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® KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATO, is a drug/device combination product designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. In Europe, the hepatic delivery system is a stand-alone medical device having the same device components as HEPZATO 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, intrahepatic cholangiocarcinoma, hepatocellular carcinoma, and neuroendocrine tumor indications and one for doxorubicin in the treatment of patients with hepatocellular carcinoma). HEPZATO has not been approved for sale in the United States.
Our clinical development program 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, a type of primary liver cancer. Our most advanced development program is the treatment of ocular melanoma liver metastases, or mOM. 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 follow-on indications that will maximize the value of the HEPZATO platform. In addition to HEPZATO’s use to treat mOM, we believe that HEPZATO has the potential to treat other liver dominant cancers, such as Metastatic Colorectal Cancer and Cholangiocarcinoma, and plan to begin the study of HEPZATO to treat such conditions in the near future. We believe that the disease states we are investigating and intend to investigate are unmet medical needs that represent significant market opportunities.
In December 2021, the Company announced that the FOCUS Trial for HEPZATO met its pre-specified endpoint. For information on the FOCUS Trial, see “Part I, Item 1. Business—Clinical Development Program—The FOCUS Trial”.
On February 14, 2023 we filed a New Drug Application resubmission to the US Food and Drug Administration (the FDA) for the HEPZATO Kit (melphalan hydrochloride for Injection/Hepatic Delivery System) seeking approval of the HEPZATO Kit in the treatment of patients with unresectable hepatic-dominant metastatic ocular melanoma, or mOM. On March 20, 2023, the FDA determined the resubmission constituted a complete response and set a Prescription Drug User Fee Act target action date of August 14, 2023.
The resubmission is in response to a September 12, 2013 Complete Response Letter, or CRL, from the FDA for the Company’s NDA in December 2010 seeking approval of its first generation melphalan hydrochloride for injection/hepatic delivery system. The NDA resubmission contains comprehensive data and information on Generation Two HEPZATO Kit relating to the matters identified in the CRL. On March 20, 2023, the FDA determined the resubmission constituted a complete response and set a Prescription Drug User Fee Act target action date of August 14, 2023. We continue to promote our early access programs in the United States to make HEPZATO readily available to mOM patients. We are focused on continuing to treat these patients with mOM as regulatory approval is sought in the United States. There are currently patients enrolled in our early access program sites.
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On February 28, 2022, CHEMOSAT received Medical Device Regulation (MDR) certification under the European Medical Devices Regulation [2017/745/EU], which may be considered by jurisdictions when evaluating reimbursement. As of March 1, 2022, we have assumed direct responsibility for sales, marketing and distribution of CHEMOSAT in Europe.
Liquidity and Capital Resources
At December 31, 2022, we had cash, cash equivalents and restricted cash totaling $11.8 million, as compared to cash, cash equivalents and restricted cash totaling $27.0 million at December 31, 2021. During the years ended December 31, 2022 and 2021, the Company used $25.0 million and $22.6 million respectively, of cash in our operating activities.
On March 10, 2023, we had a banking relationship with SVB. As of the closure of SVB on March 10, 2023, we held approximately $1.1 million of unrestricted cash in deposits held in SVB, $4.0 million held in a restricted SVB account as required per the Avenue Loan Agreement and approximately $0.2 million of restricted cash held in SVB collateral accounts as required per our line of credit for the property in New York City and our credit card program with SVB. SVB was closed on March 10, 2023 by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the U.S. Treasury, Federal Reserve, and FDIC announced that SVB depositors will have access to all of their money starting March 13, 2023. On March 13, 2023, we were able to access all of our cash, cash equivalents and investments held at or through SVB. While we have not experienced any losses in such accounts, the recent failure of SVB exposed us to significant credit risk prior to the completion by the FDIC of the resolution of SVB in a manner that fully protected all depositors. We are evaluating alternative solutions which management believes does not expose us to significant credit risk or jeopardizes our liquidity.
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 primarily with proceeds from sales of common stock, warrants and prefunded warrants for the purchase of our common stock, sales of preferred stock, proceeds from the issuance of convertible debt and borrowings under loan and security agreements. We have entered into a Controlled Equity Offering SM Sales Agreement (“ATM Sales Agreement”), with Cantor Fitzgerald & Co. (the “Sales Agent”), pursuant to which we may offer and sell, at our sole discretion through the Sales Agent, shares of our common stock having an aggregate offering price of up to $17.0 million. To date, we have sold approximately $4.0 million of our common stock, prior to issuance costs, under the ATM Sales Agreement. 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, or through partnering or licensing transactions in which we receive cash to support our future operations. If we are unable to secure additional capital or if additional capital is not available on favorable terms for us, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash.
Our capital commitments over the next twelve months include (a) $6.9 million to satisfy December 31, 2022 accounts payable, accrued expenses and lease liabilities and (b) $8.6 million of loan principal payments. Our capital commitments past the next twelve months include (a) $0.2 million of lease liabilities; (b) $1.0 million for settlement of litigation with medac; (c) $3.4 million of loan principal payments; and (d) $5.0 million of convertible note principal payments, if the holders do not elect to convert the notes into equity. On March 15, 2023, the Company returned to Avenue the $4.0 million held in the restricted cash to paydown a portion of the outstanding loan balance.
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We also expect to use cash and cash equivalents to fund our potential approval of HEPZATO from the FDA, commercialization of HEPZATO and CHEMOSAT and any future clinical research trials 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.
On August 6, 2021, the Company entered into the Avenue Loan Agreement with 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 7.7% plus the prime rate as reported in The Wall Street Journal and (b) 10.95%. The interest rate at December 31, 2022 was 15.2%. 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. On March 15, 2023, the Company returned to Avenue the $4.0 million held in the restricted cash to paydown a portion of the outstanding loan balance.
On July 20, 2022, the Company closed a private placement for the issuance and sale of 690,954 shares of common stock and 566,751 pre-funded warrants to purchase common stock to certain investors. Each share of common stock was sold at a price per share of $3.98 and the pre-funded warrants were sold at a price of $3.97 per pre-funded warrants. pre-funded warrants have an exercise price of $0.01 per share of Common Stock and are immediately exercisable. The Company received gross proceeds from the private placement of approximately $5.0 million before deducting offering expenses.
On December 13, 2022, the Company closed a private placement for the issuance and sale of 1,448,889 shares of common stock and 692,042 pre-funded warrants to purchase common stock to certain investors. Each share of common stock was sold at a price per share of $2.90 and the pre-funded warrants were sold at a price of $2.89 per pre-funded warrants. The pre-funded warrants have an exercise price of $0.01 per share of Common Stock and are immediately exercisable. The Company received gross proceeds from the private placement of approximately $6.2 million before deducting offering expenses.
Additionally, while the long-term economic impact of either the COVID-19 pandemic or the conflict between Russia and Ukraine is difficult to assess or predict, each of these events has caused significant disruptions to the global financial markets and contributed to a general global economic slowdown. Furthermore, inflation rates, particularly in the United States and the United Kingdom, have increased recently to levels not seen in decades. In addition, the U.S. Federal Reserve has raised, and is expected to further raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may further increase economic uncertainty and heighten these risks. Recent bank failures may also have an impact on our liquidity and capital resources. For example, on March 10, 2023, the FDIC, took control and was appointed receiver of SVB. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. If the disruptions and slowdown deepen or persist, we may not be able to access additional capital on favorable terms, or at all, which could in the future negatively affect our ability to pursue our business strategy. See “Risk Factors” for additional risks associated with our substantial capital requirements.
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Comparison of Results of the Years Ended December 31, 2022 and 2021
Revenue
We recorded approximately $2.5 million in product revenue and $0.2 million in other revenue during the year ended December 31, 2022. During the same period in 2021, we recorded $1.3 million in product revenue and $2.3 million in other revenue. Our product revenues increased $1.2 million primarily due to transitioning to direct selling of CHEMOSAT beginning in March 2022. Other revenues decreased as a result of the amortization of our license agreement with medac, pursuant to which medac had served as our exclusive distributor of CHEMOSAT in the United Kingdom 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. 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, 2022, cost of goods sold was relatively flat at $0.7 million for both 2022 and 2021.
Research and Development Expenses
For the year ended December 31, 2022, research and development expenses increased to $18.6 million from $13.8 million for the year ended December 31, 2021, an increase of $4.8 million or 35%. The increase is primarily due to higher expenses for preparation of the pre-NDA meeting in April 2022 and increased third party expenses related to the NDA resubmission which occurred on February 14, 2023.
Selling, General and Administrative Expenses
For the year ended December 31, 2022, selling, general and administrative expenses increased to $17.3 million from $13.6 million for the year ended December 31, 2021, an increase of $3.7 million or 27%. The increase is primarily higher costs incurred for the preparation of commercialization of HEPZATO in the United States in 2023 and the estimated accrual for the settlement of the medac litigation.
Interest Expense, Net
For the year ended December 31, 2022, we recognized $2.7 million of interest expense, as compared to $1,2 million in the prior year, an increase of $1.5 million. The increase primarily relates to a full year of interest expense and amortization of debt discount associated with the Avenue loan which commenced on August 6, 2021.
Critical Accounting Policies and Significant Judgments and Estimates
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America or GAAP. Certain critical accounting estimates have a 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
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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 a contingent liability and stock-based compensation. Contingent liabilities are re-measured to fair value each reporting period using projected financial targets, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected financial targets are based on our most recent internal operational budgets and may take into consideration alternate scenarios that could result in more or less profitability for the respective service line. Increases or decreases in projected financial targets and probabilities of payment may result in significant changes in the fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.
Valuation of stock options 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 or 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;
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Step 3: Determine the transaction price, including an estimation of any variable consideration expected to be received in connection with the contract;
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 Independent Registered Public Accounting Firm (PCAOB ID: 688) F-1
Consolidated Balance Sheets at December 31, 2022 and 2021 F-2
Notes to Consolidated Financial Statements F-8
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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, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the years ended December 31, 2022 and 2021, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 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
Marc
h 27, 2
023
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DELCATH SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31, December 31,
Assets
Current assets
Accounts receivable, net 366 44
Prepaid expenses and other current assets 1,969 2,743
Property, plant and equipment, net 1,422 1,348
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities
Deferred revenue — 170
Lease liabilities, current 186 416
Other liabilities, non-current 1,144 207
Convertible notes payable, non-current 4,772 4,639
Commitments and contingencies — —
Stockholders’ equity (deficit)
Accumulated other comprehensive (loss) income (83 ) 18
Total stockholders’ equity (deficit) (5,859 ) 11,952
Total liabilities and stockholders’ equity (deficit) $ 17,862 $ 33,124
See Accompanying Notes to these Consolidated Financial Statements.
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DELCATH SYSTEMS, INC.
Consolidated Statements of Operations
and
Comprehensive Loss
(in thousands, except
share
and per share data)
Year ended December 31,
Cost of goods sold (686 ) (671 )
Operating expenses:
Selling, general and administrative expenses 17,303 13,637
Other comprehensive (loss) income:
Foreign currency translation adjustments 101 122
Total other comprehensive loss $ (36,407 ) $ (25,527 )
Common share data:
Basic and diluted loss per common share $ (4.12 ) $ (3.59 )
See Accompanying Notes to these Consolidated Financial Statements.
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DELCATH SYSTEMS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share and per share data)
Preferred Stock Common Stock
$0.01 Par Value $0.01 Par Value
Compensation expense for issuance of stock options — — — — 7,941 — — 7,941
Total comprehensive loss — — — — — — (101 ) (101 )
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DELCATH SYSTEMS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit), Continued
(in thousands, except share and per share data)
Preferred Stock Common Stock
$0.01 Par Value $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
See Accompanying Notes to these Consolidated Financial Statements.
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DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands, except share and per share data)
Years Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense 7,941 7,832
Amortization of debt discount 768 323
Interest expense accrued related to convertible notes 160 186
Changes in assets and liabilities:
Decrease in prepaid expenses and other assets 774 813
(Increase) decrease in accounts receivable (322 ) 13
Increase in inventories (587 ) (557 )
Increase (decrease) in accounts payable and accrued expenses 1,798 (3,284 )
Increase (decrease) in other liabilities, non-current 621 (322 )
Decrease in deferred revenue (170 ) (2,427 )
Net cash used in operating activities (24,950 ) (22,604 )
Cash flows from investing activities:
Purchase of property, plant and equipment (209 ) (143 )
Net cash used in investing activities (209 ) (143 )
Cash flows from financing activities:
Net proceeds from private placement 10,857 —
Net proceeds from ATM offering 3,923
Net proceeds from debt financing — 14,437
Proceeds from the exercise of stock options 4
Proceeds from the exercise of warrants — 2,458
Payment of loan payable (714 )
Net cash provided by financing activities 10,143 20,822
Foreign currency effects on cash (115 ) 122
Total Cash, Cash Equivalents and Restricted Cash:
Cash, Cash Equivalents and Restricted Cash consisted of the following:
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DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows, continued
(in thousands, except share and per share data)
Years Ended December 31,
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Proceeds allocated to warrant $ — $ 1,171
Financing of D&O insurance premium $ 886
Right of use assets obtained in exchange for lease obligations $ 86 $ —
See Accompanying Notes to these Consolidated Financial Statements.
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DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(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, our 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.
The Company’s clinical development program for HEPZATO was comprised of the FOCUS Clinical Trial for Patients with Hepatic Dominant Ocular Melanoma (the “FOCUS Trial”), a global registration clinical trial investigating objective response rate in metastatic ocular melanoma, or mOM, a type of primary liver cancer. 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 (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 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.
In December 2021, the Company announced that the FOCUS Trial of HEPZATO met its
pre-specified
endpoint. On February 14, 2023 filed a New Drug Application resubmission to the FDA for the HEPZATO Kit (melphalan hydrochloride for Injection/Hepatic Delivery System) seeking approval for the treatment of patients with unresectable hepatic-dominant metastatic ocular melanoma (mOM). On March 20, 2023, the FDA determined the resubmission constituted a complete response and set a Prescription Drug User Fee Act target action date of August 14, 2023.
The resubmission is in response to a September 12, 2013 Complete Response Letter (CRL) from the FDA. The NDA resubmission contains comprehensive data and information relating to the matters identified in the CRL. We continue to promote our early access programs in the United States to make HEPZATO readily available to mOM patients. We are focused on continuing to treat these patients with mOM as regulatory approval is sought in the United States. There are currently patients enrolled in our early access program sites.
On February 28, 2022, CHEMOSAT received Medical Device Regulation certification under the European Medical Devices Regulation [2017/745/EU], which may be considered by jurisdictions when evaluating reimbursement. As of March 1, 2022, the Company has assumed direct responsibility for sales, marketing and distribution of CHEMOSAT in Europe.
Risks and Uncertainties
Although the Company 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 the Company’s ability to obtain components and/or significantly increase the cost of obtaining such components for the Company’s products from its
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DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(1) Description of Business – Continued
Risks and Uncertainties – Continued
third-party suppliers in a timely manner or at all. In addition, at this time, although the Company is not aware of any direct impacts, any increase in COVID cases and associated restrictions, could adversely impact the Company’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. Any rise in COVID cases and the associated absences from work of internal and external resources may also impact the Company’s ability to meet anticipated timelines.
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 shown in the accompanying consolidated financial statements, during the year ended December 31, 2022, the Company incurred net losses of $36.5 million and used $25.0 million 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.
On July 20, 2022, the Company closed a private placement for the issuance and sale of 690,954 shares of common stock and 566,751
pre-funded
warrants to purchase common stock to certain investors. Each share of common stock was sold at a price per share of $3.98 and the
pre-funded
warrants were sold at a price of $3.97 per
pre-funded
warrant. The
pre-funded
warrants have an exercise price of $0.01 per share of common stock and are immediately exercisable. The Company received gross proceeds from the private placement of approximately $5.0 million before deducting offering expenses.
On December 13, 2022, the Company closed a private placement for the issuance and sale of 1,448,889 shares of common stock and 692,042
pre-funded
warrants to purchase common stock to certain investors. Each share of common stock was sold at a price per share of $2.90 and the
pre-funded
warrants were sold at a price of $2.89
per pre-funded warrant. The pre-funded warrants have an exercise price of
$0.01 per share of Common Stock and are immediately exercisable. The Company received gross proceeds from the private placement of approximately $6.2 million before deducting offering expenses.
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
F-9
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(1) Description of Business – Continued
Liquidity and Going Concern – Continued
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.
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.
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
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 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
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Fair Value Measurements – Continued
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.
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
F-12
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Revenue Recognition – Continued
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 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
F-13
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Stock Based Compensation – Continued
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 1
4
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 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, stock purchased pursuant to the Company’s employee stock purchase plan, convertible notes 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.
F-14
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies – Continued
Net Loss per Common Share – Continued
For the years ended December 31, 2022 and 2021 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.
Subsequent Events
Management has evaluated events occurring subsequent to the consolidated balance sheet date, through Marc
h 27, 2
023, which is the date the consolidated financial statements were issued, determining all subsequent events have been disclosed.
Recently Adopted and Issued Accounting Pronouncements
We have not been required to adopt any accounting standards that had a significant impact on our consolidated financial statements in the two years ended December 31, 2022. We do not expect any recently issued accounting standards to have a significant impact on our consolidated financial statements.
F-15
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(4) Revision of Previously Issued Quarterly Financial Statements
In preparation of the Company’s audited financial statements as of and for year ended December 31, 2022, the Company determined it needed to correct previously reported share-based compensation expense for each quarter during 2022. The correction for share-based compensation increased the net loss in amount of $797 for the first quarter of 2022, $502 for the second quarter of 2022 and $372 for the third quarter of fiscal 2022. The share-based compensation adjustment is a non-cash adjustment did not have any impact on the cash balances for the Company.
The following tables contains the financial information for the periods previously reported and have been updated to reflect the revisions of the Company’s financial statements. The revisions do not have an impact on the Company’s cash position The Company has not amended its previously filed Quarterly Reports on Form 10-Q for the three quarterly periods ended September 30, 2022. The financial information that has been previously filed or otherwise reported for the three quarterly periods ended September 30, 2022 is superseded by the information in this Quarterly Report on Form 10-Q, and the financial statements and related financial information for the quarterly periods ended September 30, 2022 contained in such previously filed report should no longer be relied upon. The impact of the revision on the Company’s financial statements is reflected in the following table:
As previouslyreport Adjustment As revised
Balance Sheet for March 31, 2022 (unaudited)
Selling, general and administrative expenses 3,648 556 4,204
Basic and diluted loss per common share (1.00 ) (0.10 ) (1.10 )
Compensation expense for issuance of stock options 1,474 797 2,271
Balance Sheet for June 30, 2022 (unaudited)
F-16
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(4) Revision of Previously Issued Quarterly Financial Statements – Continued
As previouslyreport Adjustment As revised
Selling, general and administrative expenses 4,145 352 4,497
Basic and diluted loss per common share (1.18 ) (0.06 ) (1.24 )
Compensation expense for issuance of stock options 1,617 502 2,119
Balance Sheet for September 30, 2022 (unaudited)
Selling, general and administrative expenses 4,519 260 4,779
Basic and diluted loss per common share (0.92 ) (0.04 ) -0.96
Compensation expense for issuance of stock options 1,255 372 1,627
Selling, general and administrative expenses 7,791 908 8,699
Basic and diluted loss per common share (2.18 ) (0.16 ) (2.34 )
F-17
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(4) Revision of Previously Issued Quarterly Financial Statements – Continued
As previouslyreport Adjustment As revised
Basic and diluted loss per common share (3.09 ) (0.20 ) (3.29 )
(5) 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, December 31,
Restricted balance for loan agreement 4,000 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, 2022, the Company is required to maintain a letter of credit in the amount of $101, which will expire with the sublease in May 2023
. On March 15, 2023, the Company returned to Avenue the $4.0 million held in the restricted cash to paydown a portion of the outstanding loan balance.
F-18
Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(6) Inventories
Inventories consist of:
December 31, December 31,
Finished goods 133 —
(7) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include the following:
December 31, December 31,
Professional services 121 15
Total prepaid expenses and other current assets $ 1,969 $ 2,743
(8) Property, Plant, and Equipment
Property, plant, and equipment consists of:
Buildings and land $ 1,301 $ 1,222 30 years - Buildings
Enterprise hardware and software 1,855 1,858 3 years
Leaseholds 1,774 1,796 Lesser of lease term or estimated useful life
Property, plant and equipment, gross 6,353 6,173
Accumulated depreciation (4,931 ) (4,825 )
Property, plant and equipment, net $ 1,422 $ 1,348
Depreciation expense for the years ended December 31, 2022 and 2021 was $
132
and $
146
, respectively.
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(9) Accrued Expenses
Current accrued expenses include the following:
Compensation, excluding taxes 1,040 893
Short-term financing — 551
Interest on convertible note 553 393
(10) 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 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 sublease 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 sublease 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 on November 2022, is extended through May 2023.
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(10) Leases – Continued
The following table summarizes the Company’s operating leases as of December 31, 2022:
U.S. Ireland Total
Lease cost
Other information
Operating cash flows out from operating leases (406 ) (37 ) (443 )
Weighted average remaining lease term 0.5 3.6
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
Less present value discount (3 ) (17 ) (20 )
(11) Loans and Convertible Notes Payable
Gross Discount Net Gross Discount Net
[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:
Convertible
Loans Notes Total
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(11) Loans and Convertible Notes Payable – Continued
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 $20.0
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, 2022 was 15.2%. The Avenue Loan is secured by all of the Company’s assets globally, including intellectual property. The Avenue Loan matures on August 1, 2024.
The initial tranche of the Avenue Loan is $15.0
million
, including $4.0
million
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 $20.0
million
. The Company may request an additional $5.0
million
of gross proceeds between October 1, 2022 and December 31, 2022, with funding, subject to the approval of Avenue’s Investment Committee. Since the Company did not achieve a net equity raise of $20.0
million of gross proceeds, the Company did not request an additional $5.0 million of funding during the period from October 1, 2022 through December 31, 2022.
Up to $3.0 million 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. The interest only period ended in November 2022, and the Company began making principal payments on December 1, 2022. 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 fund
ing.
On March 15, 2023, the Company returned to Avenue the $4.0 million held in the restricted cash to paydown a portion of the outstanding loan balance
and reduce the monthly principal payments.
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 $5.0
million
of incremental committed capital, for a total commitment fee of $200.
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(11) Loans and Convertible Notes Payable – Continued
Term Loan from Avenue Venture Opportunities Fund, L.P. – Continued
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 $0.8 million was recorded during the year ended December 31, 2022. 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 date market price of the Company’s common stock. Interest expense was $1.9 million for the year ended December 31, 2022.
The Avenue Warrant was valued at issuance at $1.3 million 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 $2.0
million
of principal outstanding related to Senior Secured Promissory Notes (the “Rosalind Notes”) which bear interest at 8% per annum. Pursuant to their 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
.
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 $3.0
million
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.
Interest expense with respect to the Rosalind Notes was $160 for both years ended December 31, 2022 and 2021
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Table of Contents
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2022 and 2021
(amounts in thousands, except share and per share amounts)
(12) Stockholders’ Equity
Authorized Shares
The Company is authorized to issue 40,000,000 shares of common stock, $0.01 par value, and 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).
Preferred Stock
Series E and Series
E-1
Convertible Preferred Stock
During the years ended December 31, 2021, 9,274 shares of Series E and Series
E-1
Convertible Preferred Stock were converted into 927,379 shares of the Company’s common stock.
As of December 31, 2022, there were an aggregate of 11,357 shares of Series E and Series
E-1
Convertible Preferred Stock outstanding.