| Summary of Significant Accounting Policies | (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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less
accumulated depreciation. The Company provides for depreciation on
a straight line basis over the estimated useful lives of the assets
which range from three to seven years. Leasehold improvements will
be amortized over the shorter of the lease term or the estimated
useful life of the related assets when they are placed into
service. The Company evaluates property, plant and equipment for
impairment periodically to determine if changes in circumstances or
the occurrence of events suggest the carrying value of the asset or
asset group may not be recoverable. Maintenance and repairs are
charged to operations as incurred. Expenditures which substantially
increase the useful lives of the related assets are
capitalized.
Derivative Instrument Liability
The Company accounts for derivative instruments in accordance with
Accounting Standards Codification (“ASC”) 815,
Derivatives and Hedging, which establishes accounting and reporting
standards for derivative instruments and hedging activities,
including certain derivative instruments embedded in other
financial instruments or contracts and requires recognition of all
derivatives on the balance sheet at fair value, regardless of the
hedging relationship designation. 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 based on the exposures hedged. At
December 31, 2018 and 2017, the Company did not have any
derivative instruments that were designated as hedges.
Fair Value Measurements
The Company adheres to ASC 820, Fair Value Measurement, which
defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. ASC
820 applies to reported balances that are required or permitted to
be measured at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value
measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based measurement,
not an entity-specific measurement. Therefore, a fair value
measurement should be determined based on the assumptions that
market participants would use in pricing the asset or
liability. As a basis for considering market participant
assumptions in fair value measurements, ASC 820 establishes a fair
value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified
within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the
hierarchy).
•
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 is generated from proprietary and partnered product sales
and license and royalty arrangements. Revenue is recognized when or
as we transfer control of the promised goods or services to our
customers in an amount that reflects the consideration to which we
expect to be entitled to in exchange for those goods or services.
When obligations or contingencies remain after the products are
shipped, such as training and certifying the treatment centers,
revenue is deferred until the obligations or contingencies are
satisfied.
We may enter into contracts with partners that contain multiple
elements such as licensing, development, manufacturing and
commercialization components. These arrangements are often complex
and we may receive various types of consideration over the life of
the arrangement, including: up-front fees, reimbursements for
research and development services, milestone payments, payments on
product shipments, margin sharing arrangements, license fees and
royalties.
Our results of operations for reporting periods beginning on or
after January 1, 2018 are presented under ASC 606, Revenue
from Contracts with Customers, while prior period amounts, as
reported, are not adjusted. The effects of the adoption of the new
standard in 2018 were not material to our consolidated financial
statements. In assessing our revenue arrangements in accordance
with ASC 606, Revenue from Contracts with Customers, we must
identify the contract, determine the transaction price including an
estimation of any variable consideration we expect to receive in
connection with the contract, identify the promises of goods or
services to the customer and each distinct performance obligation,
allocate the transaction price to each of the performance
obligations, and recognize revenue when or as the performance
obligations are satisfied. Each of these steps in the revenue
recognition process requires management to make judgements and/or
estimates. The most significant judgements and estimates involve
the determination of variable consideration to be included in the
transaction price. Variable consideration is recognized at an
amount we believe is not subject to significant reversal and is
adjusted at each reporting period if the most likely amount of
expected consideration changes or becomes fixed. We believe this
provides a reasonable basis for recognizing revenue, however,
actual results could differ from estimates and significant changes
in estimates could impact our results of operations in future
periods.
Deferred Revenue
License fees and milestones received in exchange for the grant of a
license for the commercialization of CHEMOSAT are generally
recognized over the development period, as the license is
considered distinct from the delivery of product. Milestone
payments that are contingent upon the occurrence of future events,
are evaluated and recorded at the most likely amount, and to the
extent that it is probable that a significant reversal will not
occur when the associated uncertainty is resolved.
Selling, General and Administrative
Selling, general and administrative costs include personnel costs
and related expenses for the Company’s sales, marketing,
general management and administrative staff, recruitment, costs
related to the Company’s commercialization efforts in Europe,
professional service fees, professional license fees, business
development and certain general legal activities. All such costs
are charged to expense when incurred.
Research and Development
Research and development costs include the costs of materials used
for clinical trials and R&D, personnel costs associated with
device and pharmaceutical R&D, clinical affairs, medical
affairs, medical science liaisons, and regulatory affairs, costs of
outside services and applicable indirect costs incurred in the
development of the Company’s proprietary drug delivery
system. All such costs are charged to expense when
incurred.
Stock Based Compensation
The Company accounts for its share-based compensation in accordance
with the provisions of ASC 718, Stock-Based Compensation, which
establishes accounting for equity instruments exchanged for
employee services and ASC 505-50, Equity-Based Payments to
Non-Employees, which establishes accounting for equity-based
payments to non-employees. Under the provisions of ASC 718,
share-based compensation is measured at the grant date, based upon
the fair value of the award, and is recognized as an expense over
the option holders’ requisite service period (generally the
vesting period of the equity grant). The Company is required to
record compensation cost for all share-based payments granted to
employees based upon the grant date fair value, estimated in
accordance with the provisions of ASC 718. Under the provisions of
ASC 505-50, measurement of compensation cost related to common
shares issued to non-employees for services is based on the value
of the services provided or the fair value of the shares issued.
The measurement of non-employee stock-based compensation is subject
to periodic adjustment as the underlying equity instrument vests.
The Company expenses its share-based compensation 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 14
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, 2018 and 2017:
December 31,
(in thousands, except share data) 2018 2017
Net loss—basic $ (19,222 ) $ (45,117 )
Preferred stock dividends
— (527 )
Net loss—diluted $ (19,222 ) $ (45,644 )
Weighted average shares outstanding—basic 38,151 21
Weighted average shares outstanding—diluted 38,151 21
Net loss per share—basic $ (504.00 ) $ (2,275,000 )
Net loss per share—diluted $ (504.00 ) $ (2,275,000 )
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.
At December 31, 2018, the Company has 0.1 million
pre-funded warrants outstanding. The following table provides a
reconciliation of the weighted average shares outstanding
calculation at December 31, 2018:
December 31,
Weighted average shares issued 3,913
Weighted average pre-funded warrants 34,238
Weighted average shares outstanding 38,151
For the years ended December 31, 2018 and 2017 the following
potentially dilutive securities were excluded from the computation
of diluted earnings per share because their effects would be
antidilutive.
Shares excluded from the computation of diluted earnings per
share:
2018 2017
Common stock warrants—equity 6,005 21
Common stock warrants—liability 271
—
Assumed conversion of convertible notes 3,681
—
Total 9,957 21
Segment Information
The Company currently operates in one business segment, which is
the development and commercialization of Melphalan/HDS and
CHEMOSAT. A single management team that reports to the CEO and
President comprehensively manages the business. Accordingly, the
Company does not have separately reportable segments.
Foreign Currency and Currency Translation
Transactions that are denominated in a foreign currency are
remeasured into the functional currency at the current exchange
rate on the date of the transaction. Any foreign
currency-denominated monetary assets and liabilities are
subsequently remeasured at current exchange rates, with gains or
losses recognized as foreign exchange (losses)/gains in the
statements of operations.
The assets and liabilities of the Company’s international
subsidiaries are translated from their functional currencies into
United States dollars at exchange rates prevailing at the balance
sheet date. The majority of the foreign subsidiaries revenues and
operating expenses are denominated in Euros. The reporting currency
for the Company is the United States Dollar (“USD”).
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.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers,
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 has adopted this guidance.
In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230), which 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 was permitted, including interim
periods within those fiscal years provided that those electing
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 October 2016, the FASB issues ASU 2016-16 which simplifies the
income tax consequences of intra-entity transfers other than
inventory. Prior to ASU 2016-16, GAAL prohibited the recognition of
current and deferred income taxes for intra-entity asset transfers
until the asset has been sold to an outside party. ASU 2016-16
eliminates this prohibition for intra-entity transfers of assets
other than inventory but retains the prohibition for intra-entity
transfers of inventory. This standard is effective go r public
entities for fiscal years beginning after December 15, 2017.
The Company has adopted this guidance. The adoption did not have a
material impact on the Company’s consolidated financial
statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash, which 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 are also
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
was permitted. The Company adopted this standard.
SEC Disclosure Update and Simplification
In August 2018, the SEC adopted the final rule under SEC Release
No. 33-10532, Disclosure Update and Simplification, amending
certain disclosure requirements that were redundant, duplicative,
overlapping, outdated or superseded. In addition, the amendments
expanded the disclosure requirements on the analysis of
stockholders’ equity for interim financial statements. Under
the amendments, an analysis of changes in each caption of
stockholders’ equity presented in the balance sheet must be
provided in a note or separate statement. The analysis should
present a reconciliation of the beginning balance to the ending
balance of each period for which a statement of comprehensive
income is required to be filed. This final rule was effective on
November 5, 2018. The adoption did not have a material impact
on the Company’s consolidated financial statements.
Recent Accounting Standards to be Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842), superseding ASC Topic 840, Leases. ASU 2016-02
requires lessees to recognize a right-of-use asset and a lease
liability on their balance sheets for all the leases with terms
greater than twelve months. Based on certain criteria, leases will
be classified as either financing or operating, with classification
affecting the pattern of expense recognition in the income
statement. For leases with a term of twelve months or less, a
lessee is permitted to make an accounting policy election by class
of underlying asset not to recognize lease assets and lease
liabilities. If a lessee makes this election, it should recognize
lease expense for such leases generally on a straight-line basis
over the lease term. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, and interim periods within
those years, with early adoption permitted. In transition, lessees
and lessors are required to recognize and measure leases at the
beginning of the earliest period presented using a modified
retrospective approach. In July 2018, the FASB issued ASU
No. 2018-11, Leases (Topic 842): Targeted Improvements that
allows entities to apply the provisions of the new standard at the
effective date (e.g. January 1, 2019), as opposed to the
earliest period presented under the modified retrospective
transition approach (January 1, 2017) and recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The modified retrospective
approach includes a number of optional practical expedients
primarily focused on leases that commenced before the effective
date of Topic 842, including continuing to account for leases that
commence before the effective date in accordance with previous
guidance, unless the lease is modified. The Company is currently
evaluating the effect the guidance will have on our audited
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). This guidance was
intended 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. |
