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 HEPZATOTM KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATOTM, 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 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. The FDA has granted the active moiety melphalan hydrochloride five orphan drug designations for the treatment of patients with ocular (uveal) melanoma, cutaneous melanoma, hepatocellular carcinoma, intrahepatic cholangiocarcinoma, and neuroendocrine tumors. The FDA has granted the active moiety doxorubicin one orphan drug designation for the treatment of patients with hepatocellular carcinoma. In Europe CHEMOSAT is regulated as a Class IIb medical device and received its CE Mark in 2012.
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. We have paused the ALIGN Trial, a global Phase 3 clinical trial of HEPZATO in patients with intrahepatic cholangiocarcinoma, or the ALIGN Trial, due to difficulties in enrollment. For information on the ALIGN Trial, see “Part I, Item 1. Business—Clinical Development Program—The ALIGN Trial” above. In addition to the FOCUS Trial and the ALIGN Trial, our commercial development plan also includes a registry for CHEMOSAT cases performed in Europe and support of select investigator-initiated trials, or IITs.
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 early 2021. We intend to submit a new drug application, or NDA, to the FDA in the first quarter of 2022 for the treatment of mOM once the FOCUS Trial has been completed. The ability to achieve this goal is contingent on our ability to monitor data at our clinical sites and therefore the timeline may shift as access to the clinical sites changes in response to the rapidly evolving situation. COVID-19 has caused us to experience a decline in EU commercial product revenue. The results of the FOCUS Trial should also support securing reimbursement coverage for the use of CHEMOSAT in Europe. 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.
Liquidity and Capital Resources
We will need to raise additional capital under structures available to us including debt and/or equity offerings. If these sources do not provide the capital necessary to fund our operations, we will need to curtail certain aspects of our operations or consider other means of obtaining additional financing, although there is no guarantee that we could obtain the financing necessary to continue our operations.
Our future results are subject to substantial risks and uncertainties. We have operated at a loss for our entire history and anticipate that losses will continue over the coming years. There can be no assurance that we will ever generate significant revenues or achieve profitability. We expect to use cash, cash equivalents and investment proceeds to fund our 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.
37
At December 31, 2020, we had cash, cash equivalents and restricted cash totaling $28.8 million, as compared to cash, cash equivalents and restricted cash totaling $10.2 million at December 31, 2019. During the years ended December 31, 2020 and 2019, the Company used $22.9 million and $23.7 million respectively, of cash in our operating activities.
Our consolidated financial statements as of December 31, 2020 have been prepared under the assumption that we will continue as a going concern for the next twelve months. We expect to incur significant expenses and operating losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern.
We have historically funded our operations through a combination of private placements and public offerings of our securities.
Future Capital Needs; Additional Future Funding
Our future results are subject to substantial risks and uncertainties. We have operated at a loss for our entire history and there can be no assurance that we will ever achieve consistent profitability. 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. There can be no assurance that such working capital will be available on acceptable terms, if at all.
Results of Operations for the Year Ended December 31, 2020; Comparisons of Results of the Years Ended December 31, 2020 and 2019
Revenue
We recorded approximately $1.2 million in product revenue and $0.5 million in other revenue during the year ended December 31, 2020. During the same period in 2019, we recorded $1.1 million in product revenue and $0.5 million in other revenue. Our sales in both 2020 and 2019 were primarily generated through our license agreement with medac, pursuant to which medac serves as our exclusive distributor of CHEMOSTAT in the EU and certain other European nations.
Cost of Goods Sold
During the year ended December 31, 2020, we recognized cost of goods sold of approximately $0.6 million related to product revenue of $1.2 million as compared to cost of goods sold of approximately $0.7 million related to product revenue of $1.1 million in the prior year.
Selling, General and Administrative Expenses
For the year ended December 31, 2020, selling, general and administrative expenses decreased to $11.1 million from $11.3 million for the year ended December 31, 2019. The decrease is primarily related to $0.2 million in settlement expenses paid in 2019, which was a non-cash expense and $0.8 million in expenses related to litigation that was settled in July and August 2019.
Research and Development Expenses
For the year ended December 31, 2020, research and development expenses increased to $11.2 million from $9.5 million for the year ended December 31, 2019. The increase was primarily due to an increased rate of enrollment and related professional services for the FOCUS Trial as a result of the alleviated cash constraints we experienced during the first half of 2019.
Change in Fair Value of Derivative Liability
For the year ended December 31, 2020, non-cash derivative instrument expense was $2.8 million compared to the non-cash derivative instrument income of $17.5 million for the year ended December 31, 2019. In 2019, the Company issued warrants with an initial fair value of $20.8 million. At December 31, 2019, the fair value of the 2019 warrants was $3.4 million, resulting in a $17.5 million change in the fair value. In February 2020, the fair value of the warrant 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.
Loss on issuance of financial instrument
For the year ended December 31, 2020, there was no non-cash loss on issuance of financial instrument recorded, resulting in an increase of $1.7 million compared to the year ended December 31, 2019. In 2019, the $1.7 million loss is related to the issuance of the $2.0 million convertible note which was issued in exchange for the cancellation of the Series D and Pre-Funded Series D Warrants as discussed further in Notes 10 and 11 to the Company’s audited consolidated financial statements contained in this Annual Report on Form 10-K.
38
Other Income/Expense and Interest Expense
Other expense and interest expense are primarily related to the amortization of debt discounts, as well as foreign currency exchange gains and losses.
Interest income is from a money market account and interest earned on operating accounts.
Net Loss
We had a net loss for the year ended December 31, 2020 of $24.2 million, an increase of $15.3 million, as compared to a $8.9 million net loss for the same period in 2019. This increase is due in part to a $1.5 million increase in operating expenses and a $0.1 million increase in gross profits, as well as a $6.2 million decrease in various non-cash expense items primarily related to the amortization of debt discounts and other costs related to convertible notes and other instruments issued in 2018 and 2019, offset by a $20.3 million increase in derivative instrument expense, also a non-cash item.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Application of Critical Accounting Policies
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain accounting policies have a significant impact on amounts reported in the consolidated financial statements. A summary of those significant accounting policies can be found in Note 3 to the Company’s audited consolidated financial statements contained in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
39
Item 8. Financial Statements and Supplementary Data
Report of Marcum LLP - Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2020 and 2019 F-3
Notes to Consolidated Financial Statements F-9
40
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. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidatedstatements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the years ended December 31, 2020 and 2019, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidatedfinancial 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 Note1. 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 provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are 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.
/s/ Marcum LLP
Marcum LLP
F-1
We have served as the Company’s auditor since 2018.
New York, NY
March 31, 2021
F-2
DELCATH SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31, December 31,
Assets
Current assets
Accounts receivables, net 57 21
Prepaid expenses and other current assets 2,670 1,759
Property, plant and equipment, net 1,351 735
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Deferred revenue, current 525 482
Lease liabilities, current 495 664
Convertible notes payable, current 2,000 —
Warrant liability — 3,368
Deferred revenue, non-current 2,072 2,378
Lease liabilities, non-current 450 197
Convertible notes payable, non-current — 2,000
Commitments and contingencies (Note 13)
Stockholders' Equity (Deficit)
Accumulated other comprehensive (loss) income (104 ) 28
Total stockholders' equity (deficit) 22,078 (6,357 )
Total liabilities and stockholders' equity (deficit) $ 34,635 $ 14,212
See Accompanying Notes to these Consolidated Financial Statements.
F-3
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 (640 ) (719 )
Operating expenses:
Research and development expenses 11,201 9,490
Selling, general and administrative expenses 11,108 11,279
Change in fair value of the warrant liability, net (2,832 ) 17,493
Loss on issuance of financial instrument - (1,720 )
Deemed dividend for triggering of warrant down round feature (55 ) -
Net loss attributable to common stockholders $ (24,211 ) $ (8,879 )
Other comprehensive (loss) income:
Foreign currency translation adjustments (132 ) $ (22 )
Total other comprehensive loss $ (24,288 ) $ (8,901 )
Common share data:
Basic loss per common share* $ (8.35 ) $ (342.83 )
Diluted loss per common share* $ (8.35 ) $ (342.83 )
Weighted average number of basic shares outstanding* 2,897,827 25,900
Weighted average number of diluted shares outstanding* 2,897,827 25,900
See Accompanying Notes to these Consolidated Financial Statements.
F-4
DELCATH SYSTEMS, INC.
Consolidated Statement of Stockholders' Equity (Deficit)
(in thousands, except share and per share data)
Common Stock Preferred Stock
$0.01 Par Value $0.01 Par Value
Compensation expense for issuance of stock options — — — — 3,505 — — 3,505
Shares settled for accrued compensation 22,963 — — — 230 — — 230
Fractional rounding related to reverse stock split 49 — 1 — — — — —
Comprehensive loss — — — — — — (132 ) (132 )
F-5
DELCATH SYSTEMS, INC.
Consolidated Statement of Stockholders' Equity (Deficit), continued
(in thousands, except share and per share data)
Common Stock Preferred Stock
$0.01 Par Value $0.01 Par Value
Compensation expense for issuance of stock options — — — — 273 — — 273
Compensation expense for issuance of restricted stock 20 — — — 4 — — 4
Issuance of Series D Preferred Stock — — 15 — 150 — — 150
Retirement of Series D Preferred Stock — — (116 ) — (1,160 ) — — (1,160 )
Exercise of Pre-Funded Series D Warrants 11,285 — — — — — — —
Exchange of warrants 92 — — — 13 — — 13
Fair value of warrants issued — — — — (20,844 ) — — (20,844 )
Conversion of preferred stock into common stock 13,455 — (565 ) — 1 — — 1
Comprehensive loss — — — — — — (22 ) (22 )
* reflects, a one-for-seven hundred (1:700) reverse stock split effected on December 24, 2019.
See Accompanying Notes to these Consolidated Financial Statements.
F-6
DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense 3,505 273
Restricted stock compensation expense 406 4
Amortization of right of use assets 25 37
Warrant liability fair value adjustment 2,832 (17,493 )
Non-cash interest income (1 ) (11 )
Equitization of expenses — 1,474
Loss on issuance of financial instruments — 1,715
Interest expense accrued related to convertible notes 160 74
Debt discount amortization — 4,467
Changes in assets and liabilities:
Increase in prepaid expenses and other assets (910 ) (807 )
(Increase) decrease in accounts receivable (36 ) 497
(Increase) decrease in inventories (201 ) 204
Decrease in accounts payable and accrued expenses (4,396 ) (4,350 )
Decrease in deferred revenue (263 ) (479 )
Decrease in other liabilities — (627 )
Net cash used in operating activities (22,868 ) (23,689 )
Cash flows from investing activities:
Purchase of property, plant and equipment (782 ) (24 )
Net cash used in investing activities (782 ) (24 )
Cash flows from financing activities:
Net proceeds from the issuance of debt — 3,719
Net proceeds from sale of Series D Preferred Stock — 150
Principal payments of financing leases (26 ) (39 )
Net payments related to reverse stock split (106 ) —
Fees paid related to preferred stock conversions (1 ) —
Proceeds on Public Offering (1) 19,378 —
Proceeds on ATM Offering Trades (2) 866 —
Proceeds on Public Offering II (3) 20,386 —
Proceeds from exercise of warrants 1,858 —
Net cash provided by financing activities 42,355 30,305
Foreign currency effects on cash, cash equivalents and restricted cash (132 ) 14
Net increase in cash, cash equivalents and restricted cash 18,573 6,606
Cash, cash equivalents and restricted cash:
F-7
DELCATH SYSTEMS, INC.
Consolidated Statements of Cash Flows, continued
(in thousands)
Year ended December 31,
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest expense $ 11 $ —
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Conversions of preferred stock into common stock $ 21 $ —
Reclassification of 2019 warrants from liability to equity $ 6,200 $ —
Fair value of warrants issued $ — $ 20,844
Adoption of ASC 842 lease standard $ — $ 1,652
Right of use assets obtained in exchange for lease obligations $ 729 $ 874
Financing of D&O insurance premium $ 781 $ 548
(2) ATM offering gross proceeds were $910, with issuances costs and fees of $44
See Accompanying Notes to these Consolidated Financial Statements.
F-8
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
(1) Description of Business
We are an interventional oncology company focused on the treatment of primary and metastatic liver cancers. Our lead product candidate, the HEPZATOTM KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATOTM, 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 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.
Our 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, and the ALIGN Trial, a global Phase 3 clinical trial for intrahepatic cholangiocarcinoma, or ICC (the “ALIGN Trial”). The FOCUS Trial initiated treatment on the final enrolled patient on October 2, 2020. Presently, we have paused our work on the ALIGN Trial while we reevaluate the trial design and in order to be able to concentrate our efforts on the FOCUS Trial conclusion and subsequent new drug application, or NDA, filing with the United States Food and Drug Administration, or the FDA. 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 which will maximize the value of the HEPZATO platform. Whether we continue the ALIGN Trial will be dependent on the relative value of the ICC indication versus other alternative indications. In addition, our CDP also includes a registry for CHEMOSAT commercial cases performed in Europe and sponsorship of select investigator-initiated trials or IITs.
In the United States, HEPZATO is considered a combination drug and device product regulated by 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 Europe, CHEMOSAT is regulated as a Class IIb medical device and received its CE Mark in 2012. We are commercializing CHEMOSAT in select markets in the United Kingdom and the European Union, or the EU, where we believe the prospect of securing reimbursement coverage for the use of CHEMOSAT is strongest.
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 we can monitor data at our clinical trial sites. The resulting delay in completing enrollment and additional time required to monitor data has caused our planned announcement for the top-line data from our FOCUS Trial to shift to early 2021. We now plan to submit an NDA to the FDA in the first quarter of 2022 for the treatment of mOM. The ability to achieve this goal is contingent on our ability to monitor data at our clinical sites and therefore the timeline may shift as access to the clinical sites changes in response to the rapidly evolving situation. We have also experienced a decline in EU commercial product revenue and additional impacts to the 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.
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, 2020, the Company incurred net losses of $24,156 and used $22,868 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.
F-9
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
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 Delcath 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 Delcath. All significant inter-company accounts and transactions are eliminated.
Reverse Stock Splits
All share numbers presented in these financial statements, including these footnotes reflect a one-for seven hundred (1:700) reverse stock split effected on December 24, 2019.
(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 derivative instrument liabilities, 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.
F-10
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
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.
Derivative Instrument Liability
The Company accounts for derivative instruments in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. At December 31, 2020 and 2019, the Company did not have any derivative instruments that were designated as hedges.
Fair Value Measurements
The Company adheres to 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).
F-11
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
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 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 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 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.
F-12
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
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.
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 employee services and ASC 505-50, Equity-Based Payments to Non-Employees, which establishes accounting for equity-based payments to non-employees. 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 is required to record compensation cost for all share-based payments granted to employees based upon the grant date fair value, estimated in accordance with the provisions of ASC 718. Under the provisions of ASC 505-50, measurement of compensation cost related to common shares issued to non-employees for services is based on the value of the services provided or the fair value of the shares issued. The measurement of non-employee stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests. 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 Delcath’s 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 Delcath’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and Delcath’s 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.
F-13
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
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 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, 2020 and 2019 the following potentially dilutive securities were excluded from the computation of diluted earnings per share because their effects would be antidilutive:
Common stock warrants - equity 4,236,687 -
Common stock warrants - liability - 1,826,608
Segment Information
A single management team that reports to the CEO and President 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.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported consolidated statement of operations. The Company has reclassified categories related to lease obligations and right of use assets to properly reflect the changes in the cash flow statement.
F-14
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
Recently Issued 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; however, the changes will not significantly impact the Company due to the full valuation allowance that is recorded against the Company’s deferred tax assets. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt ASU 2019-12 in 2021.
(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.
Security for credit cards 50 50
(5) Inventories
Inventories consist of:
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include the following:
Clinical trial expenses $ 1,497 $ 725
Total prepaid expenses and other current assets $ 2,670 $ 1,759
1Other consists of various prepaid expenses and other current assets, with no individual item accounting for more than 5% at December 31, 2020 and 2019.
F-15
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
(7) Property, Plant, and Equipment
Property, plant, and equipment consists of:
Buildings and land $ 1,109 $ 589 30 years - Buildings
Enterprise hardware and software 1,862 1,739 3 years
Leaseholds 1,826 1,695 Lesser of lease term or estimated useful life
Property, plant, and equipment, gross 6,064 5,246
Accumulated depreciation (4,713 ) (4,511 )
Property, plant, and equipment, net $ 1,351 $ 735
On July 31, 2020, the Company exercised its option to purchase its 95-97 Park Road office location in Queensbury, NY for $460.3, pursuant to the terms of the lease agreement dated September 17, 2018, as amended.
Depreciation expense for the years ended December 31, 2020 and 2019 was $167 and $212, respectively.
(8) Accrued Expenses
Current accrued expenses include the following:
Compensation, excluding taxes 1,598 3,525
1Other consists of various accrued expenses, with no individual item accounting for more than 5% of current liabilities at December 31, 2020 and 2019.
(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 and financing 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.
F-16
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
The following table summarizes the Company’s operating and financing leases as of December 31, 2020:
US Ireland Total
Lease Cost
Financing lease cost 27 — 27
Sublease income - (206 ) (206 )
Other information
Operating cash flows out from operating leases (471 ) (228 ) (699 )
Operating cash flows in from operating leases - 206 206
Operating cash flows out from financing leases (26 ) — (26 )
Right-of-use assets exchanged for new operating lease liabilities 729 — 729
Weighted average remaining lease term 2.2 0.6
Weighted average discount rate - operating leases 8 % 8 %
Maturities of the Company’s operating leases, excluding short-term leases, are as follows:
US Ireland Total
Less present value discount (74 ) (3 ) (77 )
(10) Convertible notes payable
On June 6, 2019, the Company entered into a note purchase agreement with two institutional investors, pursuant to which the investors agreed to transfer and surrender to the Company for cancellation, warrants to purchase 5,605 shares of the Company’s common stock (the “Series D Warrants”) and warrants to purchase 0.1 million shares of the Company’s common stock (the “Pre-Funded Series D Warrants”). Under the terms of the note purchase agreement, the Company agreed to sell and issue to the investors an 8% Senior Secured Promissory Notes in an aggregate principal amount of $2,000 and with a July 16, 2021 maturity date, in full payment and satisfaction of the purchase price for the Series D Warrants and Pre-Funded Series D Warrants. The transactions contemplated by the note purchase agreement were effective and the 8% Senior Secured Promissory Notes were issued on July 15, 2019, upon the closing of the Company’s July 2019 Private Placement discussed in Note 11 herein. Immediately following the closing of the July 2019 Private Placement, the 8% Senior Secured Promissory Notes were amended, pursuant to a note amending agreement dated as of July 15, 2019 between the Company and the investors, to provide that the outstanding principal amount of the 8% Senior Secured Promissory Notes and any accrued and unpaid interest thereon are convertible, at the option of the holder, into shares of Series E Preferred Stock at the price of $1,500. The principal amount of the 8% Senior Secured Promissory Notes is recognized in Convertible notes payable, on the consolidated balance sheets of the Company.
Maturity date Conversion price Current interest rate Principal
Convertible notes payable
F-17
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
(11) Stockholders’ Equity
Authorized Shares
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.01 per 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.
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, 2020, there are 675,000 shares of common stock reserved under the 2020 Plan, of which 95,000 remained available to be issued.
Equity Offerings and Placements
Confidentially Marketed Public Offering
On December 11, 2020, the Company closed a confidentially marketed public offering with the issuance of 1,679,031 shares of the Company’s common stock at a price to the public of $13.25 per share. The Company received gross proceeds of $22,247, offset by $1,861 of underwriting discounts, commissions, and other estimated offering expenses.
At-the-Market Offering
On August 18, 2020, the Company entered into a sales agreement with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”), pursuant to which the Company may offer and sell, from time to time, through Cantor Fitzgerald, as sales agent or principal, shares of the Company’s common stock, (the “Placement Shares”), having an aggregate offering price of up to $10,000 (the “ATM Offering”). The Company has no obligation to sell any Placement Shares under the sales agreement. Subject to the terms and conditions of the sales agreement, Cantor Fitzgerald is required to use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of the Nasdaq Stock Market, to sell Placement Shares from time to time based upon the Company’s instructions, including any price, time or size limits specified by the Company. The Company will pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of Placement Shares, reimburse Cantor Fitzgerald’s legal fees and disbursements up to $50.0 and provide Cantor Fitzgerald with customary indemnification and contribution rights. The sales agreement may be terminated by Cantor Fitzgerald or the Company upon notice to the other party as provided in the sales agreement, or by Cantor Fitzgerald at any time in certain circumstances, including the occurrence of a material and adverse change in the Company’s business or financial condition that makes it impractical or inadvisable to market the Placement Shares or to enforce contracts for the sale of the Placement Shares.
F-18
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
In connection with the ATM Offering, in consideration for a fee equal to 1.05% of the gross sales price per share sold in the ATM Offering, ROTH Capital Advisors, LLC (“Roth”) waived, solely with respect to the ATM Offering, (i) Roth’s right, pursuant to certain engagement letters dated August 14, 2019 and January 13, 2020 between Roth and the Company, to act as placement agent or underwriter with respect to offerings of the Company’s securities and to receive a minimum of 35% of the fees paid to the agents or underwriters for such offerings and (ii) the lock-up provision included in a certain underwriting agreement dated May 1, 2020 between Roth and the Company requiring the prior written consent of Roth for any offer or sale of the Company’s common stock by the Company during the 90-day period following the date of such underwriting agreement.
Through December 31, 2020, the Company sold 77,644 shares of common stock pursuant to the ATM Offering for aggregate gross proceeds of $910, partially offset by $44 of issuance costs.
May 2020 Public Offering
On May 5, 2020, the Company closed a public offering of 1,823,000 shares of common stock, 377,000 pre-funded warrants and Series F warrants to purchase 2,224,900 shares of the Company’s common stock at an exercise price of $10.00 per share. Delcath received gross proceeds of approximately $21,996 from the public offering, partially offset by $2,618 of underwriting discounts and other offering expenses. As a result of the public offering, the conversion prices of the Company’s Series E and Series E-1 Preferred Stock were adjusted to $10.00 per share and the exercise price of the 2019 Warrants was adjusted to $10.00 per share and neither instrument is subject to further price resets.
Series E and Series E-1 Preferred Stock Private Placements
On July 11, 2019, the Company issued 32,572 shares of our Series E convertible preferred stock, par value $0.01 per share (the “Series E Preferred Stock”). The Company entered into a securities purchase agreement with certain accredited investors pursuant to which Delcath sold an aggregate of 20,000 shares of Series E Preferred Stock, at a price of $1,000 per share and a warrant, or a “2019 E Warrant”, to purchase a number of shares of common stock equal to the number of shares of common stock issuable upon conversion of the Series E Preferred Stock purchased by the investor, or the “July 2019 Private Placement”. In connection with the July 2019 Private Placement, the Company exchanged $11,800 of debt, interest and Series D Warrants for 11,500 shares of Series E Preferred Stock and related 2019 E Warrants, $100 in accounts payables for 149 shares of Series E Preferred Stock and related 2019 E Warrants and issued 923 shares of Series E Preferred Stock and related 2019 E Warrants to certain investors in exchange for a waiver of rights under exchange agreements signed in December 2018 and March 2019, or the “Debt Exchange”.
On August 19, 2019, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which Delcath sold to investors an aggregate of 9,510 shares of Series E-1 convertible preferred stock, par value $0.01 per share, or the Series E-1 Preferred Stock, at a price of $1,000 per share and a warrant, or a “2019 E-1 Warrant”, and together with the 2019 E Warrant, the “2019 Warrants”, to purchase a number of shares of common stock of the Company equal to the number of shares of common stock issuable upon conversion of the Series E-1 Preferred Stock purchased by the investor, or the “August 2019 Private Placement”, and, collectively with the July 2019 Private Placement, the “Private Placements”.
The Company received net cash proceeds after expenses of $26.5 million. Of the net proceeds and equitized value received, the Company allocated an estimated fair value of $20,844 to the 2019 Warrants, which was classified as a derivative liability due to the price reset features discussed below. As a result of the Series E Preferred Stock and Series E-1 Preferred Stock having an effective conversion price that was lower than the market price on the date of issuance, the Company has recognized a beneficial conversion feature of $18,238. Due to the Series E Preferred Stock and Series E-1 Preferred Stock being immediately convertible, the beneficial conversion feature was recognized in full as a deemed dividend.
Each share of Series E Preferred Stock and Series E-1 Preferred Stock, or, collectively, the “Preferred Stock”, is convertible at any time at the option of the holder into the number of shares of common stock determined by dividing the stated value by the conversion price of $42.00, subject to certain limitations and adjustments, or the Conversion Price. Except for certain adjustments, the holders of the Preferred Stock are entitled to receive dividends on shares of Preferred Stock equal (on an “as converted” basis) to and in the same form as dividends paid on shares of the common stock. Any such dividends that are not paid to the holders of the Preferred Stock will increase the stated value. No other dividends will be paid on shares of Preferred Stock. Each 2019 Warrant had an original exercise price equal to $42.00, subject to adjustment in accordance with the terms of the 2019 Warrants, or the Exercise Price, and became exercisable at any time upon the consummation of the Reverse Split and will be exercisable until 5:00 p.m. (NYC time) on the date that is five years following the date of the Reverse Split.
F-19
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
Pursuant to the terms of the Preferred Stock and the 2019 Warrants, the Conversion Price of the Preferred Stock and the Exercise Price of the 2019 Warrants were initially subject to adjustment in each of the following circumstances: (i) on the third trading day following the date that the Company effects a reverse stock split, or the Reverse Split Reset Date, (ii) the date that the initial registration statement covering the shares of common stock issuable upon the conversion of the Preferred Stock and the exercise of the 2019 Warrants is declared effective by the SEC, or the Registration Reset Date, and (iii) in the event that all of the shares of common stock which we were required to register with the SEC were not then registered on an effective registration statement, the date that all of the shares underlying the respective Preferred Stock and 2019 Warrants may be sold pursuant to Rule 144, or the Rule 144 Reset Date, each of such reset dates, a Reset Date and, collectively, the Reset Dates. On each Reset Date, the Conversion Price and the Exercise Price were to be reduced, and only reduced, to equal the lesser of (x) the then effective Conversion Price or Exercise Price, as applicable, and (y) 90% of the average of the five daily volume weighted average prices of the common stock immediately prior to each Reset Date, or the Reset Formula. In the event of a reduction in the Exercise Price, the aggregate number of Warrant Shares issuable upon the exercise of the 2019 Warrants were to be increased such that the aggregate Exercise Price of the Warrants on the day immediately following such Reset Date equaled the aggregate Exercise Price immediately prior to such adjustment. In addition, from the date of issuance of the Preferred Stock and Warrants until such time that the Company’s common stock is listed or quoted on a national exchange, the Conversion Price and the Exercise Price are subject to price-based anti-dilution protections.
The Registration Reset Date occurred on November 7, 2019. However, pursuant to the Reset Formula, no reduction in the Conversion Price or the Exercise Price occurred on the Registration Reset Date. The Reverse Split Reset Date occurred on December 30, 2019. Pursuant to the Reset Formula, the Conversion Price and the Exercise Price were reduced to $23.04 per share as of the Reverse Split Reset Date. The Rule 144 Reset Date with respect to the Series E Preferred Stock and the Series E Warrants occurred on January 15, 2020, but no reset in the Conversion Price or the Exercise Price of the Series E Preferred Stock or the Series E Warrants occurred as of such date because all of the shares of common stock issuable in respect of such securities had been registered for resale. The Rule 144 Reset Date with respect to the Series E-1 Preferred Stock and the Series E-1 Warrants occurred on February 19, 2020, but no reset in the Conversion Price or the Exercise Price of the Series E-1 Preferred Stock or the Series E-1 Warrants occurred as of such date because all of the shares of common stock issuable in respect of such securities had been registered for resale.
As a consequence of the reduction of the Conversion Price on the Reverse Split Reset Date, an additional 813,473 shares of common stock became issuable upon the conversion of the Preferred Stock and, as a consequence of the reduction of the Exercise Price on the Reverse Split Reset Date, an additional 824,587 shares of common stock became issuable upon the exercise of the 2019 Warrants, or collectively the Reset Shares. Pursuant to the terms of the registration rights agreements entered into in connection with the Private Placements and the Debt Exchange we were required to register a number of shares of our common stock that would be issuable assuming that the Conversion Price and the Exercise Price were $16.10 per share, regardless of the actual Conversion Price or the Exercise Price. Pursuant to that requirement, even though we were obligated to issue only the Reset Shares as a result of the Reverse Split, we registered a total of 3,429,680 shares of common stock for sale or other disposition by the selling stockholders on our registration statement on Form S-1 (File No. 333-235751), which included the Reset Shares.
During the year ended December 31, 2020, the Company incurred $106 of costs to register the shares of common stock underlying the Preferred Stock and the 2019 Warrants.
The conversion price of the Preferred Stock and the exercise price of the 2019 Warrant were subsequently adjusted to $10.00 per share (and they are no longer subject to price resets) upon the pricing of the Company’s May 2020 public offering. As a result of the price adjustment, the excess of the fair value of the common stock that will be received on conversion of the Preferred Stock, measured on the price reset date, exceeded the original proceeds allocated to the Preferred Stock by $12,000. The repricing of the exercise price of the 2019 Warrants resulted in the recognition of a $55 deemed dividend. Because the 2019 Warrants are no longer subject to price resets, the $6,200 estimated fair value of the warrants was reclassified from derivative liability to equity.
During the years ended December 31, 2020 and 2019, 20,887 and 565 shares of Series E and Series E-1 Convertible Preferred Stock were converted into 2,084,507 and 13,455 shares of common stock, respectively.
As of December 31, 2020, there were 20,631 shares of Preferred Stock outstanding.
F-20
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
Other Common Stock Issuances
During the years ended December 31, 2020 and 2019, the Company issued 72,976 and 20 shares of common stock with a grant date value of $636 and $4, respectively, as compensation. The 2020 issuances include shares valued at $230 which were issued to satisfy 2019 accrued compensation.
During the year ended December 31, 2020, the Company issued 6,000 shares of common stock associated with the exercise of pre-funded warrants and 185,803 shares of common stock associated with other warrants for combined proceeds of $1,858.During the year ended December 31, 2019, the Company issued 11,285 shares of common stock associated with the exercise of pre-funded warrants for de minimis proceeds
In April 2019, the Company entered into an exchange agreement with an institutional investor with respect to warrants held by such investor. Pursuant to the exchange agreement, the Company issued 92 shares of the Company’s common stock in exchange for warrants to purchase 82,521 shares of common stock at a weighted average exercise price of $170 per share. The exchange resulted in a loss of approximately $6 which is recognized within loss on issuance of financial instrument in the statement of operations.
Series D Preferred Stock Issuance and Exchange
On November 5, 2018, the Company’s Board authorized the establishment of a new series of preferred stock designated as Series D Preferred Stock, $0.01 par value, the terms of which are set forth in the certificate of designations for such series of Preferred Stock. During 2019, the Company issued an additional 15 shares of Series D Preferred Stock (in addition to the 101 shares issued previously) for gross proceeds of $150. On March 29, 2019, the Company exchanged all 116 issued and outstanding shares of its Series D Preferred Stock (having an aggregate stated value of $1,160) and received $400 in cash proceeds in exchange for the issuance of a senior secured promissory note (the “March 2019 Note”) in the principal amount of $1,560. The March 2019 Note bore interest at the rate of 8% per annum, was scheduled to mature on April 1, 2020, and was not convertible. The March 2019 Note was exchanged as part of the July 2019 preferred stock private placement discussed above and is no longer outstanding.
Stock Options
Pursuant to his Employment Agreement, on October 1, 2020, the Company granted a ten-year nonqualified and non-plan stock option to purchase 498,000 shares of the Company’s common stock to the Company’s new Chief Executive Officer, Gerard Michel. The exercise price of the option is equal to (i) $11.67 per share , the closing trading price per share of the Company’s common stock on October 1, 2020 as to the first 396,000 option shares to vest, (ii) 1.5 times the closing trading price per share of the Company’s common stock on October 1, 2020 as to the next 51,000 option shares to vest and (iii) 2.0 times the closing trading price per share of the Company’s common stock on October 1, 2020 as to the remaining 51,000 option shares to vest. The options vest ratably on a monthly basis over 36 months. The grant date value of the awards was $5,629, which will be recognized based on a graded approach over the vesting period.
On October 1, 2020, the Company granted ten-year options to directors and employees to purchase an aggregate of 550,000 shares of common stock at an exercise price of $11.67 per share. The options vest ratably on a monthly basis over 36 months. The grant date value of the awards was $6,230, which will be recognized using a graded approach over the vesting period.
On December 7, 2020, the Company granted ten-year options to a new employee to purchase an aggregate of 30,000 shares of common stock at an exercise price of $15.32 per share. The options vest ratably on a monthly basis over 36 months. The grant date value of the award was $446, which will be recognized using a graded approach over the vesting period.
F-21
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
The Company values stock options using the Black-Scholes option pricing model and used the following assumptions during the reporting periods:
For the year ended December 31, 2020 For the year ended December 31, 2019
Expected terms (years) 5.77 5.50
The weighted average estimated fair value of the stock options granted during the years ended December 31, 2020 and 2019 was approximately $11.41 and $181.41 per share, respectively.
The following is a summary of stock option activity under the 2019 Plan and the 2020 Plan For the year ended December 31, 2020:
Exercised — —
The following table summarizes information for stock option shares outstanding and exercisable at December 31, 2020:
Options Exercisable
F-22
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
At December 31, 2020, there was approximately $8,824 of aggregate unrecognized compensation expense related to employee and board stock option grants. The cost is expected to be recognized over a weighted average period of 9.8 year. For the years endedDecember 31, 2020 and 2019, the Company recognized compensation expense $3,505 and $273, respectively, related to stock options granted to employees and board members, which were charged to the statement of operations as detailed below:
For the year ended December 31, 2020 For the year ended December 31, 2019
Selling, general and administrative $ 2,304 $ 214
Research and development 1,110 59
Cost of goods sold 91 —
Warrants
The following is a summary of warrant activity for the year ended December 31, 2020 :
The following table presents information related to stock warrants at December 31, 2020:
Warrants Exercisable
As of December 31, 2020, warrants to purchase 371,000 shares of common stock were pre-funded, and the exercise price was $0.01 per share. The remaining warrants were exercisable at $10.00 per share. See Series E and Series E-1 Preferred Stock Private Placement above for additional information related to the price reset of the 2019 Warrants.
See the May 2020 Public Offering section above for additional information related to the warrants issued during the year ended December 31, 2020.
See theOther Common Stock Issuances section above for additional information related to warrant exercises.
F-23
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
(12) Fair Value Measurements
The table below presents the activity within Level 3 of the fair value hierarchy for the twelve months ended December 31, 2020:
Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
Warrant Liability
Total change in the liability included in earnings (17,498 )
Reclass from liability to equity (11 )
Fair value of warrants issued 20,844
Total change in the liability included in earnings 2,832
Reclass from liability to equity (6,200 )
At December 31, 2018, the Company had a total of 179 warrants outstanding that were surrendered pursuant to a settlement agreement entered into between the Company and the holders of such warrants on April 18, 2019. The final payment under the settlement was made on July 16, 2019.
See Note 11 for information related to the warrants issued in the year ended December 31, 2019 that were classified as derivative liabilities but were reclassified as equity during the year ended December 31, 2020.
The fair value of the warrants measured during the years ended December 31, 2020 and 2019 were determined by using option pricing models assuming the following:
For the Year Ended December 31,
Contractual life (in years) 4.30 4.60
Risk-free interest rates 1.40% 1.70%
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Level 1 Level 2 Level 3 Balance at December 31,
Liabilities
Derivative instrument liabilities $ — $ — $ — $ — $ — $ 3,368 $ — $ 3,368
For the twelve months ended December 31, 2020 and 2019 there were no transfers in or out of Level 1, 2 or 3 inputs.
F-24
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
(13) Commitments
Litigation, Claims and Assessments
Following the May 18, 2020 resignation (effective June 1, 2020) of Jennifer Simpson, the Company’s former President and Chief Executive Officer, and Barbra Keck, the Company’s former Chief Financial Officer (the “Claimants”), it became evident that there was a dispute regarding the Company’s compensation obligations to the Claimants. In a letter dated, June 29, 2020, an attorney representing the Claimants made certain claims and threatened litigation against the Company. On or about July 27, 2020, the Claimants filed a statement of claim with the American Arbitration Association against the Company. The Claimants seek payment of certain purported unpaid compensation amounts claimed to be due to them, in an approximate amount of $1,140 in the aggregate, as well as unspecified statutory damages under New York Labor Law, attorneys’ fees and costs, and statutory interest. The Company intends to defend the claims vigorously. The arbitrator had scheduled hearings to take place during the week of May 17, 2021. However, the Claimants and the Company recently agreed to participate in non-binding mediation of their dispute before a neutral mediator, which resulted in the arbitration proceedings being placed in abeyance pending the outcome of the mediation process. At this time, the mediation process between the Claimants and the Company is ongoing. As of December 31, 2020, the Company has accrued for the full purported unpaid compensation amounts.
Officer Appointment – Chief Executive Officer
On October 1, 2020, Gerard Michel was appointed as the Company’s new Chief Executive Officer and a Class I Director. Pursuant to an employment agreement dated as of August 31, 2020 between the Company and Mr. Michel (the “Employment Agreement”), the term of Mr. Michel’s employment began on October 1, 2020. Under the Employment Agreement, Mr. Michel will receive an annual base salary of $450 subject to annual review by the Board’s Compensation and Stock Option Committee and will be eligible to participate in the Company’s annual incentive plan with a target annual cash bonus equal to 50% of his then-current base salary. In addition, the Company will reimburse Mr. Michel up to $6.5 per month to cover his temporary expenses incurred in connection with traveling to and living in the New York City tristate area to work onsite at the Company’s principal corporate office for the initial eighteen (18) months of his employment.
Pursuant to the Employment Agreement, on October 1, 2020, the Company granted stock options to Mr. Michel. See Note 11 for additional details.
If Mr. Michel resigns his at-will employment for Good Reason, (as defined in the Employment Agreement), or the Company terminates Mr. Michel’s employment other than for Cause, (as defined in the Employment Agreement) , then Mr. Michel shall be entitled to his accrued and unpaid compensation and, subject to him entering into and not revoking a general release of claims in favor of the Company and fully complying with the terms of an Employee Confidentiality, Invention Assignment and Restrictive Covenants Agreement (the “Restrictive Covenants Agreement”), Mr. Michel shall also be entitled to: (a) a severance payment equal in the aggregate to twelve (12) months of his annual base salary at the time of termination, payable in twelve (12) equal monthly installments; and (b) specified continuing health plan benefits until the earlier of (i) the twelve (12) month anniversary of his termination date, (ii) the last day he’s eligible for coverage pursuant to COBRA or (iii) the date on which he becomes eligible for similar coverage from another employer.
Operating Leases
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 Dublin, 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.
F-25
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
On June 25, 2020, the Company entered into a sub-lease agreement (the “2021 Sub-Lease”) with its current sublessee under the 2014 Sublease and 2015 Sublease pursuant to which, effective August 2, 2021, the current sublessee will become the lessee and the Company will sub-lease its portion of the premises from the current sublessee. The Company’s rent under the 2021 Sub-Lease will be approximately $3.7 per month for a term of five years. Aside from the 2021 Sub-Lease, the Company has no operating or financing leases that have not yet commenced.
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 $405.7.
Future minimum lease payments, net of receipts due under the terms of subleases, under all operating leases at December 31, 2020 are as follows:
Future Lease Payments
For the years ended December 31, 2020 and 2019 rent expense, net of receipts under the terms of subleases, totaled approximately $423 and $529, respectively.
Letters of Credit
Under the terms of a sub-lease agreement for office space at 1633 Broadway, New York, NY, the Company is required to maintain a letter of credit in the amount of $131, which will expire with the sublease in February 2023.
(14) Income Taxes
There is no income tax expense recognized for the years ended December 31, 2020 and 2019, respectively.
Loss before taxes consists of:
Income (loss) before taxes $ (24,156 ) $ (8,879 )
F-26
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
The provision for income taxes differs from the amount computed by applying the statutory rate as follows:
Income taxes using U.S federal statutory rate $ (5,073 ) $ (1,865 )
Loss on extinguishment of debt — 361
Loss of tax benefit of state net operating loss carryforwards (11 ) 1,477
Loss of tax benefit of federal tax credit carryforwards — 324
Branch income (238 ) —
State income taxes, net of federal benefit (1,788 ) (1,461 )
Foreign rate differential (238 ) 664
Stock option exercises and cancellations 308 —
Research and development costs (166 ) (316 )
Total $ — $ —
Significant components of the Company’s deferred tax assets are as follows:
Deferred tax assets:
Employee compensation accruals $ 796 $ 84
Accrued liabilities 361 —
Deferred tax liabilities:
Total deferred tax liabilities 265 206
Net deferred tax assets $ — $ —
As of December 31, 2020, and 2019, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $260,622 and $246,347, respectively. A significant portion of the federal amount is subject to an annual limitation as low as $27,500 as a result of changes in the Company’s ownership in May 2003, November 2016, and multiple dates throughout 2017, 2018 and 2019, as defined by Section 382 of the United States Internal Revenue Code of 1986, as amended (the “IRC”), and the related income tax regulations. As a result of the limitations caused by the May 2003, November 2016 and multiple 2017, 2018 and 2019 ownership changes, approximately $206,112 of the total net operating loss carryforwards is expected to expire unutilized and will be unavailable to offset future federal taxable income. Approximately $54,510 of net operating loss carryforwards remains available to offset future federal taxable income, of which $1,737 will expire between 2020 and 2037 and $52,773 will have an unlimited carryforward period as a result of the Tax Cuts and Jobs Act.
F-27
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
In addition, the Company’s state net operating losses are also subject to annual limitations that generally follow IRC Section 382 provisions (with the exception of Connecticut), adjusted for each state’s respective income apportionment percentages. As of December 31, 2020, and 2019, the Company had net operating loss carryforwards for state and city income tax purposes between approximately $26,414 and $192,466 and between approximately $27,311 and $180,611, respectively, which expire through 2040. As a result of the IRC Section 382 limitations, approximately $168,826 and $153,056 of New York State and New York City net operating losses are expected to expire unutilized and will be unavailable to offset future taxable income. Approximately $23,641 and $23,623 of net operating loss carryforwards, respectively, will be available to offset future state and city taxable income. As of December 31, 2020, and 2019 the Company had a net operating loss carryforward for foreign income tax purposes of $30,880 and $26,141, respectively, which have indefinite carryforward periods. As of December 31, 2020,and 2019, the Company had federal research and development tax credit carryforwards of approximately $5,458 and $5,292, respectively, which expire through 2040. As a result of the IRC Section 382 limitations, all but $346 of the tax credit carryforwards is expected to expire unutilized.
Management has established a 100% valuation allowance against the deferred tax assets as management does not believe it is more likely than not that these assets will be realized. The Company’s valuation allowance increased by approximately $6,540 and $3,428 in 2020 and 2019, respectively. The change in valuation is as follows:
Charged to costs and expenses 6,281 3,512
Charged to additional paid-in capital — —
Charged to retained earnings — —
Charged to other comprehensive income 258 (83 )
On March 27, 2020, President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748). The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. Due to the Company’s history of tax loss carryforwards and full valuation allowance, the CARES Act did not have a significant effect on the income tax provision, as the corporate income tax relief was directed towards cash taxpayers.
The Company complies with the provisions of ASC 740-10 in accounting for its uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740-10 and therefore has not included a tabular rollforward of unrecognized tax benefits. As there are no uncertain tax positions recognized, interest and penalties have not been accrued.
The Company is subject to income tax in the U.S., as well as various state and international jurisdictions. The Company has not been audited by any state tax authorities in connection with income taxes. The Company has not been audited by international tax authorities or any states in connection with income taxes. The Company’s New York State tax returns have been subject to annual desk reviews which have resulted in insignificant adjustments to the related franchise tax liabilities and credits. The Company is no longer subject to federal and state examination for tax years ending prior to December 31, 2017; tax years ending December 31, 2017 through December 31, 2020 remain open to examination. The Republic of Ireland is the Company’s only significant foreign jurisdiction. The Company is no longer subject to Ireland tax examination for tax years ending prior to December 31, 2016 (as Ireland has not initiated an audit of 2015 as of December 31, 2020); tax years ending December 31, 2016 through December 31, 2020 remain open to examination. However, the Company’s tax years December 31, 1998 through December 31, 2020 generally remain open to adjustment for all federal, state and foreign tax matters until its net operating loss and tax credit carryforwards are utilized or expire prior to utilization, and the applicable statutes of limitation have expired in the utilization year. The federal and state tax authorities can generally reduce a net operating loss (but not create taxable income) for a period outside the statute of limitations in order to determine the correct amount of net operating loss which may be allowed as a deduction against income for a period within the statute of limitations.
F-28
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2020 and 2019
(amounts in thousands, except share and per share amounts)
Delcath recognizes interest accrued related to unrecognized tax benefits and penalties, if incurred, as a component of income tax expense.
(15) Subsequent Events
Series E and E-1 Preferred Stock Conversions
Subsequent to December 31, 2020, the Company has issued 15,000 shares of common stock pursuant to conversions of Series E and Series E-1 Convertible Preferred Stock.
Stock Warrant Exercises
Subsequent to December 31, 2020, warrants to purchase 232,945 shares of the Company’s common stock with an exercise price of $10.00 per share were exercised for proceeds of $2,329,450.
Subsequent to December 31, 2020, the Company has issued 4,575 shares of common stock pursuant to the option of a cashless exercise of Series E warrants.
Sales of Unregistered Securities
On February 18, 2021, the Company issued 2,636 shares of unregistered Common Stock in lieu of cash payment of deferred accrued director fees to former director, William Rueckert.
F-29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act. Based on that evaluation, Delcath’s Chief Executive Officer concluded that the Company’s disclosure controls and procedures as of December 31, 2020 (the end of the period covered by this Annual Report on Form 10-K), have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Delcath’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Delcath’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment, management has concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
There were no changes to the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. Other Information
None.
41
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2021 Annual Meeting of Stockholders of the Company and is incorporated herein by reference.
Item 11. Executive Compensation
The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2021 Annual Meeting of Stockholders of the Company and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2021 Annual Meeting of Stockholders of the Company and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2021 Annual Meeting of Stockholders of the Company and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required to be furnished pursuant to this Item will be set forth in our proxy statement for the 2021 Annual Meeting of Stockholders of the Company and is incorporated herein by reference.
42
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: The following Consolidated Financial Statements and Supplementary Data of Delcath and the Report of Independent Registered Public Accounting Firm included in Part II, Item 8:
• Consolidated Balance Sheets at December 31, 2020 and 2019
• Notes to Consolidated Financial Statements
2. Exhibits: The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary.
None.
43
Exhibit Index
Exhibit No. Description
4.9 ** Description of Securities.
44
Exhibit No. Description