Delcath Systems, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Delcath is an interventional oncology company developing Melphalan/HDS, a combination drug-device system for high-dose regional chemotherapy of liver cancers. In Europe, the CE-marked Class IIb CHEMOSAT delivery system is commercially available with separately sourced melphalan; Melphalan/HDS is not approved for sale in the United States.
The filing covers the fiscal year ended December 31, 2018. The filing does not provide a separate fourth-quarter income statement or cash-flow presentation.
The principal development programs are the FOCUS trial in hepatic-dominant ocular melanoma and the ALIGN Phase 3 trial in intrahepatic cholangiocarcinoma. In December 2018, Delcath entered an exclusive European licensing agreement with medac for CHEMOSAT commercialization.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Product revenue | $3.378 million | $2.715 million | +24.4% |
| Other revenue | $0.029 million | — | New in 2018 |
| Gross profit | $2.398 million | $2.014 million | +19.1% |
| Gross margin | Approximately 70.4% | Approximately 74.2% | Down approximately 3.8 percentage points |
| Research and development expense | $19.650 million | $10.495 million | +87.2% |
| SG&A expense | $9.819 million | $9.684 million | +1.4% |
| Operating loss | $27.071 million | $18.165 million | Worsened by $8.906 million |
| Net loss | $19.222 million | $45.117 million | Improved by $25.895 million |
| Net loss per share | $0.72 | $3,250.00 | Not directly comparable due to reverse splits and recapitalization |
| Cash used in operating activities | $14.732 million | $15.398 million | Improved by $0.666 million |
The lower net loss was primarily driven by non-cash accounting items, including a $19.706 million gain from the change in fair value of warrant liabilities, compared with $15.103 million in 2017, and substantially lower debt-related expense. These items did not represent operating cash generation.
At December 31, 2018, cash and cash equivalents were $2.516 million, restricted cash was $1.062 million, total current assets were $5.919 million and total current liabilities were $17.750 million. Total liabilities were $21.783 million versus total assets of $6.844 million, resulting in stockholders’ deficit of $14.939 million.
Convertible notes had a December 31, 2018 carrying value of approximately $2.038 million. The notes carried an 8% interest rate and were secured and convertible, with stated maturities ranging from December 2018 through March 2021 before considering defaults or subsequent amendments. The company also had approximately $2.1 million of net operating lease payments remaining at year-end and $1.012 million of restricted cash supporting letters of credit.
The independent auditor included a going-concern explanatory paragraph. Management stated that capital resources were expected to fund operations through June 2019, while the financial statement footnotes stated that resources were adequate through March 2019. Additional funding was required.
Material changes versus the prior comparable period
- Revenue increased as European product sales grew, particularly in Germany following implementation of the ZE reimbursement code. Gross profit increased, but gross margin declined.
- Research and development expense increased by $9.155 million, primarily due to the FOCUS clinical trial.
- Operating loss increased despite improved net loss because operating expenses rose substantially.
- Cash used in operations remained high at $14.732 million, while year-end cash and cash equivalents declined by $1.483 million.
- In February 2018, Delcath raised approximately $4.3 million net through common stock and warrants; in September 2018, it raised approximately $7.0 million net through a rights offering; and in 2018 it received approximately $5.7 million net from convertible note financing.
- During 2018, the company issued significant warrants and pre-funded warrants. Approximately 65.7 million warrants were outstanding at year-end, with a weighted-average exercise price of approximately $0.22 per share, creating substantial potential dilution.
- The FOCUS trial was amended in July 2018 from a randomized trial with overall survival as the primary endpoint to a non-randomized, single-arm trial with objective response rate as the primary endpoint. The amendment invalidated the prior FDA Special Protocol Assessment.
- The ALIGN Phase 3 trial in ICC began enrollment in 2018 under an FDA SPA and was designed to enroll approximately 295 patients.
Guidance, outlook, commentary, risks and unusual items
No formal revenue, earnings or profitability guidance was provided. Management expected continued operating losses and stated that additional working capital would be required. It planned to seek funding through equity issuance, debt financing or strategic alliances.
- Regulatory risk: The FDA issued a complete response letter in 2013 requiring additional evidence of safety and efficacy. Melphalan/HDS remains unapproved in the United States, and the amended FOCUS design no longer benefits from the previous SPA.
- Clinical risk: Trial enrollment, efficacy, overall survival, toxicity and regulatory acceptance remain uncertain. Prior experience included serious or potentially life-threatening adverse events, including severe bone marrow suppression, hepatic injury, hemorrhage, stroke and myocardial infarction.
- Commercial and reimbursement risk: CHEMOSAT adoption in Europe depends heavily on country-specific reimbursement. German reimbursement is renegotiated annually, while reimbursement remains limited or uncertain in other markets.
- Going-concern risk: The company had recurring losses, negative operating cash flow, a working-capital deficiency and substantial doubt regarding its ability to continue without additional financing.
- Debt and default risk: In April 2019, holders of the 2018 secured convertible notes issued notices of default. Subsequent to year-end, Delcath borrowed an aggregate of $3.3 million through secured 8% promissory notes and entered into additional financing transactions.
- Supply and manufacturing risk: The company relies on third parties for components, sterilization and melphalan supply, and does not have written contracts with all component suppliers.
- Unusual accounting items: The 2018 net loss was materially affected by non-cash warrant fair-value adjustments, debt discounts, debt extinguishment and financial-instrument issuance accounting.
- Litigation and contingencies: A Hudson Bay lawsuit was dismissed with prejudice in December 2018. A separate warrant-related action against certain investors was settled in April 2019, subject to financing-related payments.
- Capital structure: The company completed reverse stock splits in November 2017 and May 2018. Authorized shares substantially exceeded shares outstanding, and future equity or warrant exercises could materially dilute existing holders.
Most important facts for investors to verify
- Current cash, restricted cash, debt maturities, default status and financing completed after June 14, 2019.
- Whether additional capital was raised before the stated March or June 2019 liquidity horizons and on what dilution or security terms.
- FOCUS trial enrollment completion, endpoint results, safety data and the FDA’s position following invalidation of the SPA.
- ALIGN trial enrollment, interim or final outcomes and the status of the ICC regulatory pathway.
- European CHEMOSAT sales, treatment volumes, medac milestone and royalty economics, and reimbursement developments by country.
- The number of common shares outstanding on a fully diluted basis, including pre-funded warrants, convertible notes, warrants and subsequent issuances.
- Amounts owed to vendors, accrued clinical trial obligations, letters of credit and the resolution of outstanding defaults or litigation settlements.
- Whether the company has subsequently resolved the auditor’s going-concern uncertainty and achieved sustainable positive operating cash flow.