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General (Policies)

3 Months Ended

Mar. 31, 2023

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

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.

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.

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.

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	)