10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM

10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

001-16133

DELCATH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware				06-1245881
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

1633 Broadway, Suite 22C

New York, NY 10019

(Address of principal executive offices)

(212)

489-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	DCTH	The NASDAQ Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ No ☒

As of May

, 2023, 10,620,813 shares of the Company’s common stock, $0.01 par value, were outstanding.

DELCATH SYSTEMS, INC.

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		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022		3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022		4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022		5

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022		6

	Notes to the Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		24

PART II—OTHER INFORMATION			25

Item 1.	Legal Proceedings		25

Item 1A.	Risk Factors		25

Item 6.	Exhibits		26

SIGNATURES			27

DELCATH SYSTEMS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)


	March 31,			December 31,
	2023			2022
Assets
Current assets
Cash and cash equivalents	$	24,222		$	7,671
Restricted cash		50			4,151
Accounts receivable, net		458			366
Inventories		2,337			1,998
Prepaid expenses and other current assets		1,955			1,969

Total current assets		29,022			16,155
Property, plant and equipment, net		1,392			1,422
Right-of-use assets		185			285

Total assets	$	30,599		$	17,862

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,428		$	2,018
Accrued expenses		7,120			4,685
Lease liabilities, current		93			186
Loan payable, current		3,770			7,846

Total current liabilities		13,411			14,735
Warrant liability		4,940			—
Other liabilities, non-current		1,158			1,144
Loan payable, non-current		992			3,070
Convertible notes payable, non-current		4,806			4,772

Total liabilities		25,307			23,721

Commitments and contingencies		—			—
Mezzanine equity
Preferred F-1 stock, $0.01 par value; 24,900 shares designated ; 24,900 shares and 0 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		18,368			—
Stockholders’ equity (deficit)
Preferred stock, $0.01 par value; 10,000,000 shares authorized; 11,357 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		—			—
Common stock, $ .01 par value; 40,000,000 shares authorized; 10,081,634 shares and 10,046,571 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		101			100
Additional paid-in capital		453,370			451,608
Accumulated deficit		(466,483	)		(457,484	)
Accumulated other comprehensive loss		(64	)		(83	)

Total stockholders’ equity (deficit)		(13,076	)		(5,859	)

Total liabilities and stockholders’ equity	$	30,599		$	17,862

See accompanying Notes to Condensed Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share data)


	Three months ended March 31,
	2023			2022
Product revenue	$	597		$	207
Other revenue		—			171

Total revenues		597			378
Cost of goods sold		(181	)		(33	)

Gross profit		416			345

Operating expenses:
Research and development expenses		4,576			4,481
Selling, general and administrative expenses		4,165			4,204

Total operating expenses		8,741			8,685

Operating loss		(8,325	)		(8,340	)
Interest expense, net		(688	)		(645	)
Other income (expense)		13			(15	)

Net loss		(9,000	)		(9,000	)
Other comprehensive income:
Foreign currency translation adjustments		19			2

Total other comprehensive loss	$	(8,981	)	$	(8,998	)

Common share data:
Basic and diluted loss per common share	$	(0.77	)	$	(1.10	)

Weighted average number of basic and diluted shares outstanding		11,622,384			8,190,483

See accompanying Notes to Condensed Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)


	Three Months ended March 31, 2023
	Preferred Stock				Common Stock
	$0.01 Par Value				$0.01 Par Value
	No. of Shares		Amount		No. of Shares		Amount		Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balance at January 1, 2023		11,357	$	—		10,046,571	$	100	$	451,607	$	(457,483	)	$	(83	)	$	(5,859	)
Compensation expense for issuance of stock options		—		—		—		—		1,661		—			—			1,661
Private placement -issuance of common shares, net of expenses		—		—		19,646		1		55		—			—			56
Issuance of common stock with the employee stock purchase plan		—		—		15,417		—		47		—			—			47
Net loss		—		—		—		—		—		(9,000	)		—			(9,000	)
Total comprehensive income		—		—		—		—		—		—			19			19

Balance at March 31, 2023		11,357	$	—		10,081,634	$	101	$	453,370	$	(466,483	)	$	(64	)	$	(13,076	)


	Three Months ended March 31, 2022
	Preferred Stock				Common Stock
	$0.01 Par Value				$0.01 Par Value
	No. of Shares		Amount		No. of Shares		Amount		Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total

Balance at January 1, 2022		11,357	$	—		7,906,728	$	79	$	432,831	$	(420,976	)	$	18	$	11,952
Compensation expense for issuance of stock options		—		—		—		—		2,271					—		2,271
Net loss		—		—		—		—		—		(9,000	)		—		(9,000	)
Total comprehensive income		—		—		—		—		—		—			2		2

Balance at March 31, 2022		11,357	$	—		7,906,728	$	79	$	435,102	$	(429,976	)	$	20	$	5,225

See accompanying Notes to Condensed Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	For Three Months Ended March 31,
	2023			2022
Cash flows from operating activities:
Net loss	$	(9,000	)	$	(9,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock option compensation expense		1,661			2,271
Depreciation expense		30			31
Non-cash lease expense		100			97
Amortization of debt discount		194			194
Interest expense accrued related to convertible notes		27			40
Changes in assets and liabilities:
Decrease in prepaid expenses and other assets		14			39
Increase in accounts receivable		(92	)		(134	)
Increase in inventories		(339	)		(599	)
Increase in accounts payable and accrued expenses		3,221			953
Decrease in other liabilities, non-current		(80	)		(97	)
Decrease in deferred revenue		—			(170	)

Net cash used in operating activities		(4,264	)		(6,375	)

Cash flows from investing activities:
Purchase of property, plant and equipment		—			(89	)

Net cash used in investing activities		—			(89	)

Cash flows from financing activities:
Net proceeds from private placement		22,960			—
Proceeds from the issuance of common stock relating to the employee stock purchase plan		47			—
Repayment of debt		(6,313	)		—

Net cash provided by financing activities		16,694			—

Foreign currency effects on cash		20			2

Net increase (decrease) in total cash		12,450			(6,462	)
Total Cash, Cash Equivalents and Restricted Cash:
Beginning of period		11,822			26,953

End of period	$	24,272		$	20,491

Cash, Cash Equivalents and Restricted Cash consisted of the following:
Cash	$	24,222		$	16,340
Restricted Cash		50			4,151

Total	$	24,272		$	20,491


	For Three Months Ended March 31,
	2023		2022
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest expense	$	491	$	411

See accompanying Notes to Condensed Consolidated Financial Statements.

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DELCATH SYSTEMS, INC.

Notes to the Condensed Consolidated Financial Statements

(amounts in thousands, except share and per share amounts)

(1)

General

The unaudited interim condensed consolidated financial statements of Delcath Systems, Inc. (“Delcath” or the “Company”) as of and for the three months ended March 31, 2023 and 2022 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form

10-K

for the fiscal year ended December 31, 2022 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2023 and may also be found on the Company’s website (www.delcath.com). In these notes to the interim condensed consolidated financial statements the terms “us”, “we” or “our” refer to Delcath and its consolidated subsidiaries.

Description of Business

The Company is an interventional oncology company focused on the treatment of primary and metastatic liver cancers. The Company’s lead product candidate, the HEPZATO

KIT (melphalan hydrochloride for injection/hepatic delivery system), or HEPZATO, is a drug/device combination product designed to administer high-dose chemotherapy to the liver while controlling systemic exposure and associated side effects. In Europe, the hepatic delivery system is a stand-alone medical device having the same device components as HEPZATO but without the melphalan hydrochloride and is approved for sale under the trade name CHEMOSAT Hepatic Delivery System for Melphalan, or CHEMOSAT, where it has been used at major medical centers to treat a wide range of cancers of the liver.

In the United States, HEPZATO is considered a combination drug and device product and is regulated as a drug by the United States Food and Drug Administration (the “FDA”). Primary jurisdiction for regulation of HEPZATO has been assigned to the FDA’s Center for Drug Evaluation and Research. The FDA has granted Delcath six orphan drug designations (five for melphalan in the treatment of patients with ocular (uveal) melanoma, cutaneous melanoma, intrahepatic cholangiocarcinoma, hepatocellular carcinoma, and neuroendocrine tumor indications and one for doxorubicin in the treatment of patients with hepatocellular carcinoma). HEPZATO has not been approved for sale in the United States.

The Company’s clinical development program for HEPZATO is comprised of the FOCUS Clinical Trial for Patients with Hepatic Dominant Ocular Melanoma (the “FOCUS Trial”), a global registration clinical trial that is investigating objective response rate in metastatic ocular melanoma (“mOM”), a type of primary liver cancer. The Company’s most advanced development program is the treatment of mOM. The Company is currently reviewing the incidence, unmet need, available efficacy data and development requirements for a broad set of liver cancers in order to select a portfolio of

follow-on

indications that will maximize the value of the HEPZATO platform. In addition to HEPZATO’s use to treat mOM, the Company believes that HEPZATO has the potential to treat other liver dominant cancers, such as Metastatic Colorectal Cancer and Cholangiocarcinoma, and plans to begin the study of HEPZATO to treat such conditions in the near future. The Company believes that the disease states we are investigating and intend to investigate are unmet medical needs that represent significant market opportunities.

In December 2021, the Company announced that the FOCUS Trial for HEPZATO met its

pre-specified

endpoint. For information on the FOCUS Trial, see “Part I, Item 1. Business—Clinical Development Program—The FOCUS Trial” in our Annual Report.

On February 14, 2023, the Company filed a New Drug Application (“NDA”) resubmission (the “NDA resubmission”) with the FDA for the HEPZATO Kit (melphalan hydrochloride for Injection/Hepatic Delivery System) seeking approval of the HEPZATO Kit in the treatment of patients with unresectable hepatic-dominant mOM. The resubmission was in response to a September 12, 2013 Complete Response Letter (“CRL”) from the FDA for the Company’s NDA in December 2010 seeking approval of its first generation melphalan hydrochloride for injection/hepatic delivery system. The NDA resubmission contains comprehensive data and information on Generation Two HEPZATO Kit relating to the matters identified in the CRL. On March 20, 2023, the FDA determined the NDA resubmission constituted a complete response and set a Prescription Drug User Fee Act target action date of August 14, 2023. The Company continues to promote its early access programs in the United States to make HEPZATO readily available to mOM patients. The Company is focused on continuing to treat these patients with mOM as regulatory approval is sought in the United States. There are currently patients enrolled in our early access program sites.

On February 28, 2022, CHEMOSAT received Medical Device Regulation (“MDR”) certification under the European Medical Devices Regulation [2017/745/EU], which may be considered by jurisdictions when evaluating reimbursement. As of March 1, 2022, the Company has assumed direct responsibility for sales, marketing and distribution of CHEMOSAT in Europe.

Risks and Uncertainties

While the long-term economic impact of either the

COVID-19

pandemic or the conflict between Russia and Ukraine is difficult to assess or predict, each of these events has caused significant disruptions to the global financial markets and contributed to a general global economic slowdown. Furthermore, inflation rates, particularly in the United States and the United Kingdom, have increased recently to levels not seen in decades. In addition, the U.S. Federal Reserve has raised interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may further increase economic uncertainty and heighten these risks. Recent bank failures, including Silicon Valley Bank (“SVB”), Signature Bank and First Republic Bank, may also have an impact on the Company’s liquidity and capital resources. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. If the

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disruptions and slowdown deepen or persist, we may not be able to access additional capital on favorable terms, or at all, which could in the future negatively affect our ability to pursue our business strategy. See “Risk Factors” in “Par

t I –

Item 1A – Risk Factors” in the Company’s Annual Report for additional risks associated with its substantial capital requirements.

Liquidity and Going Concern

At March 31, 2023, the Company had cash, cash equivalents and restricted cash totaling $24.3 million, as compared to cash, cash equivalents and restricted cash totaling $11.8 million at December 31, 2022. During the three months ended March 31, 2023, the Company used $4.3 million of cash in our operating activities.

On March 10, 2023, the Company had a banking relationship with SVB. As of the closure of SVB on March 10, 2023, it held approximately $1.1 million of unrestricted cash in deposits held in SVB, $4.0 million held in a restricted SVB account as required per the Avenue Loan Agreement (as defined in “Note 8 – Loans and Convertible Notes Payable”) and approximately $0.2 million of restricted cash held in SVB collateral accounts as required per the Company’s line of credit for the property in New York City and its credit card program with SVB. SVB was closed on March 10, 2023 by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the U.S. Treasury, Federal Reserve, and FDIC announced that SVB depositors would have access to all of their money starting March 13,2023. On March 13, 2023, the Company was able to access all of its cash, cash equivalents and investments held at or through SVB. While the Company has not experienced any losses in such accounts, the recent failure of SVB exposed it to significant credit risk prior to the completion by the FDIC of the resolution of SVB in a manner that fully protected all depositors. The Company is evaluating alternative solutions which management believes does not expose us to significant credit risk or jeopardizes our liquidity.

The Company’s future results are subject to substantial risks and uncertainties. The Company has operated at a loss for its entire history and there can be no assurance that it will ever achieve or maintain profitability. The Company has historically funded its operations primarily with proceeds from sales of common stock, warrants and prefunded warrants for the purchase of common stock, sales of preferred stock, proceeds from the issuance of convertible debt and borrowings under loan and security agreements. The Company has entered into a Controlled Equity Offering

Sales Agreement (“ATM Sales Agreement”), with Cantor Fitzgerald & Co. (the “Sales Agent”), pursuant to which the Company may offer and sell, at its sole discretion through the Sales Agent, shares of common stock having an aggregate offering price of up to $17.0 million. To date, the Company has sold approximately $4.0 million of its common stock, prior to issuance costs, under the ATM Sales Agreement. No sales were made during the three months ended March 31, 2023.

We currently believe that our current cash and cash equivalents will enable us to have sufficient cash past our anticipated PDUFA date of August 14, 2023. Subject to the approval by our stockholders of the private placement that we closed on March 29, 2023 at our upcoming annual general meeting of stockholders, the Tranche A and B warrants issued in such private placement will become exercisable. The exercise of all such warrants would generate approximately $60.0 million in proceeds. We believe that this amount will be adequate to fund the commercialization of HEPZATO, if approved. If there is a substantial delay in the approval of HEPZATO we expect to need to raise additional capital under structures available to us, including debt and/or equity offerings, which may not be on terms favorable to us. In a delayed approval scenario, our ability to continue as a going concern depends on our ability to raise additional capital through the sale of equity or debt securities, or through partnering or licensing transactions in which we receive cash to support our future operations. If we are unable to secure additional capital or if additional capital is not available on favorable terms for us, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash.

The Company’s capital commitments over the next twelve months include (a) $9.6 million to satisfy accounts payable, accrued expenses and lease liabilities and (b) $4.4 million of loan principal payments. Additional capital commitments beyond the next twelve months include (a) $0.2 million of lease liabilities; (b) $1.0 million for settlement of litigation with medac; (c) $1.2 million of loan principal payments; and (d) $5.0 million of convertible note principal payments, if the holders do not elect to convert the notes into equity.

The Company also expects to use cash and cash equivalents to fund

its

potential approval of HEPZATO from the FDA, commercialization of HEPZATO and CHEMOSAT and any future clinical research trials and operating activities. The Company’s future liquidity and capital requirements will depend on numerous factors, including the initiation and progress of clinical trials and research and product development programs; obtaining regulatory approvals and complying with applicable laws and regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments.

On August 6, 2021, the Company entered into the Avenue Loan Agreement with Avenue Venture Opportunities Fund, L.P. (the “Lender,” or “Avenue”) for a term loan in an aggregate principal amount of up to $20 million (the “Avenue Loan”). The Avenue Loan bears interest at an annual rate equal to the greater of (a) the sum of 7.7% plus the prime rate as reported in The Wall Street Journal and (b) 10.95%. The interest rate at March 31, 2023 was 15.45%. The Avenue Loan is secured by all of the Company’s assets globally, including intellectual property. The Avenue Loan matures on August 1, 2024. On March 15, 2023, the Company returned to Avenue $4.0 million held in restricted cash to paydown a portion of the outstanding Avenue Loan balance. On March 31, 2023, the Company reached an agreement to amend its existing loan agreement with Avenue to defer the interest only to September 30, 2023. The interest only period may be extended at the Company’s option to December 31, 2023 if, by September 30, 2023, Delcath has (a) received FDA approval for the HEPZATO Kit and (b) received net proceeds of at least $10 million from the sale and issuance of equity securities or exercise of existing warrants. In exchange for this extension, the Company has agreed to provide Avenue

with

34,072 warrants to purchase shares of common stock. The exercise price of the warrants is $0.01.

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On March 27, 2023, the Company entered into to a securities purchase agreement with certain accredited investors (the “Preferred Purchase Agreement”). Pursuant to the Preferred Purchase Agreement, on March 29, 2023, the Company issued to purchasers an aggregate $24.9 million in shares, consisting of 24,900 shares of the Company’s Series

F-1

Convertible Preferred Stock, par value $0.01 per share (the

“Series F-1 Preferred

Stock”), that are convertible into approximately 7.6 million shares of common stock at a conversion price of $3.30 per share, and two tranches of warrants that are exercisable as follows:

•

Tranche A warrants (the “Preferred Tranche A Warrant

”) for an aggregate exercise price of approximately $34.9 million are exercisable for an aggregate of up to 34,860 shares of Series

F-3

Convertible Preferred Stock, par value $0.01 per share (the

“Series F-3 Preferred

Stock”), at an exercise price of $1,000 per share (and convertible into an aggregate of up to approximately 7.8 million shares of common stock at a conversion price of $4.50 per share) until the earlier of 3/31/2026 or 21 days following the Company’s announcement of receipt of FDA approval for HEPZATO; and

•

Tranche B warrants (the “Preferred Tranche B Warrant

,” together with the Preferred Tranche A Warrant, the “Preferred Warrants”) for an aggregate exercise price of $24.9 million are exercisable for an aggregate of up to 24,900 shares of Series

F-4

Convertible Preferred Stock, par value $0.01 per share (the “Series

F-4

Preferred Stock” and, together with the Series

F-3

Preferred Stock, the “Preferred Warrant Shares”), at an exercise price of $1,000 per share, (and convertible into an aggregate of up to approximately 4.2 million shares of common stock at a conversion price of $6.00 per share) until the earlier of 3/31/2026 or 21 days following disclosure of the Company’s public announcement of recording at least $10 million in quarterly U.S. revenue from the commercialization of HEPZATO (collectively, the “Series F Preferred Offering”).

The shares of Series

F-1

Convertible Preferred Stock, and accompanying warrants, were issued at a price of $1,000 per share. Conversion of the Series

F-1

Convertible Preferred Stock into shares of common stock of the Company, and the exercisability of the warrants, is subject to approval by the Company’s stockholders (the “Stockholder Approval”). The Company received gross proceeds of approximately $24.9 million

from the private placement

, before deducting the fees paid to the placement agent and the financial advisors and other financing expenses payable

by the Company.

See Note 9 – Preferred Purchase Agreement for additional details related to the Series F Preferred Offering.

Also on March 27, 2023, the Company entered into a securities purchase agreement with the Company’s Chief Executive Officer, Gerard Michel (the “Common Purchase Agreement”). Pursuant to the Common Purchase Agreement, on March 29, 2023, the Company issued to Mr. Michel 19,646 shares of common stock and two tranches of warrants that are exercisable as follows:

	•		A Preferred Tranche A Warrant (the “Common Tranche A Warrant’) for an aggregate exercise price of approximately $0.1 m illion are exercisable for an aggregate of up to 31,110 shares of common stock until the earlier of 3/31/2026 or 21 days following the Company’s announcement of receipt of FDA approval for HEPZATO; and

	•		A Preferred Tranche B Warrant (the “Common Tranche B Warrant” and, together with the Common Tranche A Warrant, the “Common Warrants”) for an aggregate exercise price of $0.1 million are exercisable for an aggregate of up to 16,666 shares of common stock until the earlier of 3/31/2026 or 21 days following disclosure of the Company’s public announcement of recording at least $10 million in quarterly U.S. revenue from the commercialization of HEPZATO (collectively, the “Common Financing”). The shares of common stock issuable upon exercise of the Common Warrants collectively are referred to herein as the “Common Warrant Shares”.

See Note 10 – Stockholders’ Equity – Equity Offerings and Placements – Common Purchase Agreement for additional details related to the Common Offering.

Basis of Presentation

These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with generally accepted accounting principles in the United States of America (GAAP) and with the SEC’s instructions to Form

10-Q

and Article 10 of Regulation

S-X.

They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation.

The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended March 31, 2023 and 2022; however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report have been condensed or omitted as permitted by GAAP. It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any interim period.

Significant Accounting Policies

Other than the new policies listed below, there have been no material changes to our significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report on Form

10-K

for the fiscal year ended December 31, 2022.

Warrant Liabilities

The Company determined the warrant liability was not in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, which classifies and measures certain financial instruments with characteristics of both liability and equity. Entities must consider whether to classify contracts that may be settled in its own stock, such as warrants, as equity of the entity or as an asset or liability. If an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability at their fair value at issuance with subsequent changes in fair value recorded in earnings.

The Company has accounted for the Preferred Warrants as derivative instruments in accordance with ASC 815, Derivatives and Hedging. Management has determined that the Preferred Warrants issued in conjunction with the Preferred Purchase Agreement and the Common Warrants issued in conjunction with the Common Purchase Agreement should be liability classified due to the existence of a pre-specified volatility input to the Black-Scholes calculation which would be used to calculate the repurchase price of the Preferred Warrants and Common Warrants in the event of a Fundamental Transaction, as defined.

The valuations of the warrant liability and preferred F-1 shares were determined using option 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. In addition, the Company used probabilities of the FDA approval and of recording at least $10 million in quarterly U.S. revenue from the commercialization of HEPZATO as inputs in the model to determine the fair value of warrants liability and preferred F-1 shares. The Company will adjust the fair value of the warranty liability at the end of each reporting period.

Mezzanine Equity

The Company accounts for its warrant liability in accordance with the provisions of ASC 480, Distinguishing Liabilities from Equity, which classifies and measures certain financial instruments with characteristics of both liability and equity. When ordinary or preferred shares are determined to be conditionally redeemable upon the occurrence of certain events that are not solely within the control of the issuer, and upon such event, the shares would become redeemable at the option of the holders, they are classified as ‘mezzanine equity’ (temporary equity). The purpose of this classification is to convey that such a security may not be permanently part of equity and could result in a demand for cash, securities or other assets of the entity in the future.

Recently Adopted and Issued Accounting Pronouncements

We have not been required to adopt any accounting standards that had a significant impact on our consolidated financial statements in the two years ended December 31, 2022. We do not expect any recently issued accounting standards to have a significant impact on our consolidated financial statements.

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Revision of Previously Issued Quarterly Financial Statements

In preparation of the Company’s audited financial statements as of and for year ended December 31, 2022, the Company determined it needed to correct previously reported share-based compensation expense for each quarter during 2022. The correction for share-based compensation increased the net loss in amount of $0.8

million for

the first quarter of 2022, $0.5

million for

the second quarter of 2022 and $0.4

million for

the third quarter of fiscal 2022. The share-based

compensation adjustment is a

non-cash

adjustment and did not have any impact on the cash balances for the Company.

The following tables contain the financial

information for the periods previously reported and have been updated to reflect the revisions of the Company’s financial statements. The revisions do not have an impact on the Company’s cash position

The Company has not amended its previously filed Quarterly Reports on Form

10-Q

for the three quarterly periods ended September 30, 2022. The impact of the revision on the Company’s financial statements for the first quarter of 2022 is reflected in the following table:


	As previously report			Adjustment			As revised
Balance Sheet for March 31, 2022 (unaudited)
Additional paid-in capital	$	434,305		$	797		$	435,102
Accumulated deficit		(429,179	)		(797	)		(429,976	)
Consolidated Statement of Operations and Comprehensive Loss for the three months March 31, 2022 (unaudited)
Research and development expenses		4,240			241			4,481
Selling, general and administrative expenses		3,648			556			4,204

Total operating expenses		7,888			797			8,685
Operating loss		(7,543	)		(797	)		(8,340	)
Net loss		(8,203	)		(797	)		(9,000	)
Total other comprehensive loss		(8,201	)		(797	)		(8,998	)
Basic and diluted loss per common share		(1.00	)		(0.10	)		(1.10	)
Consolidated statement of Stockholders’ Equity (Deficit) for the three months ended March 31, 2022 (unaudited)
Compensation expense for issuance of stock options		1,474			797			2,271
Net loss		(8,203	)		(797	)		(9,000	)
Consolidated Statement of Cash Flows for the three months ended March 31, 2022 (unaudited)
Net loss		(8,203	)		(797	)		(9,000	)
Stock option compensation expense		1,474			797			2,271
Balance Sheet for June 30, 2022 (unaudited)
Additional paid-in capital		435,922			1,299			437,221
Accumulated deficit		(438,836	)		(1,299	)		(440,135	)

(2)	Cash, Cash Equivalents and Restricted Cas h

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in

Restricted

Cash

on the balance sheets.

Cash, cash equivalents, and restricted cash balances were as follows:


	March 31, 2023		December 31, 2022
Cash and cash equivalents	$	24,222	$	7,671
Restricted balance for loan agreement		—		4,000
Letters of credit		—		101
Security for credit cards		50		50

Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	24,272	$	11,822

On March 15, 2023, the Company returned to Avenue the $4.0 million held in the restricted cash to paydown a portion of the outstanding Avenue Loan balance. On March 31, 2023, letter of credit for the

sub-lease

agreement for office space at 1633 Broadway, New York, NY expired.

(3)	Inventories

Inventories consist of the following:


	March 31, 2023		December 31, 2022
Raw materials	$	811	$	763
Work-in-process		1,410		1,102
Finished goods		116		133

Total inventories	$	2,337	$	1,998

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(4)	Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:


	March 31,		December 31,
	2023		2022
Clinical trial expenses	$	1,630	$	1,630
Insurance premiums		109		123
Professional services		91		121
Other		125		95

Total prepaid expenses and other current assets	$	1,955	$	1,969

(5)	Property, Plant, and Equipment

Property, plant, and equipment consist of the following:


	March 31, 2023			December 31, 2022			Estimated Useful Life
Buildings and land	$	1,301		$	1,301			30 years - Buildings
Enterprise hardware and software		1,856			1,855			3 years
Leaseholds		1,781			1,774			Lesser of lease term or estimated useful life
Equipment		1,223			1,222			7 years
Furniture		201			201			5 years

Property, plant and equipment, gross		6,362			6,353
Accumulated depreciation		(4,970	)		(4,931	)

Property, plant and equipment, net	$	1,392		$	1,422

Depreciation expenses for the three months ended March 31, 2023 and 2022 was $30 and $31 respectively.

(6)	Accrued Expenses

Accrued expenses consist of the following:


	March 31,		December 31,
	2023		2022
Clinical expenses	$	2,398	$	1,470
Compensation, excluding taxes		1,559		1,040
Professional fees		2,189		1,087
Interest on convertible note		593		553
Other		381		535

Total accrued expenses	$	7,120	$	4,685

(7)

Leases

The Company recognizes

right-of-use

(“ROU”) assets and lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company leases its facilities under

non-cancellable

operating and financing leases. The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the ROU asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments.

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The following table summarizes the Company’s operating leases as of and for the three months ended March 31, 2023:


	U.S.			Ireland			Total
Lease cost
Operating lease cost	$	97		$	9		$	106
Other information
Operating cash flows out from operating leases		(97	)		(9	)		(106	)
Weighted average remaining lease term		0.5			3.6
Weighted average discount rate - operating leases		8	%		8	%

Remaining maturities of the Company’s operating leases, excluding short-term leases, are as follows:


	U.S.		Ireland		Total
Year ended December 31, 2023		58		28		86
Year ended December 31, 2024		—		37		37
Year ended December 31, 2025		—		37		37
Year ended December 31, 2026		—		22		22

SEC Form 10-Q filed by Delcath Systems Inc.