Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form
10-K.
Overview
We are an interventional oncology company focused on the treatment of primary and metastatic liver cancers. Our lead product candidate, the HEPZATO
TM
KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATO
TM
, is a drug/device combination product designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. HEPZATO has not been approved for sale in the United States. In Europe, HEPZATO is a stand-alone medical device having the same device components as HEZPATO, but without the melphalan hydrochloride, and is approved for sale under the trade name CHEMOSAT
®
Hepatic Delivery System for Melphalan, or CHEMOSAT, where it has been used at major medical centers to treat a wide range of cancers of the liver.
In the United States, HEPZATO is considered a combination drug and device product and is regulated as a drug by the United States Food and Drug Administration, or the FDA. Primary jurisdiction for regulation of HEPZATO has been assigned to the FDA’s Center for Drug Evaluation and Research. The FDA has granted Delcath six orphan drug designations (five for melphalan in the treatment of patients with ocular (uveal) melanoma, cutaneous melanoma, hepatocellular carcinoma, intrahepatic cholangiocarcinoma, and neuroendocrine tumors) and one for doxorubicin in the treatment of patients with hepatocellular carcinoma). HEPZATO has not been approved for sale in the United States.
Our most advanced development program is the treatment of ocular melanoma liver metastases, or mOM, a type of primary liver cancer. We are currently reviewing the incidence, unmet need, available efficacy data and development requirements for a broad set of liver cancers in order to select a portfolio of indications which will maximize the value of the HEPZATO platform. We believe that the disease states we are investigating and intend to investigate are unmet medical needs that represent significant market opportunities.
We are investigating the objective response rate of HEPZATO in patients with mOM in our FOCUS Clinical Trial for Patients with Hepatic Dominant Ocular Melanoma, or the FOCUS Trial, a global registration clinical trial. For information on the FOCUS Trial, see “Part I, Item 1. Business—Clinical Development Program—The FOCUS Trial” above.
Due to the global outbreak of
SARS-CoV-2,
a novel strain of coronavirus that causes Coronavirus disease
(COVID-19),
the Company experienced an impact on certain areas of its business. These effects included a slowing of patient recruitment in the FOCUS Trial and a reduction in the pace at which we can monitor data at our clinical trial sites. The resulting delay in completing enrollment and additional time required to monitor data caused our planned announcement for the
top-line
data from our FOCUS Trial to shift to December 2021. In December 2021, we announced that HEPZATO met its prespecified endpoint. Based on the FOCUS Trial results, we are preparing to submit a new drug application, or NDA, to the FDA for HEPZATO. We plan to request a
pre-NDA
meeting with the FDA and, pending feedback from FDA and the pace of complete data analysis from our clinical sites which have been impacted by the
COVID-19
pandemic, we intend to submit an NDA to the FDA by
mid-2022
for the use of HEPZATO in the treatment of mOM. The results of the FOCUS Trial should also support securing reimbursement coverage for the use of CHEMOSAT in the European Union. Additional impacts of
COVID-19
on our business may arise that we are not aware of currently. The ultimate impact of the pandemic on the Company’s results of operations, financial position, liquidity, or capital resources cannot be reasonably estimated at this time.
47
Liquidity and Capital Resources
At December 31, 2021, we had cash, cash equivalents and restricted cash totaling $27.0 million, as compared to cash, cash equivalents and restricted cash totaling $28.8 million at December 31, 2020. During the years ended December 31, 2021 and 2020, the Company used $22.6 million and $22.9 million respectively, of cash in our operating activities.
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 have historically funded our operations through a combination of private placements and public offerings of our securities. We will need to raise additional capital under structures available to us, including debt and/or equity offerings.
These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Our financial statements do not include adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. Our ability to continue as a going concern depends on our ability to raise additional capital through the sale of equity or debt securities to support our future operations.
Our capital commitments over the next twelve months include (a) $5.2 million to satisfy December 31, 2021 accounts payable, accrued expenses and lease liabilities; (b) $0.6 million of loan principal payments; and (c) potentially $0.5 million of severance payments. Our capital commitments past the next twelve months include (a) $0.2 million of lease liabilities; (b) $10.4 million of loan principal payments; and (c) $4.6 million of convertible note principal payments, if the holders do not elect to convert the notes into equity.
We also expect to use cash, cash equivalents and investment proceeds to fund our clinical research and operating activities. Our future liquidity and capital requirements will depend on numerous factors, including the initiation and progress of clinical trials and research and product development programs; obtaining regulatory approvals and complying with applicable laws and regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments.
If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash.
On August 6, 2021, the Company entered into a Loan and Security Agreement (the “Avenue Loan Agreement”) with Avenue Venture Opportunities Fund, L.P. (the “Lender,” or “Avenue”) for a term loan in an aggregate principal amount of up to $20 million (the “Avenue Loan”). The Avenue Loan bears interest at an annual rate equal to the greater of (a) the sum of 7.70% plus the prime rate as reported in The Wall Street Journal and (b) 10.95%. The interest rate at December 31, 2021 was 10.95%. The Avenue Loan is secured by all of the Company’s assets globally, including intellectual property. The Avenue Loan matures on August 1, 2024. Additional information regarding the Avenue Loan can be found in Note 10 to the Company’s audited consolidated financial statements contained in this Annual Report on Form 10-K.
Results of Operations for the Year Ended December 31, 2021; Comparison of Results of the Years Ended December 31, 2021 and 2020
Revenue
We recorded approximately $1.3 million in product revenue and $2.3 million in other revenue during the year ended December 31, 2021. During the same period in 2020, we recorded $1.2 million in product revenue and $0.5 million in other revenue. Our sales in both 2021 and 2020 were primarily generated through our license agreement with medac, pursuant to which medac had served as our exclusive distributor of CHEMOSAT in the United Kingdom
48
and European Union. On December 30, 2021, medac terminated the license agreement and ceased distribution activities at the end of a mutually agreed transition period on February 28, 2022. Effective March 1, 2022, the Company began directly marketing CHEMOSAT in these markets. As a result of the termination of the license agreement, the Company changed its estimate of the contract life as of December 31, 2021, which resulted in the immediate recognition of $1.7 million of other revenue that had previously been deferred.
Cost of Goods Sold
During the year ended December 31, 2021, we recognized cost of goods sold of approximately $0.7 million related to product revenue of $1.3 million as compared to cost of goods sold of approximately $0.6 million related to product revenue of $1.2 million in the prior year. The increase is primarily due to the increase in product sales volume.
Research and Development Expenses
For the year ended December 31, 2021, research and development expenses increased to $13.8 million from $11.2 million for the year ended December 31, 2020, an increase of $2.6 million or 23.2%. The increase was due to additional compensation expense related to the hiring of additional employees, $1.2 million of additional stock-based compensation expense, and an increase in costs related to the ongoing FOCUS trial and preparation for the NDA submission.
Selling, General and Administrative Expenses
For the year ended December 31, 2021, selling, general and administrative expenses increased to $13.6 million from $11.1 million for the year ended December 31, 2020, an increase of $2.5 million or 22.5%. The increase is primarily due to a $3.0 million increase in stock-based compensation, partially offset by a $0.5 million decrease in professional fees.
Change in Fair Value of Derivative Liability
For the year ended December 31, 2021, there was no
non-cash
derivative instrument expense, compared to the
non-cash
derivative instrument expense of $2.8 million for the year ended December 31, 2020. In 2019, the Company issued warrants with an initial fair value of $20.8 million. At December 31, 2019, the fair value of the common stock warrants issued by the Company in 2019 was $3.4 million. In February 2020, the fair value of the warrants increased to $6.2 million, resulting in expense of $2.8 million. The entire $6.2 million warrant liability was reclassified to equity at March 31, 2020.
Interest Expense
For the year ended December 31, 2021, we recognized $1.2 million of interest expense, as compared to $0.2 million in the prior year, an increase of $1.0 million. The increase primarily relates to interest expense and amortization of debt discount associated with the Avenue Loan that commenced on August 6, 2021.
Net Loss
We had a net loss for the year ended December 31, 2021 of approximately $25.6 million, an increase of $1.4 million, as compared to a $24.2 million net loss for the same period in 2020. The increase in the net loss is due to a $5.1 million increase in operating expenses and a $1.0 increase in interest expense, partially offset by a $1.9 million increase in gross profit and a $2.8 million decrease in
non-cash
derivative instrument expense.
Critical Accounting Estimates
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain critical accounting estimates have a
49
significant impact on amounts reported in the consolidated financial statements. A summary of those critical accounting estimates is below. Additional details can be found in Note 3 to the Company’s audited consolidated financial statements contained in this Annual Report on Form
10-K.
Fair Value Measurements
GAAP 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, GAAP 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).
Our fair value measurements are generally related to the valuation of warrants and stock-based compensation. Valuation of such financial instruments generally requires certain assumptions, including the fair value of our common stock (generally an observable market price, as our common stock is publicly traded), the expected term of the financial instrument (judgment is required), the expected volatility of our common stock over the expected term (generally estimated by reference to the historical volatility of our common stock), our expected dividend rate over the expected term (currently estimated as zero, given that we are not projecting profits over the intermediate term) and the expected risk-free rate over the expected term (generally estimated by reference to United States treasury instruments with similar remaining terms).
Revenue Recognition
Revenue is generated from proprietary and partnered product sales and license and royalty arrangements. Revenue is recognized when or as we transfer control of the promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services. When obligations or contingencies remain after the products are shipped, such as training and certifying the treatment centers, revenue is deferred until the obligations or contingencies are satisfied.
We may enter into contracts with partners that contain multiple elements such as licensing, development, manufacturing, and commercialization components. These arrangements are often complex, and we may receive various types of consideration over the life of the arrangement, including up-front fees, reimbursements for research and development services, milestone payments, payments on product shipments, margin sharing arrangements, license fees and royalties.
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with the customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price, including an estimation of any variable consideration expected to be received in connection with the contract;
50
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when the company satisfies a performance obligation.
Each of these steps in the revenue recognition process requires management to make judgments and/or estimates. The most significant judgements and estimates involve the determination of variable consideration to be included in the transaction price. Variable consideration is recognized at an amount we believe is not subject to significant reversal and is adjusted at each reporting period if the most likely amount of expected consideration changes or becomes fixed. We believe this provides a reasonable basis for recognizing revenue; however, actual results could differ from estimates and significant changes in estimates could impact our results of operations in future periods.
As required by GAAP, the Company disaggregates its revenue into the categories of product revenue and other revenue. The Company recognizes product revenue and milestone payments at a point in time, whereas other revenues (primarily license fees) are recognized over time. Milestone payments that are contingent upon the occurrence of future events, are evaluated and recorded at the most likely amount, and to the extent that it is probable that a significant reversal will not occur when the associated uncertainty is resolved
Accrued Expenses
We utilize contract research organizations in order to perform research and development and conduct clinical trials. In some cases, these organization do not bill on a timely basis. Management monitors certain key drivers of these costs and estimates accruals in an attempt to properly match expenses incurred with the appropriate reporting period. However, there is judgment involved and the actual billings could be more or less than the estimated accrual.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
Report of Marcum LLP – Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2021 and 2020 F-2
Notes to Consolidated Financial Statements F-8
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Delcath Systems, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delcath Systems, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the years ended December 31, 2021 and 2020, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
Marcum
LLP
We have served as the Company’s auditor since 2018.
New York, NY
March 30, 2022
F-1
DELCATH SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
Assets
Current assets
Accounts receivable, net 44 57
Prepaid expenses and other current assets 2,743 2,670
Property, plant and equipment, net 1,348 1,351
Liabilities and Stockholders’ Equity
Current liabilities
Deferred revenue, current 170 525
Lease liabilities, current 416 495
Loan payable, current 621 —
Convertible notes payable, current — 2,000
Deferred revenue, non-current — 2,072
Lease liabilities, non-current 207 450
Loan payable, non-current 10,372 —
Convertible notes payable, non-current 4,639 —
Commitments and contingencies (Note 13)
Stockholders’ equity
Accumulated other comprehensive loss 18 (104 )
Total liabilities and stockholders’ equity $ 33,124 $ 34,635
See Accompanying Notes to these Consolidated Financial Statements.
F-2
DELCATH SYSTEMS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
Years ended December 31,
Cost of goods sold (671 ) (640 )
Operating expenses:
Selling, general and administrative expenses 13,637 11,108
Change in fair value of the warrant liability, net — (2,832 )
Interest expense, net (1,186 ) (175 )
Deemed dividend for triggering of warrant down round feature — (55 )
Net loss attributable to common stockholders $ (25,649 ) $ (24,211 )
Other comprehensive income (loss):
Foreign currency translation adjustments 122 (132 )
Total other comprehensive loss $ (25,527 ) $ (24,288 )
Common share data:
Basic and diluted loss per common share $ (3.59 ) $ (8.35 )
See Accompanying Notes to these Consolidated Financial Statements.
F-3
DELCATH SYSTEMS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
Preferred Stock$0.01 Par Value Common Stock$0.01 Par Value
Compensation expense for issuance of stock options — — — — 7,832 — — 7,832
Shares settled for services — — 2,636 — 57 — — 57
Conversion of preferred stock into common stock (9,274 ) — 927,379 9 (9 ) — — —
Proceeds allocated to warrant — — — — 1,171 — — 1,171
Cash issuance costs of warrant — — — — (44 ) — — (44 )
Exercise of options into common stock — — 439 — 4 — — 4
Total comprehensive income — — — — — — 122 122
F-4
DELCATH SYSTEMS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit), Continued
(in thousands, except share and per share data)
Preferred Stock$0.01 Par Value Common Stock$0.01 Par Value
Compensation expense for issuance of stock options — — — — 3,505 — — 3,505
Shares settled for accrued compensation — — 22,963 — 229 — — 229
Common stock issued in connection with ATM Offering — — 77,644 1 866 — — 867
Fractional rounding related to reverse stock split 1 — 49 — — — — —
Comprehensive loss — — — — — — (132 ) (132 )
See Accompanying Notes to these Consolidated Financial Statements.
F-5
DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands, except share and per share data)
Years endedDecember 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense 7,832 3,505
Restricted stock compensation expense — 406
Non-cash lease expense 322 25
Amortization of debt discount 323 —
Warrant liability fair value adjustment — 2,832
Non-cash interest income — (1 )
Interest expense accrued related to convertible notes 186 160
Changes in assets and liabilities:
Increase (decrease) in prepaid expenses and other assets 813 (910 )
Increase (decrease) in accounts receivable 13 (36 )
Increase in inventories (557 ) (201 )
Decrease in accounts payable (1,136 ) (4,396 )
Decrease in accrued expenses (2,148 ) —
Decrease in lease liabilities (322 ) —
Decrease in deferred revenue (2,427 ) (263 )
Net cash used in operating activities (22,604 ) (22,868 )
Cash flows from investing activities:
Purchase of property, plant and equipment (143 ) (782 )
Net cash used in investing activities (143 ) (782 )
Cash flows from financing activities:
Principal payments of financing leases — (26 )
Payments related to registration costs — (106 )
Net proceeds from Public Offerings (1) — 39,764
Net proceeds from ATM Offering (2) 3,923 866
Fees paid related to preferred stock conversions — (1 )
Net proceeds from debt financing (3) 14,437 —
Proceeds from the exercise of stock options 4 —
Proceeds from the exercise of warrants 2,458 1,858
Net cash provided by financing activities 20,822 42,355
Foreign currency effects on cash 122 (132 )
Net (decrease) increase in total cash (1,803 ) 18,573
Total Cash, Cash Equivalents and Restricted Cash:
(1) - Includes gross proceeds of $44,243, less total issuance costs of $4,479.
(3) - Includes gross proceeds of $15,000 less total costs of $563.
F-6
DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows, continued
(in thousands, except share and per share data)
Years endedDecember 31,
Cash, Cash Equivalents and Restricted Cash consisted of the following:
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest expense $ 681 $ 11
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Conversions of preferred stock into common stock $ — $ 21
Shares settled for services $ 57 $ —
Proceeds allocated to warrant $ 1,171 $ —
Reclassification of 2019 warrants from liability to equity $ — $ 6,200
Right of use assets obtained in exchange for lease obligations $ — $ 729
Financing of D&O insurance premium $ 886 $ 781
See Accompanying Notes to these Consolidated Financial Statements.
F-7
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(1) Description of Business
Delcath Systems, Inc. (“Delcath” or the “Company”) is an interventional oncology company focused on the treatment of primary and metastatic liver cancers. The Company’s lead product candidate, the HEPZATO
TM
KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATO
TM
, is a drug/device combination product. HEPZATO is designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. In Europe, Delcath’s commercial product is a stand-alone medical device having the same device components as the HEPZATO KIT, but without the melphalan hydrochloride, and is approved for sale under the trade name CHEMOSAT
®
Hepatic Delivery System for Melphalan, or CHEMOSAT, where it has been used at major medical centers to treat a wide range of cancers of the liver.
Delcath’s clinical development program (“CDP”) for HEPZATO is comprised of the FOCUS Clinical Trial for Patients with Hepatic Dominant Ocular Melanoma (the “FOCUS Trial”), a global registration clinical trial that is investigating objective response rate in metastatic ocular melanoma, or mOM. The Company is currently reviewing the incidence, unmet need, available efficacy data and development requirements for a broad set of liver cancers in order to select a portfolio of
follow-on
indications which will maximize the value of the HEPZATO platform.
In the United States, HEPZATO is considered a combination drug and device product regulated by the Food and Drug Administration (“FDA”). Primary jurisdiction for regulation of HEPZATO has been assigned to the FDA’s Center for Drug Evaluation and Research. The FDA has granted Delcath six orphan drug designations (five for melphalan in ocular melanoma, cutaneous melanoma, cholangiocarcinoma, hepatocellular carcinoma, and neuroendocrine tumor indications and one for doxorubicin in the hepatocellular carcinoma indication). HEPZATO has not been approved for sale in the United States.
Risks and Uncertainties
Due to the global outbreak of
SARS-CoV-2,
a novel strain of coronavirus that causes Coronavirus disease
(COVID-19),
the Company experienced an impact on certain areas of its business. These effects included a slowing of patient recruitment in the FOCUS trial and a reduction in the pace at which the Company can monitor data at its clinical trial sites. The resulting delay in completing enrollment and additional time required to monitor data has caused the Company’s planned announcement for the
top-line
data from its FOCUS Trial to shift to early 2021 and to be modified to a preliminary analysis. The Company now plans to submit a New Drug Application (NDA) to the FDA mid-2022 for the treatment of mOM. The ability to achieve this goal is contingent on the Company’s ability to monitor data at its clinical sites and therefore the timeline may shift as access to the clinical sites changes in response to the rapidly evolving situation. The Company also has experienced a decline in EU commercial product revenue and additional impacts to the business may arise that the Company is not aware of currently. The ultimate impact of the pandemic on the Company’s results of operations, financial position, liquidity, or capital resources cannot be reasonably estimated at this time.
Although Delcath is not aware of any direct impacts of the war between the Ukraine and the Russian Federation on its supply chain, the war could adversely impact Delcath’s ability to obtain components and/or significantly increase the cost of obtaining such components for the Company’s products from its third-party suppliers in a timely manner or at all.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As
F-8
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(1) Description of Business – Continued
Liquidity and Going Concern – Continued
shown in the accompanying consolidated financial statements, during the year ended December 31, 2021, the Company incurred net losses of $25,649 and used $22,554 of cash for its operating activities. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to obtain additional funding sources or to enter into strategic alliances. Adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise additional capital and/or enter into strategic alliances when needed or on attractive terms, it would be forced to delay, reduce or eliminate its research and development programs or any commercialization efforts. There can be no assurance that the Company’s efforts will result in the resolution of the Company’s liquidity needs. If the Company is not able to continue as a going concern, it is likely that holders of its common stock will lose all of their investment. The accompanying consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additional working capital will be required to continue operations. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of product development and clinical trial results; uncertainty regarding regulatory approval; technological uncertainty; uncertainty regarding patents and proprietary rights; comprehensive government regulations; limited commercial manufacturing, marketing or sales experience; and dependence on key personnel.
(2) Basis of Consolidated Financial Statement Presentation
The accounting and financial reporting policies of the Company conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires management to make assumptions and estimates that impact the amounts reported in the Company’s consolidated financial statements. The consolidated financial statements include the accounts of all entities controlled by the Company. All significant inter-company accounts and transactions are eliminated.
(3) Summary of Significant Accounting Policies
Use of Estimates
The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s consolidated balance sheets and the amount of revenues and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for valuation of warrants, stock-based compensation, valuation of inventory, impairment of long-lived assets, income taxes and operating expense accruals. 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.
F-9
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Cash Equivalents and Concentrations of Credit Risk
The Company considers investments with original maturities of three months or less at date of acquisition to be cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation; however, the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash on the accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable, principally trade, are generally due within 30 days and are stated at amounts due from customers. Collections and payments from customers are monitored and a provision for estimated credit losses may be created based upon historical experience and specific customer collection issues that may be identified.
Inventories
Inventories are valued at the lower of cost or net realizable value (“NRV”) using the
first-in,
first-out
method. The reported “NRV” of inventory includes finished saleable products,
work-in-process,
and raw materials that will be sold or used in future periods. The Company reserves for expired, obsolete, and slow-moving inventory.
Property, Plant and Equipment
Property, plant, and equipment are recorded at cost, less accumulated depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives of the assets which range from
three
to
seven years
. Leasehold improvements will be amortized over the shorter of the lease term or the estimated useful life of the related assets when they are placed into service. The Company evaluates property, plant and equipment for impairment periodically to determine if changes in circumstances or the occurrence of events suggest the carrying value of the asset or asset group may not be recoverable. Maintenance and repairs are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized.
Fair Value Measurements
The Company adheres to Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 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.
ASC 820 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
F-10
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Fair Value Measurements – Continued
market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 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).
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.
Revenue Recognition
Revenue is generated from proprietary and partnered product sales and license and royalty arrangements. Revenue is recognized when or as the Company transfers control of the promised goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. When obligations or contingencies remain after the products are shipped, such as training and certifying the treatment centers, revenue is deferred until the obligations or contingencies are satisfied.
Delcath may enter into contracts with partners that contain multiple elements such as licensing, development, manufacturing, and commercialization components. These arrangements are often complex, and the Company may receive various types of consideration over the life of the arrangement, including up-front fees, reimbursements for research and development services, milestone payments, payments on product shipments, margin sharing arrangements, license fees and royalties.
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
F-11
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Revenue Recognition – Continued
The following five steps are applied to achieve that core principle:
• Step 1: Identify the contract with the customer;
• Step 2: Identify the performance obligations in the contract;
• Step 5: Recognize revenue when the company satisfies a performance obligation.
Each of these steps in the revenue recognition process requires management to make judgments and/or estimates. The most significant judgements and estimates involve the determination of variable consideration to be included in the transaction price. Variable consideration is recognized at an amount management believes is not subject to significant reversal and is adjusted at each reporting period if the most likely amount of expected consideration changes or becomes fixed. Management believes this provides a reasonable basis for recognizing revenue; however, actual results could differ from estimates and significant changes in estimates could impact the Company’s results of operations in future periods.
As required by ASC 606, the Company disaggregates its revenue into the categories of product revenue and other revenue. The Company recognizes product revenue and milestone payments at a point in time, whereas other revenues (primarily license fees) are recognized over time. Milestone payments that are contingent upon the occurrence of future events, are evaluated and recorded at the most likely amount, and to the extent that it is probable that a significant reversal will not occur when the associated uncertainty is resolved. See Note 13 – Commitments and Contingencies – Litigations, Claims and Assessments – medac Matter.
Deferred Revenue
The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. See Note 13 – Commitments and Contingencies – Litigations, Claims and Assessments – medac Matter.
Selling, General and Administrative
Selling, general and administrative costs include personnel costs and related expenses for the Company’s sales, marketing, general management and administrative staff, recruitment, costs related to the Company’s commercialization efforts in Europe, professional service fees, professional license fees, business development and certain general legal activities. All such costs are charged to expense when incurred.
Research and Development
Research and development costs include the costs of materials used for clinical trials and R&D, personnel costs associated with device and pharmaceutical R&D, clinical affairs, medical affairs, medical science
F-12
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Research and Development – Continued
liaisons, and regulatory affairs, costs of outside services and applicable indirect costs incurred in the development of the Company’s proprietary drug delivery system. All such costs are charged to expense when incurred.
Stock Based Compensation
The Company accounts for its share-based compensation in accordance with the provisions of ASC 718, Stock-Based Compensation, which establishes accounting for equity instruments exchanged for services. Under the provisions of ASC 718, 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 expenses its share-based compensation granted under the accelerated 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 the common stock at the date of the grant. The Company estimates the fair value of stock options using an option pricing model. Key inputs used to estimate the fair value of stock options include the exercise price of the option, the expected term, the expected volatility of the stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the 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.
Income Taxes
The Company accounts for income taxes following the asset and liability method in accordance with the ASC 740 “Income Taxes.” Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company applies the accounting guidance issued to address the accounting for uncertain tax positions. This guidance clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements as well as provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company classifies interest and penalty expense related to uncertain tax positions as a component of income tax expense. 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. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. See Note 14 for additional information.
Net Loss per Common Share
Basic net loss per share is determined by dividing net loss by the weighted average shares of common stock outstanding during the period, without consideration of potentially dilutive securities, except for those
F-13
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Net Loss per Common Share – Continued
shares that are issuable for little or no cash consideration. Diluted net loss per share is determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potentially dilutive common shares, such as stock options and warrants calculated using the treasury stock method. In periods with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.
For the years ended December 31, 2021 and 2020 the following potentially dilutive securities were excluded from the computation of diluted earnings per share because their effects would be antidilutive:
December 31,
Segment Information
A single management team that reports to the Chief Executive Officer comprehensively manages the business. Accordingly, the Company does not have separately reportable segments.
Foreign Currency and Currency Translation
Transactions that are denominated in a foreign currency are remeasured into the functional currency at the current exchange rate on the date of the transaction. Any foreign currency-denominated monetary assets and liabilities are subsequently remeasured at current exchange rates, with gains or losses recognized as foreign exchange (losses)/gains in the statements of operations.
The assets and liabilities of the Company’s international subsidiaries are translated from their functional currencies into United States dollars at exchange rates prevailing at the balance sheet date. The majority of the foreign subsidiaries revenues and operating expenses are denominated in Euros. The reporting currency for the Company is the United States dollar. Average rates of exchange during the period are used to translate the statement of operations, while historical rates of exchange are used to translate any equity transactions.
Translation adjustments arising on consolidation due to differences between average rates and balance sheet rates, as well as unrealized foreign exchange gains or losses arising from translation of intercompany loans that are of a long-term-investment nature, are recorded in other comprehensive income.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2019-12,
“Simplifying the Accounting for Income Taxes.” The list of changes is comprehensive;
F-14
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Recently Adopted Accounting Pronouncements – Continued
however, the changes did not significantly impact the Company due to the full valuation allowance that is recorded against the Company’s deferred tax assets. The Company adopted ASU
2019-12
on January 1, 2021, and there was no material impact on the Company’s financial statements or disclosures.
In March 2020, the FASB issued ASU
2020-03,
“Codification Improvements to Financial Instruments” (“ASU
2020-03”).
ASU
2020-03
improves and clarifies various financial instruments topics. ASU
2020-03
includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company adopted ASU
2020-03
upon issuance, which did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU
2020-06, “Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU
2020-06
simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. ASU
2020-06
requires entities to provide expanded disclosures about the terms and features of convertible instruments and amends certain guidance in ASC 260, Earnings per Share, relating to the computation of earnings per share for convertible instruments and contracts in an entity’s own equity. The guidance becomes effective for the Company on January 1, 2024, with early adoption permitted. The Company early adopted ASU
2020-06
on January 1, 2022 and the adoption is not expected to have any immediate effect on the Company’s financial statements. Going forward, the Company will no longer be required to assess convertible instruments for beneficial conversion features.
In October 2020, the FASB issued ASU
2020-10
“Codification Improvements”, which improves consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The guidance is effective for the Company beginning in the first quarter of fiscal year 2022 with early adoption permitted. The Company adopted this guidance on January 1, 2022 and it did not have a material impact on its consolidated financial statements.
On May 3, 2021, the FASB issued ASU
2021-04,
“Earnings Per Share” (Topic 260), “Debt—Modifications and Extinguishments” (Subtopic
470-50),
“Compensation—Stock Compensation” (Topic 718), and “Derivatives and Hedging—Contracts in Entity’s Own Equity” (Subtopic
815-40):
“Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.” This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company adopted this guidance on January 1, 2022 and it did not have a material impact on its consolidated financial statements.
F-15
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(4) Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in
Restricted Cash
on the balance sheet. Restricted cash does not include required minimum balances.
December 31,
Restricted balance for loan agreement 4,000 —
Security for credit cards 50 50
Under the terms of a
sub-lease
agreement for office space at 1633 Broadway, New York, NY, as of December 31, 2021, the Company is required to maintain a letter of credit in the amount of $101, which will expire with the sublease in February 2023.
(5) Inventories
Inventories consist of:
December 31,
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include the following:
December 31,
Total prepaid expenses and other current assets $ 2,743 $ 2,670
F-16
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(7) Property, Plant, and Equipment
Property, plant, and equipment consists of:
December 31,
Buildings and land $ 1,222 $ 1,109 30 years - Buildings
Enterprise hardware and software 1,858 1,862 3 years
Leaseholds 1,796 1,826 Lesser of lease termor estimated usefullife
Property, plant, and equipment, gross 6,173 6,064
Accumulated depreciation (4,825 ) (4,713 )
Property, plant, and equipment, net $ 1,348 $ 1,351
On July 31, 2020, the Company exercised its option to purchase its
95-97
Park Road office location in Queensbury, NY for $460, pursuant to the terms of the lease agreement dated September 17, 2018, as amended.
Depreciation expense for the years ended December 31, 2021 and 2020 was $146 and $167, respectively.
(8) Accrued Expenses
Current accrued expenses include the following:
December 31,
Compensation, excluding taxes 893 1,598
Interest on Rosalind convertible note 393 234
(9) Leases
The Company recognizes
right-of-use
(“ROU”) assets and lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company leases its facilities under
non-cancellable
operating leases.
The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the ROU asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it
F-17
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(9) Leases – Continued
would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments.
Pursuant to a 2014 sublease agreement (the “2014 Sublease”) and a 2015 sublease agreement (the “2015 Sublease”) the Company subleased portions of its leased premises in Galway, Ireland to a sublessee. On May 15, 2020, the Company and its sublessee entered into amendments to the 2014 Sublease and the 2015 Sublease pursuant to which (i) the 2014 Sublease and 2015 Sublease were extended from May 31, 2020 to August 2, 2021, (ii) effective July 1, 2020, the leased premises under the 2015 Sublease would be expanded to include an additional 4,999 square feet of space, and (iii) effective July 1, 2020, the rent under the 2015 Sublease would increase from approximately $14.6 per month to $20.6 per month. The Company analyzed the terms of the amended 2014 Sublease and 2015 Sublease and determined that its ROU asset for the master operating lease was not impaired as a result of the amendments. On June 25, 2020, the Company entered into a
sub-lease
agreement (the “2021
Sub-Lease”)
with its previous sublessee under the 2014 Sublease and 2015 Sublease pursuant to which, effective August 2, 2021, the previous sublessee would become the lessee and the Company would then
sub-lease
its portion of the premises in Galway, Ireland from the previous sublessee. The Company’s rent expense under the 2021
Sub-Lease
is approximately $3.7 per month for a term of five years.
On September 22, 2020, the Company entered into an amendment to a
sub-lease
agreement executed in March 2016 for approximately 6,877 square feet of office space at 1633 Broadway, New York, NY. The term of the
sub-lease
agreement began in April 2016 and, pursuant to the amendment, is extended through February 2023 for total annual base rent of $406.
The following table summarizes the Company’s operating leases as of December 31, 2021:
U.S . Ireland Total
Lease cost:
Sublease income — (132 ) (132 )
Other information:
Operating cash flows out from operating leases $ (417 ) $ (147 ) $ (564 )
Operating cash flows in from operating leases $ — $ 132 $ 132
Weighted average remaining lease term 1.2 4.6
Weighted average discount rate - operating leases 8 % 8 %
Maturities of the Company’s operating leases, excluding short-term leases, are as follows:
U.S . Ireland Total
F-18
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(9) Leases – Continued
U.S . Ireland Total
Less present value discount (25 ) (36 ) (61 )
(10) Loans and Convertible Notes Payable
December 31,
Gross Discount Net Gross Discount Net
Loan - Avenue [1] - Less Current Portion (714 ) 93 (621 ) — — —
Total - Loans Payable, Non-Current $ 11,924 $ (1,552 ) $ 10,372 $ — $ — $ —
Convertible Portion of Loan Payable - Avenue 3,000 (361 ) 2,639 — — —
[1] The gross amount includes the 4.25% final payment of $637.5.
Remaining maturities of the Company’s loan and convertible note payables are as follows:
Loans ConvertibleNotes Total
Term Loan from Avenue Venture Opportunities Fund, L.P.
On August 6, 2021, the Company entered into a Loan and Security Agreement (the “Avenue Loan Agreement”) with Avenue Venture Opportunities Fund, L.P. (the “Lender,” or “Avenue”) for a term loan in an aggregate principal amount of up to $20,000 (the “Avenue Loan”). The Avenue Loan bears interest at an annual rate equal to the greater of (a) the sum of 7.70% plus the prime rate as reported in The Wall Street Journal and (b) 10.95%. The interest rate at December 31, 2021 was 10.95%. The Avenue Loan is secured by all of the Company’s assets globally, including intellectual property. The Avenue Loan matures on August 1, 2024.
F-19
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(10) Loans and Convertible Notes Payable – Continued
Term Loan from Avenue Venture Opportunities Fund, L.P. – Continued
The initial tranche of the Avenue Loan is $15,000, including $4,000 which has been funded into a restricted account and will be released upon achievement of (a)(x) positive FOCUS trial efficacy per the trial’s predefined Statistical Analysis Plan (SAP) (specifically the Overall Response Rate exceeds the prespecified threshold for success defined in the SAP by a statistically significant amount); and (y) based on data contained within the FOCUS trial database and appropriate for use with the U.S. Food and Drug Administration, safety and tolerability among FOCUS trial participants is within the range of currently approved and commonly used cytotoxic chemotherapeutic agents; and (b) raising subsequent net equity proceeds of at least $20,000. The Company may request an additional $5,000 of gross proceeds between October 1, 2022 and December 31, 2022, with funding, subject to the approval of Avenue’s Investment
Committee.
Up to $3,000 of the principal amount of the Avenue Loan outstanding may be converted, at the option of Avenue, into shares of the Company’s common stock at a conversion price of $11.98 per share.
In connection with the Avenue Loan, the Company issued to Avenue a warrant (the “Avenue Warrant”) to purchase 127,755 shares of common stock at an exercise price per share equal to $0.01. The Avenue Warrant is exercisable until August 31, 2026.
The Company will make monthly interest-only payments during the first fifteen months of the term of the Avenue Loan, which could be increased to up to twenty-four months upon the achievement of specified performance milestones. Following the interest-only period, the Company will make equal monthly payments of principal plus interest until the maturity date, when all remaining principal outstanding and accrued interest must be paid. If the Company prepays the Avenue Loan, it will be required to pay (a) a prepayment fee of 3% if the Avenue Loan is prepaid during the interest-only period; and (b) a prepayment fee of 1% if the Avenue Loan is prepaid after the interest-only period. The Company must make an incremental final payment equal to 4.25% of the aggregate funding.
The Company paid an aggregate commitment fee of $150 at closing. Upon funding a second tranche of the Avenue Loan, the Lender will earn a 1.0% fee on the $5,000 of incremental committed capital, for a total commitment fee of $200.
The Avenue Loan Agreement requires the Company to make and maintain representations and warranties and other agreements that are customary in loan agreements of this type. The Avenue Loan Agreement also contains customary events of default, including
non-payment
of principal or interest, violations of covenants, bankruptcy and material judgments.
The Company determined that the embedded conversion option associated with the Avenue Loan was not required to be bifurcated. The Company determined that the Avenue Warrant met the criteria to be equity-classified. The $637 value of the final payment was treated as original issue discount. The $1,171 relative fair value of the Avenue Warrant was credited to Additional Paid in Capital while it was debited as debt discount. Of the $563 of cash issuance costs, $519 was allocated to the Avenue Loan and was recorded as debit discount, while $44 was allocated to the Avenue Warrant and was debited to Additional Paid in Capital. Of the $2,327 of aggregate debt discount, $1,909 was allocated to the
non-convertible
portion of the Avenue Loan, while $418 was allocated to the convertible portion of the Avenue Loan. Aggregate debt discount amortization of $323 was recorded during the year ended December 31, 2021, including $265 related to the
non-convertible
portion of the Avenue Loan and $58 related to the convertible portion of the Avenue Loan. The Company also determined that the convertible portion of the Avenue Loan did not include a beneficial conversion feature, because the effective conversion price exceeded the commitment
F-20
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(10) Loans and Convertible Notes Payable – Continued
Term Loan from Avenue Venture Opportunities Fund, L.P. – Continued
date market price of the Company’s common stock. Interest expense incurred was $675 for the year ended December 31, 2021
.
The
Avenue Warrant was valued at issuance at $1,309 using the Black-Scholes option pricing method using the following assumptions:
Contractual term (years) 5.07
Expected volatility 187.0 %
Risk-free interest rate 0.77 %
Expected dividends 0.00 %
Convertible Notes Payable
The Company has $2,000
of
principal outstanding related to Senior Secured Promissory
Notes (the “Rosalind Notes”) which bear interest
at 8% per annum. Pursuant to
the
ir
original terms, the Rosalind Notes
were
convertible into Series E Preferred Stock at a price of $1,500 per share and
were
to mature on July 16, 2021
.
Interest expense was $160 for both years ended December 31, 2021 and 2020.
On August 6, 2021, the Company executed an agreement to amend the Rosalind Notes to (a) reduce the conversion price to $1,198 per share of the Company’s Series E Convertible Preferred Stock; and (b) extend the maturity date to October 30, 2024.
In addition, in order to induce the Avenue Venture Opportunities Fund, L.P. to provide the Avenue Loan described above, the holders of the Rosalind Notes agreed to subordinate (a) all of the Company’s indebtedness and obligations to the holders; and (b) all of the holders’ security interest, to the Avenue Loan and Avenue’s security interest in the Company’s property.
Up to $3,000 of the principal amount of the Avenue Loan outstanding may be converted, at the option of the Lender, into shares of the Company’s common stock at a conversion price of $11.98 per share.
(11) Stockholders’ Equity
Authorized Shares
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.01 par value. To date, the Company has designated the following preferred stock: Series A (4,200 shares), Series B (2,360 shares), Series C (590 shares), Series D (10,000 shares), Series E (40,000 shares) and Series
E-1
(12,960 shares).
On November 23, 2020, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of the State of Delaware. The Certificate of Amendment, which became effective immediately upon its filing, decreased the total number of shares of common stock, $0.01 par value, that the Company is authorized to issue from 1,000,000,000 shares to 40,000,000 shares. The Board of Directors of the Company adopted a resolution approving the Certificate of Amendment on September 30, 2020.
F-21
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2021 and 2020
(amounts in thousands, except share and per share amounts)
(11) Stockholders’ Equity – Continued
Preferred Stock
Series E and Series
E-1
Convertible Preferred Stock
During the years ended December 31, 2021 and 2020, 9,274 and 20,887 shares of Series E and Series
E-1
Convertible Preferred Stock were converted into 927,379 and 2,084,507 shares of the Company’s common stock, respectively.
As of December 31, 2021, there were an aggregate of 11,357 shares of Series E and Series
E-1
Convertible Preferred Stock outstanding.
Stock Incentive Plans
The Company’s 2019 Equity Incentive Plan (the “2019 Plan”) allows for grants in the form of incentive stock options, nonqualified stock options, stock units, stock awards, stock appreciation rights, and other stock-based awards. All of the Company’s officers, directors, employees, consultants, and advisors are eligible to receive grants under the 2019 Plan. The 2019 Plan provides for the grant of options to purchase shares of common stock at exercise prices not less than 100% of fair value on the dates of grant. The maximum number of shares reserved for issuance under the 2019 Plan was 2,142. The 2019 Plan has been superseded by the 2020 Plan discussed below and no further awards will be made under the 2019 Plan; however, outstanding awards granted under the 2019 Plan will remain outstanding and continue to be administered in accordance with the terms of the 2019 Plan and the applicable award agreements.
On September 30, 2020, the Company’s 2020 Omnibus Equity Incentive Plan (the “2020 Plan”) was adopted by the Company’s Board of Directors. On November 23, 2020, the Company’s stockholders approved the 2020 Plan. The 2020 Plan will continue in effect until the tenth anniversary of the date of its adoption by the Board or until earlier terminated by the Board. The 2020 Plan is administered by the Board of Directors or a committee designated by the Board of Directors. The 2020 Plan provides for the grant of incentive stock options,
non-qualified
stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, as well as other stock-based awards or cash awards that are deemed to be consistent with the purposes of the plan to Company employees, directors and consultants. As of December 31, 2021, there are 2,475,000 shares of common stock reserved under the 2020 Plan, of which 1,240,600 remained available to be issued.