitation, the exercise of options or rights to purchase Common Stock in anticipation of the reverse stock split.

The tax treatment of a stockholder may vary depending upon the particular facts and circumstances of such stockholder. You should consult with your own tax advisor with respect to the tax consequences of the reverse stock split. As used herein, the term United States holder means a stockholder that is, for federal income tax purposes: a citizen or resident of the United States; a corporation or other entity taxed as a corporation created or organized in or under the laws of the United States or any state, including the District of Columbia; an estate the income of which is subject to federal income tax regardless of its source; or a trust that (i) is subject to the primary supervision of a U.S. court and of which one or more “U.S. persons” (as defined in the Code) has the authority to control all substantial decisions, or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

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The following discussion is based on the Code, applicable Treasury Regulations promulgated thereunder, judicial authority and administrative rulings and practice, all as of the date hereof, all of which are subject to change, potentially with retroactive effect which could adversely affect the a ccuracy of the statements and conclusions set forth herein. No ruling from the Internal Revenue Service or opinion of counsel has been obtained in connection with the reverse stock split, and there can be no assurance that the Internal Revenue Service woul d not take a position contrary to that discussed herein, nor that such contrary position would not be sustained.

Other than in respect of a fractional share that is rounded up to a full share, no gain or loss should be recognized by a United States holder upon such stockholder’s exchange of pre-reverse stock split shares of Common Stock for post-reverse stock split shares of Common Stock pursuant to the reverse stock split. The aggregate tax basis of the post-reverse stock split shares received in the reverse stock split (including any whole share received in exchange for a fractional share) will be the same as the stockholder’s aggregate tax basis in the pre-reverse stock split shares exchanged therefore. The United States holder’s holding period for the post-reverse stock split shares will include the period during which the stockholder held the pre-reverse stock split shares surrendered in the reverse stock split. Although the matter is not clear, it is possible that United States holders whose fractional shares resulting from the reverse stock split are rounded up to the nearest whole share will recognize gain, which may be characterized as either a capital gain or as a dividend, to the extent of the value of such rounded-up amount (i.e., less than one share).

No gain or loss will be recognized by us as a result of the reverse stock split.

THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IN LIGHT OF YOUR SPECIFIC CIRCUMSTANCES.

Required Vote and Recommendation of the Board of Directors

Approval of this Proposal requires the affirmative vote of the holders of a majority of our issued and outstanding shares.

Abstentions will be counted for the purposes of determining the presence or absence of a quorum. Abstentions will have the effect of a vote “AGAINST” this proposal.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

This proposal will be effective upon its approval by our stockholders at the Annual Meeting and is not conditioned upon the approval by our stockholders of any other proposal.

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