Delcath Systems, Inc. 2019 Form 10-K Summary
Business context and reporting period
Delcath is an interventional oncology company developing Melphalan/HDS, a high-dose regional chemotherapy system for primary and metastatic liver cancers. In Europe, the system is marketed as CHEMOSAT, a Class IIb medical device with CE Mark authorization. The product has not been approved for sale in the United States.
This filing reports the fiscal year ended December 31, 2019, with comparisons to fiscal 2018. The 2019 Form 10-K was filed March 25, 2020. The company’s principal programs were the FOCUS Phase 3 trial in ocular melanoma liver metastases and the ALIGN Phase 3 trial in intrahepatic cholangiocarcinoma.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Product revenue | $1.101 million | $3.378 million | Down 67.4% |
| Other revenue | $0.479 million | $0.029 million | Up $0.450 million |
| Total revenue | $1.580 million | $3.407 million | Down 53.6% |
| Gross profit | $0.861 million | $2.398 million | Down 64.1% |
| Total operating expenses | $20.769 million | $29.469 million | Down 29.5% |
| Operating loss | $19.908 million | $27.071 million | Improved by $7.163 million |
| Net loss | $8.879 million | $19.222 million | Improved by $10.343 million |
| Cash used in operating activities | $23.690 million | $14.732 million | Use increased by $8.958 million |
| Cash, cash equivalents and restricted cash | $10.183 million | $3.578 million | Up $6.605 million |
Gross profit represented approximately 54.5% of total revenue, compared with approximately 70.4% in 2018. Product gross margin was approximately 34.7% in 2019, down from approximately 70.1% in 2018, reflecting the change from direct CHEMOSAT sales to a royalty-based model under the medac license.
Research and development expense was $9.490 million, down from $19.650 million, primarily because cash constraints reduced FOCUS trial enrollment and related services. Selling, general and administrative expense increased to $11.279 million from $9.819 million, driven by $0.9 million of non-cash settlement expense and $0.8 million of litigation expense.
The reported net loss benefited from non-cash income of $17.493 million from the change in fair value of warrant liabilities. Interest expense was $4.746 million. No income tax expense was recorded because the company remained in a tax-loss position and maintained a full valuation allowance against deferred tax assets.
Liquidity, capital structure and debt
- Cash and cash equivalents were $10.002 million at December 31, 2019; restricted cash was $0.181 million.
- Current liabilities were $15.512 million versus current assets of $12.617 million, producing a working-capital deficit of approximately $2.895 million.
- Outstanding convertible notes payable totaled $2.0 million, classified as long-term debt, bearing 8% interest.
- Current warrant liability was $3.368 million, measured at fair value and subject to significant non-cash changes.
- The company raised approximately $29.5 million of gross proceeds through July and August 2019 private placements of preferred stock and warrants. Net proceeds from the Series E and Series E-1 financings were approximately $26.5 million.
- Management stated that available capital was expected to fund operations through June 2020, with additional working capital required thereafter.
- The auditor’s report and financial statement notes state that substantial doubt exists about the company’s ability to continue as a going concern. The company will require additional financing or strategic alliances to sustain operations.
Material changes versus the prior comparable period
- Revenue declined substantially because the December 2018 medac agreement shifted European commercialization from direct product sales to royalties and other contractual consideration.
- Operating expenses declined primarily because of reduced clinical trial spending, while SG&A increased due to settlements and litigation.
- Net loss improved by approximately 53.8%, but operating cash burn increased materially, demonstrating that the lower net loss was substantially affected by non-cash accounting items.
- The July and August 2019 financings converted or exchanged certain debt and other obligations into preferred stock and warrants, materially changing the capital structure.
- The December 2019 reverse stock split triggered a reset of the Series E preferred stock conversion price and warrant exercise price to $23.04 per share and increased potential dilution.
- The company adopted the new lease accounting standard, recording $0.860 million of right-of-use assets and $0.861 million of lease liabilities at year-end.
Guidance, outlook, commentary and risks
- Management expected continuing operating losses and stated that significant additional capital would be needed to fund clinical trials, regulatory activities and commercialization.
- FOCUS enrollment was completed, and top-line data had been expected in mid-2020; however, COVID-19 delayed patient treatment, site monitoring and data review, making the timing uncertain.
- ALIGN enrollment faced difficulties because the protocol excluded patients who had received standard-of-care treatment outside the trial. The company intended to seek an FDA protocol amendment.
- The prior U.S. NDA received an FDA Complete Response Letter. The current FOCUS trial is a non-randomized, single-arm study with objective response rate as its primary endpoint, unlike the earlier randomized overall-survival design, and the prior Special Protocol Assessment no longer applies.
- CHEMOSAT depends on European reimbursement, physician adoption, medac’s commercialization efforts and the availability of melphalan from third-party suppliers.
- COVID-19 was expected to reduce CHEMOSAT procedures and revenue because hospitals were restricting procedures not considered life-threatening. The ultimate financial and liquidity impact was not reasonably estimable at filing.
- Additional risks include adverse clinical outcomes, procedure-related toxicity, regulatory delays or failure, manufacturing and supply constraints, product liability, intellectual-property challenges, dilution from preferred stock and warrants, and potential inability to meet obligations or avoid bankruptcy protection.
- The company had no stated expectation of paying common-stock dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the company obtained sufficient financing after June 2020 to resolve the going-concern uncertainty and maintain clinical and commercial operations.
- FOCUS and ALIGN enrollment status, protocol changes, clinical outcomes, safety data and regulatory interaction with the FDA.
- Whether the FOCUS data were sufficient to support a new U.S. NDA despite the loss of the original SPA and the change to a single-arm objective-response-rate endpoint.
- Actual royalty, milestone and other revenue generated under the medac agreement, along with European procedure volumes and reimbursement developments.
- The potential dilution from 2019 preferred stock, reset-price warrants, conversions, registration rights and subsequent equity financings.
- Current debt, warrant liabilities, accrued compensation and other obligations, including any defaults, settlements or liquidated damages.
- The continuing effects of COVID-19 on clinical-trial operations, hospital procedure volumes, supply chains and liquidity.