Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
(1)
|
Description of Business
|
Delcath Systems, Inc. is an interventional oncology company focused on the treatment of primary and metastatic liver cancers. Our investigational product—Melphalan Hydrochloride for Injection for use with the Delcath Hepatic Delivery System (Melphalan/HDS) —is designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. In Europe, our system is commercially available under the trade name Delcath Hepatic CHEMOSAT® Delivery System for Melphalan (CHEMOSAT®), where it has been used at major medical centers to treat a wide range of cancers of the liver.
Our primary research focus is on ocular melanoma liver metastases (mOM) and intrahepatic cholangiocarcinoma (ICC), a type of primary liver cancer, and certain other cancers that are metastatic to the liver. We believe the disease states we are investigating represent a multi-billion dollar global market opportunity and a clear unmet medical need.
Liquidity
The accompanying 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. The Company has incurred losses since inception and has accumulated deficit of $324.8 million at December 31, 2017. As shown in the accompanying financial statements during the year ended December 31, 2017, the Company incurred net losses of $45.1 million and used $15.4 million of cash for its operating activities. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
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 us 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 our 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. Management believes that its capital resources are adequate to fund operations through May 2018. 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.
F-6
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
(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 (FDIC), however, the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.
Restricted Cash
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash on the accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable, principally trade, are generally due within 30 days and are stated at amounts due from customers. Collections and payments from customers are monitored and a provision for estimated credit losses may be created based upon historical experience and specific customer collection issues that may be identified.
Inventories
Inventories are valued at the lower of cost or market value using the first-in, first-out method. The reported net value 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.
Prior to obtaining authorization to affix the CE Mark to its Generation Two CHEMOSAT System in April 2012, the Company expensed all of its inventory costs as research and development. Inventory as of December 31, 2017 includes finished goods and components that have been purchased since April 2012. Therefore, to the extent that materials expensed prior to April 2012 are used in manufacturing finished goods for sale, the Company’s cost of goods sold will be impacted accordingly.
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, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Accounting for changes in the fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are
F-7
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
based on the exposures hedged. At December 31, 2017 and 2016, the Company did not have any derivative instruments that were designated as hedge
s.
Fair Value Measurements
The Company adheres to ASC 820, 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).
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
•
|
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity.
|
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Revenue Recognition
Revenue from product sales is generally recognized when all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred; product price is fixed or determinable; and collection of the resulting receivable is reasonably assured. 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.
Deferred Revenue
Deferred revenue on the accompanying consolidated balance sheets includes payment received for product sales to a distributor. 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. The Company will recognize the revenue related to product sales when its obligations under the agreement have been 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.
F-8
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
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, which establishes accounting for equity instruments exchanged for employee services and ASC 505-50, 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 for share-based payments 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 award, the expected post-vesting option life, 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 13 for additional information.
Net Loss per Common Share
Basic net loss per share is determined by dividing net loss by the weighted average shares of common stock outstanding during the period. 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 stock options, unvested restricted stock and warrants are deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.
The calculation of net loss and the number of shares used to compute basic and diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 are as follows:
F-9
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
(in thousands, except share data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(45,117
|
)
|
|
$
|
(17,971
|
)
|
|
$
|
(14,704
|
)
|
Preferred stock dividends
|
|
|
(527
|
)
|
|
|
—
|
|
|
|
—
|
|
Net loss, adjusted
|
|
|
(45,644
|
)
|
|
|
(17,971
|
)
|
|
|
(14,704
|
)
|
Net loss per share – basic and diluted
|
|
|
(6.50
|
)
|
|
|
(3,707
|
)
|
|
|
(5,096
|
)
|
Weighted average shares outstanding –
basic and diluted
|
|
|
7,019,316
|
|
|
|
4,847
|
|
|
|
2,887
|
|
In the third quarter of 2017, the Company issued Series B Preferred Shares. A portion of the redemption price of the Series B Preferred Shares was accounted for as a deemed dividend and is discussed further in Note 10.
For the years ended December 31, 2017, 2016 and 2015, the following potentially dilutive securities were excluded from the computation of diluted earnings per share (EPS) because their effects would be antidilutive.
Shares excluded from the computation of diluted EPS:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
127
|
|
|
|
118
|
|
|
|
135
|
|
Unvested restricted shares
|
|
|
283
|
|
|
|
55
|
|
|
|
103
|
|
Warrants
|
|
|
7,005,952
|
|
|
|
20,618
|
|
|
|
3,225
|
|
Total
|
|
|
7,006,362
|
|
|
|
20,791
|
|
|
|
3,463
|
|
All share numbers presented in this footnote reflect a one-for-sixteen (1:16) reverse stock split effected on July 21, 2016
and a one-for-three hundred and fifty (1:350) reverse stock split effected on November 6, 2017
.
Segment Information
The Company currently operates in one business segment, which is the development and commercialization of CHEMOSAT/Melphalan/HDS. 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. 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should 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. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the Company beginning in its fiscal year 2018, and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company will adopt this standard
F-10
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
on January 1, 2018
using the modified retrospective method.
The Company has completed an analysis of its existing product sales and distribution agreement and assessed the differences in accounting for each under ASU 2014-09 compared wit
h current revenue accounting standards. Based on that review, the Company does not expect the implementation of ASU 2014-09 to have a material quantitative impact on its consolidated financial statements as the timing of revenue recognition for product sal
es is not expected to change considerably.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires entities to report a right-to-use asset and liability for the obligation to make payments for all leases with the exception of those leases with a term of twelve months or less. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018.
The Company intends to adopt this standard on January 1, 2019 and is currently evaluating the impact it may have on its consolidated financial statements
.
In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. The Company has adopted this guidance.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted. The Company will adopt this standard on January 1, 2018 and does not anticipate that this guidance will materially impact its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815). The new guidance intends to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. In addition, the Board re-characterized the indefinite deferral of certain provisions of Topic 480 to a scope exception. The re-characterization has no accounting effect. ASU 2017-11 is effective for public entities for fiscal years beginning after December 15, 2018.
The Company intends to adopt this standard on January 1, 2019 and is evaluating the effects, if any, that the adoption of this guidance will have on the Company’s consolidated financial statements.
Inventories consist of:
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
298
|
|
|
$
|
346
|
|
Work-in-process
|
|
|
721
|
|
|
|
214
|
|
Finished goods
|
|
|
229
|
|
|
|
100
|
|
Total Inventory
|
|
$
|
1,248
|
|
|
$
|
660
|
|
F-11
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
(5)
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets include the following:
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Insurance premiums
|
|
$
|
421
|
|
|
$
|
501
|
|
Financing costs
|
|
|
70
|
|
|
|
—
|
|
Security deposit
|
|
|
50
|
|
|
|
50
|
|
Other
1
|
|
|
159
|
|
|
|
147
|
|
Total prepaid expenses and other current assets
|
|
$
|
700
|
|
|
$
|
698
|
|
1
Other consists of various prepaid expenses and other current assets, with no individual item accounting for more than 5% at December 31, 2017 and 2016.
(6)
|
Property, Plant, and Equipment
|
Property, plant, and equipment consists of:
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Buildings and land
|
|
$
|
579
|
|
|
$
|
556
|
|
Enterprise hardware and software
|
|
|
1,744
|
|
|
|
1,532
|
|
Leaseholds
|
|
|
1,705
|
|
|
|
1,504
|
|
Equipment
|
|
|
971
|
|
|
|
940
|
|
Furniture
|
|
|
175
|
|
|
|
354
|
|
Property, plant and equipment, gross
|
|
|
5,174
|
|
|
|
4,886
|
|
Accumulated depreciation
|
|
|
(3,876
|
)
|
|
|
(3,803
|
)
|
Property, plant and equipment, net
|
|
$
|
1,298
|
|
|
$
|
1,083
|
|
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $0.3 million, $0.3 million, $0.6 million, respectively.
(7)
|
Current Accrued Expenses
|
Current accrued expenses include the following:
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Clinical trial expenses
|
|
$
|
869
|
|
|
$
|
1,365
|
|
Compensation, excluding taxes
|
|
|
1,124
|
|
|
|
933
|
|
Professional fees
|
|
|
221
|
|
|
|
286
|
|
Short-term portion of lease restructuring
|
|
|
209
|
|
|
|
216
|
|
Other
1
|
|
|
985
|
|
|
|
607
|
|
Total accrued expenses
|
|
$
|
3,408
|
|
|
$
|
3,407
|
|
1
Other consists of various accrued expenses, with no individual item accounting for more than 5% of current liabilities at December 31, 2017 and 2016.
(8)
|
Restructuring Expenses
|
In order to help reduce operating costs and more appropriately align its office space with the reduced size of its workforce, the Company entered into two sub-leases for office space at its 810 Seventh Avenue office. On May 22, 2014, the Company entered into a sub-lease agreement (“Sub-lease #1”) for approximately one-half of the office space at this location (“Suite 3500”), resulting in a lease restructuring reserve of approximately $0.9 million. On August 18, 2014, the Company entered into a sub-
F-12
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
lease agreement (“Sub-lease #2”) for the remaining one-half of office space at its 810
Seventh Avenue office (“Suite 3505”), resulting in a lease restructuring reserve of approximately $0.7 million. As of December 31, 2017, the total remaining lease restructuring liability for its leased office space was approximately $0.6 million, of which
approximately $0.2 million and $0.4 million were included in Accrued expenses and Other non-current liabilities on the consolidated balance sheets, respectively.
The following table provides the year-to-date activity of the Company’s restructuring reserves as of December 31, 2017:
(in thousands)
|
|
Lease Liability
|
|
Reserve balance at December 31, 2016
|
|
$
|
820
|
|
Charges
|
|
|
—
|
|
Payments/Utilizations
|
|
|
(216
|
)
|
Reserve balance at December 31, 2017
|
|
$
|
604
|
|
(9)
|
Convertible Notes Payable
|
As of December 31, 2017, the senior secured convertible notes (the “Notes”) had been repaid in full and were no longer outstanding.
On June 6, 2016, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain investors named on the Schedule of Buyers attached to the SPA pursuant to which the Company issued $35.0 million in principal face amount of Notes and related Series C Warrants (the “Series C Warrants”) to purchase additional shares of the Company’s common stock, par value $0.01 per share (“Common Stock”).
$35.0 million of the Notes were issued for cash proceeds of $32.2 million with an original issue discount in the amount of $2.8 million.
The Notes were secured pursuant to a Security Agreement which creates a first priority security interest in all of the personal property (other than Excluded Collateral (as defined in the Security Agreement) of the Company of every kind and description, tangible or intangible, whether currently owned and existing or created or acquired in the future.
Under the terms of the Notes, at closing the Company received an initial tranche of $3.0 million for immediate use for general corporate purposes.
A second tranche of $3.0 million was released to the Company in December 2016. The balance was released throughout 2017.
In connection with the issuance of the Notes under the SPA, the Company also issued Series C Warrants, exercisable to acquire approximately 20,000 shares of Common Stock. The provisions in the Series C Warrants required the Company to account for the warrants as derivative liabilities. The Company recognized a discount to debt of $27.8 million related to the initial fair value of the Series C Warrants. On April 2, 2017 the Company entered into separate warrant repurchase agreements (the “Warrant Repurchase Agreements”) with each of the investors named on the Schedule of Buyers attached to the SPA. Pursuant to the Warrant Repurchase Agreements, each investor agreed to a Controlled Account Release, in an aggregate amount equal to $7.9 million, which funds in each case were paid to the respective investor, in exchange for cancellation of the Warrants issued to each investor under the SPA. As a result of the extinguishment, the Company recognized a gain of $9.6 million, representing the difference between the fair value of the liability as of the extinguishment date of $17.5 million related to the Series C Warrants and the $7.9 million in cash returned to the Note holders to extinguish the liability.
The Company had agreed to make amortization payments with respect to the Notes in fourteen (14) equal installments beginning seven (7) months after the original date of issuance of June 13, 2016 (each, an “Installment Date”). On each installment date, assuming certain equity conditions were met, the installment payment was, at the election of the Company, automatically converted into shares of Common Stock at a conversion rate defined in the SPA.
If the Company could not meet the equity conditions, it would have been required to repay some or all of the amounts due under the notes in cash.
At any time after the issuance of the Notes, the Notes were convertible at the election of the holder into shares of our Common Stock at a conversion price equal to $1,536.50, subject to adjustment as provided in the Notes.
As a result of the Notes including a feature such that the conversion price is based upon a formula which includes discounts to the market price of the common stock as well as having a
lower effective conversion price considering the issuance discount and the value allocated to the Series C Warrants
, the Company has recognized a beneficial conversion feature of $4.4 million. The original issue discount, the beneficial conversion feature, and the fair value of the issuance of the Series C Warrants are collectively considered the debt discount. The Company recorded a debt discount in the amount of $35.0 million which was
F-13
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
being amortized over the life of the Notes using
the effective interest method. As of December 31, 2017, $
35.0
million of the debt discount has been amortized to interest expense
. All debt issuance costs were accounted for as a deferred asset and were amortized over the life of the Notes. As of December
31, 2017, the Company had incurred approximately $2.2 million in debt issuance costs all of which were amortized or expensed as of December 31, 2017.
Restructuring Agreement
On August 28, 2017, the Company entered into a Restructuring Agreement (the “Agreement”) with one of the institutional investors (the “Investor”) who was a party to the SPA. As of the date the Agreement was entered into, the Investor held $11,444,637 aggregate principal amount of Notes of which there was $10,092,857 aggregate Restricted Principal, (as defined in the Notes) of Notes (the “Restricted Notes”), secured by such aggregate cash amount held in a collateral account of the Company in the same amount (the “Restricted Cash”) and (y) $1,351,780 principal of Notes (the “Unrestricted Notes”), (ii) 4,200 shares of Series A Preferred Stock and (iii) 2,006 shares of Series B Convertible Preferred Stock.
Pursuant to the Agreement, (a) on the date thereof the Company and the Investor took the following actions (the “Initial Restructuring”): (i) the Investor released restrictions on $1,650,000 of Restricted Cash (the “Initial Release”), (ii) the Investor consented to the use of additional Restricted Cash to effect redemptions of the Series A Preferred Shares and the Series B Preferred Shares, (iii) the Investor cancelled $1,200,000 aggregate principal of the Notes (such portion of the Notes, the “Cancellation Note”), (iv) the Company redeemed all the Series A Preferred Shares outstanding for a cash payment to the Investor of $4.20 and (v) the Company redeemed the Series B Preferred Shares for a cash payment to the Investor of $2,006,000 and (b) upon the consummation of a reverse stock split of our Common Stock of at least twenty to one (the “Reverse Stock Split Event”, and such date, the “Reverse Stock Split Date”) by September 15, 2017, the Company and the Investor shall have taken the following actions (the “Additional Restructuring”, and together with the Initial Restructuring, the “Restructuring”): (i) the Investor shall consent to the use of Restricted Cash to effect redemptions of $4,000,000 aggregate Restricted Principal of the Restricted Notes (such portion of the Restricted Notes, the “Redemption Notes”), (ii) the Company shall redeem the Redemption Notes for a redemption price of $6,436,852.80 (the “Redemption Price”) and (iii) the Company shall exchange (the “Exchange”), pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, $2,436,852.80 aggregate Restricted Principal of the Restricted Notes (such portion of the Restricted Notes, the “Exchange Notes”, and together with the Redemption Notes, the “Restructured Notes”) for new warrants to purchase 114,286 shares of its Common Stock (the “New Warrants”, as exercised, the “New Warrant Shares”). The New Warrants expire on the 42 month anniversary of the date of issuance and bear an exercise price of $122.50 per share (which shall be adjusted to the new lower purchase price per share if there is a subsequent “down round” financing). The Investor, in lieu of an exercise of the New Warrants pursuant to a cash payment of the aggregate exercise price of the number of New Warrants being exercised, may exercise the New Warrants, in whole or in part, by electing instead to receive upon such exercise two shares and one hundred and twenty-five thousandths of a share of the Company’s Common Stock for each Warrant Share exercised pursuant to this provision. The transactions set forth herein were being made in reliance upon the exemption from registration provided by Rule 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”) and Rule 144(d)(3)(ii) of the 1933 Act. As a result of not having effected a reverse stock split by September 15, 2017, the Additional Restructuring did not occur.
This transaction was accounted for as a debt settlement that resulted in extinguishment. As such, the $1.9 million difference between the fair value of the common shares issued and the $1.2 million debt settlement was recorded as a loss on debt settlement.
Amendment to Restructuring Agreement
As a result of the lack of requisite approval by Delcath stockholders for the Company’s proposed reverse stock split, the parties and the two investors in the Notes entered into an amendment to the August restructuring agreement on October 10, 2017 as follows: (i) on the date that the Company effects a reverse split of its common stock, (x) the Company will exchange, pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, an aggregate principal amount of those notes equal to $279,015 for new warrants to purchase an aggregate of 127,551 shares of Common Stock, and the Company shall redeem all the Series C Preferred Shares then outstanding for a cash payment of $590,000 and (ii) upon the initial consummation, on or prior to December 15, 2017, by the Company of the offering contemplated by the registration statement on Form S-1 that was filed with the SEC on October 11, 2017 the following shall occur: (i) pursuant to Section 3(b) of the Restricted Notes, the Company shall be deemed (as adjusted downward by the Black-Scholes value of the warrants being issued in this offering) to have automatically, and irrevocably, adjusted the conversion price of the Notes to 200% of the purchase price of a share of our common stock in the offering contemplated by the registration statement, (ii) the maturity date (as defined in the notes) shall
F-14
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
automatically be extended to the earlier to occur of (x) the first anniversary of the date of consummation of the offering contemplated by the registration statement and (y) Dec
ember 30, 2018, (iii) until the earlier of (x) this maturity date and (y) the 75
th
calendar day after the date of consummation of the offering contemplated by the registration statement, all installments to be made under the notes shall be deemed automatic
ally deferred with no conversions during that 75 day period, (iv) the Company agreed to redeem any portion of the outstanding notes at any time requested by either investor thereto with $7.3 million in cash to be reduced by $0.6 million to redeem the Serie
s C Preferred Stock remaining in the restricted accounts with respect to the 2016 convertible notes and (v) the conversion floor price on the notes is $0.05 and not subject to adjustments. As a result of not consummating an S-1 offering by December 15, 201
7, the actions contemplated in (ii) of this paragraph did not occur. This transaction resulted in the extinguishment of $0.3 million in debt in exchange for the issuance of warrants. The $2.3 million difference in the fair value of the issued warrants and
the $0.3 million in extinguished debt was recorded as a loss on debt extinguishment.
November 2017 Exchange Agreement
On November 15, 2017, the Company entered into exchange agreements (“Exchange Agreement”) with each of the two investors from its June 2016 private placement of senior secured convertible notes as contemplated by the SPA. As of November 15, 2017, those investors held $11,157,970 aggregate principal amount of Notes. On November 15, 2017, the Company authorized a new series of senior secured convertible notes of the Company, in the aggregate original principal amount as set forth above (the “Exchange Notes”), which Exchange Notes convertible into shares of Common Stock in accordance with the terms of the Exchange Notes. Subject to the terms and conditions of the Exchange Agreements, the Company and the investors exchanged for (a) $10,562,425 aggregate principal amount of the Exchange Notes (the “New Notes”, and the shares of Common Stock issuable pursuant to the terms of the New Notes, including, without limitation, upon conversion or otherwise, collectively, the “New Conversion Shares”) and (b) warrants to purchase an aggregate of 7,000,000 shares of Common Stock at an initial exercise price of $2.45. The warrants have a five year term.
The New Notes had the following terms:
|
•
|
The initial conversion price was $1.50 per share for an optional conversion and at any time, an investor could have instead engaged in an alternate conversion for which the conversion price was 82% (75% if an event of default) of the lowest vwap for the Company’s common stock on the three trading days prior to and including the date of the conversion.
|
|
•
|
The obligation to prepay the New Notes was extended to March 31, 2018, except in the case of an event of default or change in control.
|
|
•
|
Assuming equity conditions as stated in the New Notes are met, the investors consented to release cash to the Company from the existing controlled accounts upon conversion of the New Notes.
|
The November Exchange Agreement was accounted for as an extinguishment. As such, the New Notes were recorded at their calculated fair value of $15.2 million, the related November 2017 Warrants were recorded as a derivative liability at their calculated fair value of $14.4 million and the difference between the fair value of the New Notes, the fair value of the warrants issued, and the carrying amount of the old notes was recorded as a $19.0 million loss on extinguishment. As with the Notes issued in June 2016, the New Notes also contained a beneficial conversation feature. The value of this feature was considered in the fair value calculations of the New Notes and was determined to be $4.9 million of the $15.2 million total fair value. The $10.3 million fair value of the New Notes was accreted up to the face value of $10.6 million over the term of the New Notes with the $0.3 million difference charged to interest expense. The $4.9 million beneficial conversion feature was fully credited to Additional paid-in capital as the New Notes were fully satisfied under the December 28, 2017 Exchange Agreement. The November 2017 Warrants that were issued in connection with the November Exchange Agreement assessed at the end of each reporting period with any changes in fair value being recognized as derivative income or expense.
December 28, 2017 Exchange Agreements
On December 28, 2017, the Company entered into exchange agreements (“Exchange Agreements”), with each of the two investors from its June 2016 private placement of senior secured convertible notes (as further exchanged, the “Notes”) originally issued pursuant the SPA. Pursuant to the Exchange Agreements, the Company (i) extinguished its remaining $3,027,408 in outstanding obligations under the New Notes in full, (ii) obtained a release of restrictions on $2,046,898 in
F-15
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
restricted cash held in its control accoun
ts, (iii) issued to the investors 14.8 million shares (the “Shares”) of its common stock and rights (“Rights”) to receive 108.9 million shares of common stock to the extent such issuance of Shares would otherwise result in the beneficial ownership by any s
uch investor of more than 4.9% or 9.9% of its issued and outstanding stock), as applicable, for an aggregate of 123,708,735 shares of its common stock (in each case, subject to trading restrictions set forth in leak out agreements the Company separately en
tered into with each) and (iv) a cash payment to the investors of $829,831 from the restricted cash held in the control accounts. The 14.8 million shares were issued and outstanding at December 31, 2017. The rights were fully exercised in January 2018. Thi
s transaction resulted in the settlement of $3.0 million in debt. The $3.7 million difference between the fair value of the shares and rights issued for shares and the carrying value of the Notes was recorded as a loss on debt settlement.
The Company has issued shares of Common Stock and Preferred Stock as payments of principal (including certain early repayments at the option of the holders) and effected a retirement under the Notes and New Notes as follows:
|
|
Number of
Shares of
Common Stock
|
|
|
Number of
Shares of
Preferred Stock
|
|
|
Applicable
Conversion
Price
|
|
|
Reduction in
Principal
|
|
January 12, 2017
|
|
|
11,753
|
|
|
|
—
|
|
|
$
|
126.00
|
|
|
$
|
1,478,318
|
|
January 26 - February 1, 2017
1
|
|
|
4,857
|
|
|
|
—
|
|
|
$
|
112.00
|
|
|
$
|
544,000
|
|
February 10, 2017
|
|
|
43,882
|
|
|
|
—
|
|
|
$
|
70.00
|
|
|
$
|
3,045,817
|
|
February 23 - March 2, 2017
1
|
|
|
2,571
|
|
|
|
—
|
|
|
$
|
49.00
|
|
|
$
|
125,999
|
|
March 13, 2017
|
|
|
117,297
|
|
|
|
—
|
|
|
$
|
38.50
|
|
|
$
|
4,417,829
|
|
April 10, 2017
|
|
|
169,061
|
|
|
|
—
|
|
|
$
|
21.00
|
|
|
$
|
3,621,286
|
|
May 9, 2017
|
|
|
109,367
|
|
|
|
—
|
|
|
$
|
17.50
|
|
|
$
|
1,913,915
|
|
June 7 / July 2, 2017 Exchange Agreement
2
|
|
|
689,796
|
|
|
|
4,200
|
|
|
$
|
6.09
|
|
|
$
|
4,200,000
|
|
July 7, 2017
|
|
|
114,286
|
|
|
|
—
|
|
|
$
|
17.50
|
|
|
$
|
2,000,000
|
|
August 4, 2017
|
|
|
38,906
|
|
|
|
—
|
|
|
$
|
24.50
|
|
|
$
|
1,015,848
|
|
August 28, 2017 Restructuring Agreement
3
|
|
|
117,171
|
|
|
|
—
|
|
|
$
|
10.50
|
|
|
$
|
1,200,000
|
|
November 6, 2017 Warrant Exchange
4
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
279,016
|
|
November 15, 2017 Exchange Agreements
5
|
|
|
97,448,072
|
|
|
|
—
|
|
|
$
|
0.08
|
|
|
$
|
8,130,564
|
|
Retirement per December 28, 2017 Exchange
Agreements
6
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
553,234
|
|
December 28, 2017 Exchange Agreements
6
|
|
|
123,708,735
|
|
|
|
—
|
|
|
$
|
0.02
|
|
|
$
|
2,474,174
|
|
Total
|
|
|
222,575,755
|
|
|
|
|
|
|
|
|
|
|
$
|
35,000,000
|
|
1
During the periods referenced above, the Company and the holders of the Notes agreed to a temporary reduction in the conversion price in order to encourage voluntary conversion of Notes by the holders thereof.
2
On July 2, 2017, the Company entered into an exchange agreement with one of its investors which had purchased Notes, for $4.2 million aggregate principal amount of such Notes for 4,200 shares of Series A Preferred Stock. The Series A Preferred Stock shares were issued to address a short-term valuation issue for 689,796 common shares delivered to the Notes holders to close an installment period. Through the Series A Preferred Shares placement, the Company was able to value the open installment shares such that the amount of debt remaining under the Notes was reduced by $4.2 million. Additionally, the Company recognized a loss on debt settlement of $1.0 million related to this transaction.
3
On August 28, 2017, the Company entered into a restructuring agreement with one of its investors which had purchased Notes. The restructuring agreement included a provision to exchange 117,171 shares for $1.2 million aggregate principal amount of such Notes. Additionally, the Company recognized a loss on debt settlement of $1.9 million related to this transaction.
4
On October 10, 2017, the Company entered into an amendment to the August 28, 2017 Restructuring Agreement which included a provision to exchange debt for the issuance of warrants. Additionally, the Company recognized a loss on debt extinguishment of $2.3 million.
5
On November 15, 2017, the Company entered into an exchange agreement which included a provision to exchange 973,764 shares for $0.6 million aggregate principal amount of such Notes. Additionally, the Company issued 96.5 million shares for $7.5 million aggregate principal amount of Notes under the updated conversion price formula as discussed in more detail above.
F-16
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
Additionally, the Company recognized a loss on
debt extinguishment of $21.0 million in connection with the issuance of the New Notes and warrants as part of such exchange.
6
On December 28, 2017, the Company entered into an exchange agreement to retire $0.6 million aggregate principal amount of Notes and to issue 123.7 million shares and rights for shares for the remaining $2.5 million aggregate principal amount of Notes. Additionally, the Company recognized a loss on debt extinguishment of $3.7 million.
(10)
|
Stockholders’ Equity
|
Reverse Stock Split
On November 6, 2017, the Company effected a reverse stock split at which time Delcath’s common stock began trading on the OTCQB on a one-for-three hundred and fifty (1:350) split-adjusted basis. All owners of record as of the open of the OTCQB market on November 6, 2017 received one issued and outstanding share of Delcath common stock in exchange for three hundred and fifty issued and outstanding shares of Delcath common stock. No fractional shares were issued in connected with the reverse stock split. All fractional shares created by the one-for-three hundred and fifty exchange were rounded up to the next whole share. The reverse stock split had no impact on the par value per share of Delcath common stock, which remains at $0.01. All current and prior period amounts related to shares, share prices and earnings per share, presented in the Company’s consolidated financial statements contained in this Annual Report on Form 10-K and the accompanying Notes have been restated to give retrospective presentation for the reverse stock split.
On July 19, 2016, shareholders of the Company approved, through a shareholder vote, an amendment to the Company’s Amended and Restated Certificate of Incorporation authorizing the Board of Directors to effect a reverse stock split of Delcath’s common stock at a ratio within a range of one-for-ten (1:10) to one-for-twenty (1:20). The reverse stock split became effective on July 21, 2016 at which time Delcath’s common stock began trading on the NASDAQ Stock Exchange on a one-for-sixteen (1:16) split-adjusted basis. All owners of record as of the open of the NASDAQ market on July 21, 2016 received one issued and outstanding share of Delcath common stock in exchange for sixteen issued and outstanding shares of Delcath common stock. No fractional shares were issued in connection with the reverse stock split. All fractional shares created by the one-for-sixteen exchange were rounded up to the next whole share. The reverse stock split had no impact on the par value per share of Delcath common stock, which remains at $0.01. All current and prior period amounts related to shares, share prices and earnings per share, presented in the Company’s consolidated financial statements contained in this Annual Report on Form 10-K and the accompanying Notes, have been restated to give retrospective presentation for the reverse stock split.
In addition, shareholders of the Company also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 170,000,000 to 500,000,000. The previously discussed reverse stock split had no impact on the increase in authorized shares.
Preferred Stock Issuances
Series A Preferred Stock
On June 29, 2017, the Company’s Board authorized the establishment of a new series of preferred stock designated as Series A Preferred Stock, $0.01 par value, the terms of which are set forth in the certificate of designations for such series of Preferred Stock (the “Series A Certificate of Designations”) which was filed with the State of Delaware on June 30, 2017 (together with any preferred shares issued in replacement thereof in accordance with the terms thereof, the “Series A Preferred Stock”). On July 2, 2017, the Company entered into an exchange agreement (the “Exchange”) with one of its investors which had purchased the Notes of $4.2 million aggregate principal amount of such Notes for 4,200 shares of Series A Preferred Stock (the “Series A Preferred Shares”). The Exchange was made in reliance upon the exemption from registration provided by Rule 3(a)(9) of the Securities Act of 1933, as amended. The Series A Preferred Shares were entitled to the whole number of votes equal to $4.2 million divided by $1,288.00 (the closing bid price on June 13, 2016, the date of issuance of the Notes) or 3,261 votes. The Series A Preferred Stock had no dividend, liquidation or other preferential rights to the Company’s common stock, and each share of Series A Preferred Stock was redeemed for the amount of $0.001, paid in cash pursuant to the Restructuring Agreement signed on August 28, 2017 and discussed in further detail in Note 9.
Series B Preferred Stock
F-17
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
On June 29, 2017, the Company’s Board authorized the establishment of a new series of preferred stock designated as Series B
Preferred Stock, $0.01 par value, the terms of which are set forth in the certificate of designations for such series of Preferred Stock (the “Series B Certificate of Designations”) which was filed with the State of Delaware on June 30, 2017 (together with
any preferred shares issued in replacement thereof in accordance with the terms thereof, the “Series B Preferred Stock”). On July 11, 2017, the Company entered into a securities purchase agreement with existing holders of Notes pursuant to which the inves
tors purchased $2,360,000 of Series B Preferred Stock for a cash purchase price of $2,000,000 in a private placement. The Series B Preferred Stock was entitled to the whole number of votes equal to $2.0 million divided by $65.35 (the closing bid price on J
uly 5, 2017, the date of the original securities purchase agreement for the Series B Preferred Stock), or 30,607 votes. The Series B Preferred Stock had no liquidation or other preferential rights (but had the redemption rights described below) to the Comp
any’s common stock and could have been converted into shares of common stock at a price equal to $53.55 per share upon the earlier of the date of closing to the extent that the holder thereof reallocated shares of our common stock reserved for issuance und
er its Notes to conversion of the Series B Preferred Shares and otherwise upon receipt of shareholder approval of the Reverse Stock Split. The Series B Preferred Stock allowed for optional redemption by the Company at any time after issuance or the holders
at any time after the tenth business day prior to the maturity date. In the instance of a Financing, the Company was required to redeem the Series B Preferred Stock. The $360,000 difference between the redemption amount and the cash purchase price of the
Series B Preferred Stock, as well as all issuance costs related to the Series B Preferred Stock, have been recorded as a deemed dividend. The Series B Preferred Stock was redeemed for $2,360,000 pursuant to the Restructuring Agreement signed on August 28,
2017 with one investor and upon a redemption notice from the second investor as discussed in further detail in Note 9.
Series C Preferred Stock
On September 12, 2017, the Company’s Board authorized the establishment of a new series of preferred stock designated as Series C Preferred Stock, $0.01 par value, the terms of which are set forth in the certificate of designations for such series of Preferred Stock which was filed with the State of Delaware on September 20, 2017. On September 21, 2017, the Company entered into a securities purchase agreement with the two investors which had purchased Notes of $0.5 million aggregate purchase price for 590 shares of Series C Preferred Stock. The purchase of the Series C Preferred Stock is being made in reliance upon the exemption from registration provided by Rule 4(a)(2) of the Securities Act of 1933, as amended. The Series C Preferred Stock shall be entitled to 1,484,061 votes and may only vote on approval of a reverse split of our outstanding common stock. The Series C Preferred Stock has no dividend, liquidation or other preferential rights to the Company’s common stock, and each share of Series C Preferred Stock shall be redeemable for the amount of $1,000.00, payable in cash per share at our written election, and must be redeemed no later than December 21, 2017. Because the Series C Preferred Stock was mandatorily redeemable, it has been recorded as a liability with the difference between the purchases price and the fair value being recognized over the term of the instrument. Additionally, all expenses related to the issuance of the Series C Preferred Stock are recognized as a debt discount and have been amortized over the term of the instrument. Per the terms of the October 22, 2017 Amendment to the Restructuring Agreement, the Series C Preferred Stock was redeemed for $590,000 on November 6, 2017.
Stock and Warrant Issuances
In October 2013, the Company completed the sale of 234 shares of its common stock and the issuance of warrants to purchase approximately 106 common shares (the “2013 Warrants”) pursuant to a placement agency agreement. The Company received proceeds of $7.5 million, with net cash proceeds after related expenses from this transaction of approximately $6.9 million. Of those proceeds, the Company allocated an estimated fair value of $1.9 million to the 2013 Warrants. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. At December 31, 2017, the 2013 Warrants were exercisable at $39,424 per share with 106 warrants outstanding. The 2013 Warrants have a five-year term.
In February 2015, the Company completed the sale of 440 shares of its common stock and the issuance of warrants to purchase 197 common shares (the “February 2015 Warrants”) pursuant to an underwriting agreement. The Company received proceeds of $2.6 million, with net cash proceeds after related expenses from this transaction of $2.5 million. Of those proceeds, the Company allocated an estimated fair value of $0.8 million to the February 2015 Warrants. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants is also subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. At December 31, 2017, the February 2015 Warrants were exercisable at $49.00 per share with approximately 92 warrants outstanding. The February 2015 Warrants have a five-year term. There were approximately 114 February 2015 Warrants exercised during the year ended December 31, 2016 for proceeds of approximately $0.1 million.
F-18
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
In July 2015, the Company completed the sale of approximately 1,670 Units consisting of 1,670 shares of its common stock, Series A Warrants to purchase up to approximately 1,253 common shares (“Series A Warrants”) and Series B Warrants to purchase Units consisting of up to approximately 1,670 million common shares (“Series B Warrants”) and 1,253 Series A Warrants pursuant to an underwriting agreement. The Company received proceeds of $7.0 million, with net cash proceeds after related expenses from this transaction of $6.0 million. Of those proceeds the Company allocated an estimated fair value of $3.4 million to the Series A and Series B Warrants. During the year ended December 31, 2016, approximately 399 Series B Warrants were exercised for net proceeds of approximately $0.8 million. The remaining 1,271 Series B Warrants expired on January 29, 2016 and the related liability was credited to Change in the fair value of the warrant liability. As a result of the Series B Warrant exercises, an additional 399 Series A Warrants were issued. The exercise price of the Series A Warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and is subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. At December 31, 2017, the July 2015 Series A Warrants were exercisable at $49.00 with approximately 541 million warrants outstanding. The Series A Warrants have a five-year term. There were approximately 300 July 2015 Series A Warrant exercised during the year ended December 31, 2017 for proceeds of approximately $15,000. There were approximately 700 July 2015 Series A Warrants exercised during the year ended December 31, 2016 for proceeds of $0.4 million.
In June 2016, the Company entered into a SPA pursuant to which the Company issued $35.0 million in principal face amount of the Notes and related Series C Warrants to purchase 19,368 additional shares of the Company’s common stock. The Company allocated an estimated fair value of $27.8 million to the Series C Warrants. Pursuant to the Warrant Repurchase Agreements, each investor agreed to a Controlled Account Release, in an aggregate amount equal to $7.9 million, which funds in each case are to be paid to the respective investor, in exchange for cancellation of the Series C Warrants issued to each investor under the SPA. During 2017, 112.2 million common shares and rights to receive 108.9 million common shares were issued to satisfy the Notes.
In October 2016, the Company completed the sale of 1,215 shares of its common stock and the issuance of warrants to purchase 425 common shares (the “October 2016 Warrants”) pursuant to an underwriting agreement. The Company received proceeds of $1.2 million, with net cash proceeds after related expenses from this transaction of $1.1 million. Of those proceeds, the Company allocated an estimated fair value of $0.3 million to the October 2016 Warrants. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants is also subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. For purposes of these adjustments, dilutive issuances do not include securities issued under existing instruments, under board-approved equity incentive plans or in certain strategic transactions. At December 31, 2017, the October 2016 Warrants were exercisable at $49.00 per share with 225 warrants outstanding. The October 2016 Warrants have a five-year term. There were 200 October 2016 Series C Warrants exercised during the year ended December 31, 2016 for proceeds of $0.1 million.
Pursuant to the October 10, 2017 Amendment to the Restructuring Agreement, 127,551 warrants were issued to each of the two investors from the June 2016 SPA on November 6, 2017 following the effectuation of the reverse stock split discussed earlier. The warrants contain a cashless exercise provision that allows the holders to exercise each warrant for three shares of common stock. The warrants have a 4.5 year term and an exercise price of $122.50. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants is also subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. For purposes of these adjustments, dilutive issuances do not include securities issued under existing instruments, under board-approved equity incentive plans or in certain strategic transactions. As of December 31, 2017, 122,551 warrants have been exercised resulting in the issuance of 367,653 common shares. 5,000 warrants remain outstanding at December 31, 2017.
In November 2017, the Company issued 7.0 million warrants pursuant to an Exchange Agreement entered into with each of the two investors from the June 2016 SPA. The Company allocated an estimated fair value of $14.4 million to the November 2017 Warrants. The exercise price is subject to adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants is also subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. For purposes of these adjustments, dilutive issuances do not include securities issued under existing instruments, under
F-19
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
board-approved equity incentive plans or in certain strategic transactions. At December 31, 2017, the November 2017 Warrants were exercisable at
$2.45 per share with 7.0 million warrants outstanding. The November 2017 Warrants have a five-year term from the date of exercisability.
In October 2015, the Company filed a registration statement on Form S-3 with the SEC, which was declared effective on October 20, 2015 and allows the Company to offer and sell, from time to time in one or more offerings, up to $71.8 million of common stock, preferred stock, warrants, debt securities and stock purchase contracts as it deems prudent or necessary to raise capital at a later date. The Company is not currently eligible to use its Form S-3.
Stock Incentive Plans
The Company established the 2004 Stock Incentive Plan and the 2009 Stock Incentive Plan (collectively, the “Plans”) under which 34 and 573 shares, respectively, have been reserved for the issuance of stock options, stock appreciation rights, restricted stock, stock grants and other equity awards. In July 2016, the total number of shares of Delcath common stock reserved for issuance under the 2009 Stock Incentive Plan was increased by 304 shares, from 269 to 573 shares, upon a favorable vote by the Company’s stockholders. The Plans are administered by the Compensation and Stock Option Committee of the Board of Directors which determines the individuals to whom awards shall be granted as well as the type, terms, conditions, option price and the duration of each award. As of December 31, 2017, there were 83
shares available to grant under the 2009 Stock Incentive Plan.
A stock option grant allows the holder of the option to purchase a share of the Company’s common stock in the future at a stated price. Options and Restricted Stock granted under the Plans vest as determined by the Company’s Compensation and Stock Option Committee. Options granted under the Plans expire over varying terms, but not more than ten years from the date of grant.
Stock option activity for 2017, 2016 and 2015 is as follows:
|
|
Stock Option Activity under the Plans
|
|
|
|
Stock Options
|
|
|
Exercise
Price
per
Share
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Life
(Years)
|
|
Outstanding at December 31, 2014
|
|
|
51
|
|
|
$6,944 - $1,372,672
|
|
|
$
|
132,328.00
|
|
|
|
8.83
|
|
Granted
|
|
|
94
|
|
|
|
6,664
|
|
|
|
6,664.00
|
|
|
|
|
|
Forfeited
|
|
|
(9
|
)
|
|
6,664-949,760
|
|
|
|
168,056.00
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
136
|
|
|
$6,664-$1,372,672
|
|
|
$
|
42,840.00
|
|
|
|
8.95
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
(48
|
)
|
|
6,664-190,848
|
|
|
|
8,382.50
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
88
|
|
|
$6,644-$1,326,080
|
|
|
$
|
12,815.73
|
|
|
|
7.90
|
|
Granted
|
|
|
42
|
|
|
$
|
84.00
|
|
|
$
|
84.00
|
|
|
|
|
|
Forfeited
|
|
|
(3
|
)
|
|
$
|
6,664.00
|
|
|
$
|
6,664.00
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
127
|
|
|
$84.00-$381,696.00
|
|
|
$
|
8,750.55
|
|
|
|
7.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
|
75
|
|
|
$6,664.00 - $381,696.00
|
|
|
$
|
13,882.03
|
|
|
|
7.10
|
|
For the years ended December 31, 2017, 2016 and 2015 the Company recognized compensation expense related to stock option grants of approximately $0.1 million, $0.2 million and $0.3 million, respectively.
F-20
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
The estimated fair value of each option award granted was determined on the date of grant using an opti
on pricing model with the following assumptions for option grants made in 2017 and 2015. There were no option grants during 2016.
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2015
|
|
Weighted average risk-free interest rates
|
|
|
2.15
|
%
|
|
|
1.82
|
%
|
Weighted average expected volatility
|
|
|
170.42
|
%
|
|
|
97.70
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Weighted average expected option term (in years)
|
|
|
7.29
|
|
|
|
5.15
|
|
Weighted average grant date fair value
|
|
$
|
82.34
|
|
|
$
|
4,964.73
|
|
No dividend yield was assumed because the Company has never paid a cash dividend on its common stock and does not expect to pay dividends in the foreseeable future. Volatilities were developed using the Company’s historical volatility. The risk-free interest rate was developed using the U.S. Treasury yield for periods equal to the expected life of the stock options on the grant date. The expected option term is based on actual historical results.
A summary of the Company’s non-vested options to purchase shares as of December 31, 2017 and changes during the years ended December 31, 2017 and December 31, 2016 are presented below:
|
|
Non-Vested Options
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Non-vested at December 31, 2015
|
|
|
101
|
|
|
$
|
7,892.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(45
|
)
|
|
|
9,397.50
|
|
Forfeited
|
|
|
(114
|
)
|
|
|
6,730.50
|
|
Non-vested at December 31, 2016
|
|
|
25
|
|
|
$
|
6,686.40
|
|
Granted
|
|
|
42
|
|
|
|
84
|
|
Vested
|
|
|
(13
|
)
|
|
|
6,707.08
|
|
Forfeited
|
|
|
(2
|
)
|
|
|
6,664.00
|
|
Non-vested at December 31, 2017
|
|
|
52
|
|
|
$
|
1,349.38
|
|
Additional compensation expense of approximately $6,800, relating to the unvested portion of stock options granted, is expected to be recognized over a remaining average period of 0.42 years.
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2017 is $0. The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $0.9 as of December 31, 2017, which would have been received by the option holders had those option holders exercised their options as of that date.
F-21
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
A summary of the Company’s restricted stock activity as of December 31, 2017 and changes during the years ended December 31, 2017 and December 31, 2016 are presented below:
|
|
Restricted Stock Activity
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2015
|
|
|
103
|
|
|
$
|
6,664.00
|
|
Granted
|
|
|
13
|
|
|
|
1,512.00
|
|
Vested
|
|
|
(55
|
)
|
|
|
5,404.00
|
|
Forfeited
|
|
|
(15
|
)
|
|
|
6,664.00
|
|
Non-vested at December 31, 2016
|
|
|
46
|
|
|
$
|
6,664.00
|
|
Granted
|
|
|
261
|
|
|
|
84.00
|
|
Vested
|
|
|
(24
|
)
|
|
|
6,664.00
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested at December 31, 2017
|
|
|
283
|
|
|
$
|
595.52
|
|
For the three years ended December 31, 2017, 2016 and 2015 the Company recognized compensation expense related to restricted stock grants of approximately $0.1 million, $0.3 and $0.3 million, respectively. Additional compensation expense of approximately $23,600 relating to the unvested portion of restricted stock granted is expected to be recognized over a remaining average period of 0.4 years.
Warrants
The Company issued warrants as part of its offerings in 2013, 2015, and 2016 as well as part of its issuance of convertible notes in 2016 and an exchange agreement in 2017. A summary of warrant activity is as follows:
|
|
Warrants
|
|
|
Exercise
Price
per Share
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Outstanding at January 1, 2014
|
|
|
152
|
|
|
$9,800-$39,424
|
|
$
|
30,341.76
|
|
|
|
2.78
|
|
Issued
|
|
|
3,120
|
|
|
|
|
|
4,480.00
|
|
|
|
|
|
Exercised
|
|
|
(39
|
)
|
|
|
|
|
4,592.00
|
|
|
|
|
|
Expired
|
|
|
(8
|
)
|
|
|
|
|
4,592.00
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
3,224
|
|
|
$4,144-$39,424
|
|
$
|
5,607.33
|
|
|
|
2.16
|
|
Issued
|
|
|
20,091
|
|
|
|
|
|
1,680.00
|
|
|
|
|
|
Exercised
|
|
|
(1,428
|
)
|
|
|
|
|
963.00
|
|
|
|
|
|
Expired
|
|
|
(1,271
|
)
|
|
|
|
|
1,988.00
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
20,616
|
|
|
$563.50-$39,424
|
|
$
|
1,820.00
|
|
|
|
5.59
|
|
Issued
|
|
|
7,127,551
|
|
|
|
|
|
4.60
|
|
|
|
|
|
Exercised
|
|
|
(122,848
|
)
|
|
|
|
|
8.44
|
|
|
|
|
|
Expired
|
|
|
(19,367
|
)
|
|
|
|
|
1,690.50
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
7,005,952
|
|
|
$2.45-$39,424
|
|
$
|
3.14
|
|
|
|
4.88
|
|
(11)
|
Fair Value Measurements
|
Derivative Financial Instruments
As disclosed in Note 10 of the Company’s consolidated financial statements contained in this Annual Report on Form 10-K, the Company allocated part of the proceeds of public offerings in 2013, 2015 and 2016 of the Company’s common stock to warrants issued in connection with those transactions. In addition, the Company recognized a discount to debt related to the
F-22
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
initial fa
ir value of warrants issued in connection with the June 2016 Convertible Notes
and allocated an estimated fair value of $14.4 million to warrants issued pursuant to an exchange agreement signed in November 2017
discussed in further detail in Note 9 of the
Company’s consolidated financial statements contained in this Annual Report on Form 10-K
. The valuations of the October 2013, February 2015, July 2015 Series A, October 2016 and November 2017 Warrants (collectively, the “Warrants”) were determined using op
tion pricing models. These models use inputs such as the underlying price of the shares issued at the measurement date, volatility, risk free interest rate and expected life of the instrument.
The Company has classified the Warrants as a current liability
due to certain provisions relating to price adjustments and potential cash payments, as well as the holders’ ability to exercise the warrants within twelve months of the reporting date
and has accounted for them as derivative instruments in accordance with
ASC 815, adjusting the fair value at the end of each reporting period. Additionally, the Company has determined that the warrant derivative liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option p
ricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820. There are six inputs: closing price of Delcath stock on the day of evaluation; the exercise
price of the warrants; the remaining term of the warrants; the volatility of Delcath’s stock over that term; annual rate of dividends; and the risk-free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily
observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of Delcath stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in
an active market (ASC 820-10). The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, Delcath determined the warrant der
ivative liability is most appropriately classified within Level 3 of the fair value hierarchy.
For the year ended December 31, 2017, the Company recorded pre-tax derivative instrument income of $15.1 million. The resulting derivative instrument liabilities totaled $0.6 million at December 31, 2017. Management expects that the Warrants will either be exercised or expire worthless. The fair value of the Warrants at December 31, 2017 was determined by using option pricing models assuming the following:
|
|
November 2017
Warrants
|
|
|
October 2016
Warrants
|
|
|
July 2015 Series A Warrants
|
|
|
February 2015
Warrants
|
|
|
October 2013
Warrants
|
|
Expected volatility
|
|
217.39%
|
|
|
130.88%
|
|
|
161.87%
|
|
|
169.95%
|
|
|
266.92%
|
|
Risk free interest rates
|
|
1.98%
|
|
|
2.06%
|
|
|
1.94%
|
|
|
1.90%
|
|
|
1.68%
|
|
Expected life (in years)
|
|
|
4.88
|
|
|
|
3.76
|
|
|
|
2.56
|
|
|
|
2.13
|
|
|
|
0.82
|
|
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016, 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,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instrument liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
560
|
|
|
$
|
18,751
|
|
|
$
|
560
|
|
|
$
|
18,751
|
|
F-23
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
Fair Value M
easurements Using Significant Unobservable
Inputs (Level 3)
(in thousands)
|
|
Warrant Liability
|
|
Balance at January 1, 2015
|
|
$
|
225
|
|
Total change in the liability included in earnings
|
|
|
(564
|
)
|
Fair value of warrants issued
|
|
|
4,247
|
|
Fair value of warrants exercised
|
|
|
(123
|
)
|
Balance at December 31, 2015
|
|
|
3,785
|
|
Total change in the liability included in earnings
|
|
|
(12,780
|
)
|
Fair value of warrants issued
|
|
|
28,472
|
|
Fair value of warrants exercised
|
|
|
(726
|
)
|
Balance at December 31, 2016
|
|
$
|
18,751
|
|
Total change in the liability included in earnings
|
|
|
(15,103
|
)
|
Extinguishment of convertible note warrant
|
|
|
(17,489
|
)
|
Fair value of warrants issued
|
|
|
16,953
|
|
Fair value of warrants exercised
|
|
|
(2,552
|
)
|
Balance at December 31, 2017
|
|
$
|
560
|
|
Operating Leases
In February 2010, the Company entered into an agreement to lease (Initial Lease) 8,629 square feet of office space at 810 Seventh Avenue, New York, NY with an option to expand an additional 8,629 square feet. The term of the Initial Lease began in March, 2010. In September 2010, the Company exercised its option right under the Initial Lease and entered into an agreement to lease (Lease Amendment) an additional 8,629 square feet of office space. The term of the Lease Amendment began in January 2011 and will expire in March 2021. In addition, the Lease Amendment extends the term of the Initial Lease to March 2021. The Initial Lease and the Lease Amendment provide for annual rent of $996,000 in 2015, $1.0 million in 2016, and $1.1 million in 2017-2020. As discussed in Note 8, the Company has sub-leased this office space.
In August 2011, Delcath Systems Limited entered into an agreement of lease for an office and manufacturing facility located in the city of Galway, Ireland. This facility is approximately 19,200 square feet and is intended to be the location of Delcath’s European headquarters. The Lease is for a term of ten years, commencing August, 2011. The Lease provides for fixed annual lease amounts payable in advance in equal quarterly installments. The remaining annual lease amount is (USD conversion is based on the December 31, 2017 conversion rate):– €183,179 ($143,726). Delcath Limited is also required to pay for customary building operating expenses. Delcath Limited’s payment obligations and performance of the Lease are guaranteed by Delcath. The Company has sub-leased a portion of this facility.
In March 2016, the Company entered into a sub-lease agreement to lease approximately 6,877 square feet of office space at 1633 Broadway, New York, NY. The term began in April 2016 and is effective through March 2019. The agreement provides for total annual base rent of $522,652.
In October 2016, the Company entered into a lease agreement for 95-97 Park Road in Queensbury, NY, agreeing to lease the 6,000 square feet at that location. The term began on November 1, 2016 and was effective for a two year period. The agreement provides for total annual base rent of $48,223 and will expire October 2018.
F-24
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
Future
minimum lease payments, net of receipts due under the terms of subleases, under all operating leases at December 31, 2017 are as follows:
(in thousands)
|
|
Future
Lease
Payment
|
|
2018
|
|
|
872
|
|
2019
|
|
|
501
|
|
2020
|
|
|
456
|
|
2021
|
|
|
281
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
|
|
$
|
2,110
|
|
For the years ended December 31, 2017, 2016, and 2015 rent expense totaled approximately $0.6 million, $0.5 million and $0.4 million, respectively.
Letters of Credit
Under the terms of the lease agreement for office space at 810 Seventh Avenue, New York, NY, the Company is required to maintain a letter of credit in the amount of $881,297 which will expire in February 2019 if not renewed by the Company. 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 $130,663 which will expire with the sublease in March 2019.
There is no income tax provision for the years ended December 31, 2017, 2016 and 2015.
Income (loss) before income taxes consists of:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
(41,313
|
)
|
|
$
|
(13,930
|
)
|
|
$
|
(11,276
|
)
|
Foreign
|
|
|
(3,804
|
)
|
|
|
(4,040
|
)
|
|
|
(3,428
|
)
|
Income (loss) before taxes
|
|
$
|
(45,117
|
)
|
|
$
|
(17,970
|
)
|
|
$
|
(14,704
|
)
|
The provision for income taxes differs from the amount computed by applying the statutory rate as follows:
F-25
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income taxes using U.S federal statutory rate
|
|
$
|
(15,340
|
)
|
|
$
|
(6,110
|
)
|
|
$
|
(4,999
|
)
|
Tax Cuts and Jobs Act
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
Nondeductible interest
|
|
|
6,912
|
|
|
|
—
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
10,174
|
|
|
|
|
|
|
|
|
|
Loss of tax benefit of federal net operating loss
carryforwards
|
|
|
5,067
|
|
|
|
68,795
|
|
|
|
—
|
|
Loss of tax benefit of state net operating loss
carryforwards
|
|
|
1,373
|
|
|
|
13,891
|
|
|
|
—
|
|
Loss of tax benefit of federal tax credit carryforwards
|
|
|
324
|
|
|
|
4,023
|
|
|
|
—
|
|
Amortization of gain on IP migration
|
|
|
767
|
|
|
|
767
|
|
|
|
767
|
|
State income taxes, net of federal benefit
|
|
|
(1,339
|
)
|
|
|
(2,576
|
)
|
|
|
380
|
|
Foreign rate differential
|
|
|
1,196
|
|
|
|
1,141
|
|
|
|
920
|
|
Valuation allowance
|
|
|
(1,423
|
)
|
|
|
(75,407
|
)
|
|
|
2,649
|
|
Derivative charge
|
|
|
(8,403
|
)
|
|
|
(4,345
|
)
|
|
|
(192
|
)
|
Stock option exercises and cancellations
|
|
|
841
|
|
|
|
53
|
|
|
|
674
|
|
Research and development costs
|
|
|
(295
|
)
|
|
|
(250
|
)
|
|
|
(199
|
)
|
Other
|
|
|
3
|
|
|
|
18
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Significant components of the Company’s deferred tax assets are as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation accruals
|
|
$
|
292
|
|
|
$
|
1,386
|
|
|
$
|
1,279
|
|
Accrued liabilities
|
|
|
353
|
|
|
|
343
|
|
|
|
633
|
|
Research tax credits
|
|
|
17
|
|
|
|
22
|
|
|
|
3,796
|
|
Other
|
|
|
34
|
|
|
|
55
|
|
|
|
66
|
|
Net operating losses
|
|
|
5,289
|
|
|
|
6,194
|
|
|
|
77,906
|
|
Total deferred tax assets
|
|
|
5,985
|
|
|
|
8,000
|
|
|
|
83,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
|
|
|
—
|
|
|
|
906
|
|
|
|
—
|
|
Other
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
13
|
|
|
|
906
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
5,972
|
|
|
|
7,094
|
|
|
|
83,680
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of December 31, 2017, 2016 and 2015, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $211.3 million, $209.3 million and $184.5 million, respectively. A significant portion of the federal amount, $210.5 million, is subject to an annual limitation of approximately $27,500 as a result of a changes in the Company’s ownership in May 2003, November 2016 and multiple dates throughout 2017, as defined by Federal Internal Revenue Code Section 382 and the related income tax regulations. As a result of the limitations caused by the May 2003, November 2016 and multiple 2017 ownership changes, approximately $209.5 million of the total net operating loss carryforwards is expected to expire unutilized and will be unavailable to offset future federal taxable income. Approximately $1.0 million of net operating loss carryforwards remains available to offset future federal taxable income which will expire between 2018 and 2037. In addition, the Company’s state net operating losses are also subject to annual limitations that generally follow the federal Section 382 provisions (with the exception of Connecticut), adjusted for each state’s respective income apportionment percentages. As of December 31, 2017 and 2016, the Company had net operating loss carryforwards for state and city income tax purposes between approximately $27.3 million and $150.3 million and between approximately $27.3 million and $153.0, respectively,
F-26
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
which expire through 2037. As a result of the 382 limitations, approximately $149.0 million and $133.3 million of New York State and New York City net operating losses are expected to expire unutilized and will be unavailable to offset f
uture taxable income. Approximately $0.8 million and $0.8 million of net operating loss carryforwards, respectively, will be available to offset future state and city taxable income. As of December 31, 2017, 2016 and 2015, the Company had a net operating l
oss carryforward for foreign income tax purposes of $25.0 million, $21.1 million and $22.1 million, respectively, which have indefinite carryforward periods. As of December 31, 2017, 2016 and 2015, the Company had federal research and development tax credi
t carryforwards of approximately $4.3 million, $4.0 million and $3.8 million, respectively, which expire through 2037. As a result of the section 382 limitation, the entire tax credit carryforward 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 decreased by approximately $1.1 million and $76.6 million in 2017 and 2016, respectively. The primary reason for the significant decrease in the valuation allowance during 2016 is due to the reduction of recognizable deferred tax assets related net operating loss and credit carryforwards resulting from the Sec. 382 ownership change. The change in valuation allowance is as follows:
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Beginning balance
|
|
$
|
7,094
|
|
|
$
|
83,680
|
|
Charged to costs and expenses
|
|
|
(1,423
|
)
|
|
|
(75,407
|
)
|
Charged to additional paid-in capital
|
|
|
—
|
|
|
|
(1,854
|
)
|
Charged to retained earnings
|
|
|
—
|
|
|
|
1,010
|
|
Charged to other comprehensive income
|
|
|
301
|
|
|
|
(335
|
)
|
Ending balance
|
|
$
|
5,972
|
|
|
$
|
7,094
|
|
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other provisions, reducing the maximum U.S. corporate income tax rate from 35% to 21% starting in 2018. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. The Company is continuing to assess the impact from the Act and will record adjustments in 2018 if necessary.
During the year ended December 31, 2017, the Company reduced deferred tax assets by a provisional amount of $143,500, offset by a corresponding reduction to its valuation allowance, as a result of the re-measurement of deferred tax assets and liabilities from its 34% effective rate under existing law to the new lower statutory rate of 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The Act also requires a mandatory one-time inclusion of the deferred foreign income of controlled foreign corporations. The one-time transition tax is based on Delcath’s total post-1986 earnings and profits (E&P) for which the Company has previously deferred from U.S. income taxes. The Company’s reasonable estimate resulted in no provisional amount for the one-time transition tax liability, as the Company’s international subsidiaries are expected to have a cumulative deficit in E&P. Delcath has not yet completed its calculation of the total post-1986 foreign E&P (including deficits) for these foreign subsidiaries. As the Company’s international subsidiaries have a cumulative deficit in earnings and profits, the Company does not anticipate being affected by the mandatory inclusion provisions of the Act.
On December, 22, 2017, SAB 118 was issued due to the complexities involved in accounting for the recently enacted Act. SAB 118 requires the Company to include in its financial statements a reasonable estimate of the impact of the Act on earnings to the extent such estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118. The Company is continuing to assess the impact from the Act and will record adjustments in 2018 if necessary.
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
F-27
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
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 rollfoward 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. During the third quarter of 2015, the Internal Revenue Service commenced an examination of the Company’s federal income tax return for the year ended December 31, 2013. The examination was completed in the third quarter of 2017 and no changes were made to the reported amounts. Accordingly, there was no effect on the financial statements as a result of the examination. 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, 2014; tax years ending December 31, 2014 through December 31, 2017 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, 2013 (as Ireland has not initiated an audit of 2012 as of December 31, 2017); tax years ending December 31, 2013 through December 31, 2017 remain open to examination. However, the Company’s tax years December 31, 1998 through December 31, 2017 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.
Delcath recognizes interest accrued related to unrecognized tax benefits and penalties, if incurred, as a component of income tax expense.
(14)
|
Quarterly Financial Data (Unaudited)
|
Set forth below is selected quarterly financial data for each of the quarters in the years ended December 31, 2017 and 2016.
|
|
2017 Quarters Ended
|
|
(in thousands, except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenue
|
|
$
|
743
|
|
|
$
|
584
|
|
|
$
|
684
|
|
|
$
|
704
|
|
Costs and expenses
|
|
|
4,736
|
|
|
|
5,050
|
|
|
|
5,139
|
|
|
|
5,254
|
|
Operating loss
|
|
|
(4,212
|
)
|
|
|
(4,601
|
)
|
|
|
(4,627
|
)
|
|
|
(4,725
|
)
|
Net loss
|
|
|
(11,332
|
)
|
|
|
(1,943
|
)
|
|
|
(12,596
|
)
|
|
|
(19,246
|
)
|
Basic loss per share
|
|
|
(87.50
|
)
|
|
|
(3.50
|
)
|
|
|
(9.36
|
)
|
|
|
(0.75
|
)
|
|
|
2016 Quarters Ended
|
|
(in thousands, except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenue
|
|
$
|
370
|
|
|
$
|
511
|
|
|
$
|
435
|
|
|
$
|
676
|
|
Costs and expenses
|
|
|
3,721
|
|
|
|
4,232
|
|
|
|
5,047
|
|
|
|
4,882
|
|
Operating loss
|
|
|
(3,462
|
)
|
|
|
(3,871
|
)
|
|
|
(4,724
|
)
|
|
|
(4,383
|
)
|
Net loss
|
|
|
(1,813
|
)
|
|
|
(6,667
|
)
|
|
|
(1,004
|
)
|
|
|
(8,486
|
)
|
Basic loss per share
|
|
|
(437.50
|
)
|
|
|
(1,543.50
|
)
|
|
|
(230.99
|
)
|
|
|
(1,292.02
|
)
|
As of January 25, 2018, all of the Rights issued under the December 28, 2017 Exchange Agreements discussed in more detail in Note 9 to the Company’s consolidated financial statements contained in this Annual Report on Form 10-K have been exercised resulting in the issuance of 108.9 million shares.
F-28
DELCATH SYSTEMS, INC.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2017, 2016 and 2015
On February 9, 2018, the Company closed a registered offering of 212,000,000 shares of common stock, 38,000,000 pre-funded warrants to purchase 38,0
00,000 shares of common stock and Series D warrants to purchase an aggregate of 500,000,000 shares of common stock for total gross proceeds of approximately $5.0 million. The offering was priced at $0.02 per unit with each unit comprised of one share of co
mmon stock (or one pre-funded warrant) and one common stock purchase warrant to purchase two shares, provided that, with respect to the units with pre-funded warrants $0.019 per unit shall be paid at closing and $0.001 shall be paid upon exercise of each o
f the pre-funded warrants. The warrants carry a five-year term from the date of initial exercisability (which is later of one year from the date of issuance and date of amendment to articles of incorporation to increase number of authorized shares of commo
n stock) with an exercise price of $0.02 per share. The securities were offered pursuant to a registration statement on Form S-1 (File No. 333-220898) previously filed with the Securities and Exchange Commission (the “SEC”) and declared effective on Februa
ry 7, 2018. After consummation of this offering, the Company has 434,981,824 shares of its common stock issued and outstanding.
On February 26, 2018, the Company filed a Definitive Proxy Statement on Schedule 14A seeking shareholder approval to increase its authorized shares of common stock from 500,000,000 to 1,000,000,000 in order to have sufficient authorized shares for full exercise of its recently issued Series D Warrants and for a reverse split of its common stock at a ratio of at least 1:100 but no more than 1:500,
in the discretion of the Board of Directors and to grant authorization to the Board of Directors to determine, in its sole discretion, whether to implement the reverse stock split, as well as its specific timing (but not later than April 6, 2019).
F-29