Delcath Systems, Inc. 2022 Form 10-K Summary
Business context and reporting period
Delcath is an interventional oncology company developing and commercializing liver-directed cancer treatments. HEPZATO is a U.S. drug/device combination product candidate using high-dose melphalan and hepatic perfusion; CHEMOSAT is the related medical device marketed in Europe. This Form 10-K covers the fiscal year ended December 31, 2022. The filing does not provide a separate fourth-quarter income statement.
- HEPZATO was not approved for sale in the United States at December 31, 2022.
- CHEMOSAT received EU Medical Device Regulation certification in February 2022, and Delcath assumed direct European sales, marketing and distribution responsibility in March 2022.
- The FOCUS trial reported a 36.3% objective response rate in the 91-patient treated population, with 14.0 months median duration of response and 20.53 months estimated median overall survival. The trial reported no treatment-related deaths, but 41.1% of the 95-patient safety population experienced a treatment-related serious adverse event.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $2.719 million | $3.555 million | Down $0.836 million |
| Product revenue | $2.548 million | $1.300 million | Up $1.248 million |
| Other revenue | $0.171 million | $2.255 million | Down $2.084 million |
| Gross profit | $2.033 million | $2.884 million | Down $0.851 million |
| Research and development | $18.583 million | $13.778 million | Up 35% |
| SG&A | $17.303 million | $13.637 million | Up 27% |
| Operating loss | $33.853 million | $24.531 million | Worsened $9.322 million |
| Net loss | $36.508 million | $25.649 million | Worsened $10.859 million |
| Basic and diluted loss per share | $4.12 | $3.59 | Worsened |
| Net cash used in operating activities | $24.950 million | $22.604 million | Use increased $2.346 million |
Gross margin was approximately 74.8% in 2022 versus 81.1% in 2021. The operating margin was approximately negative 1,245% and the net margin approximately negative 1,343%, reflecting the company’s very limited revenue base relative to development and commercialization costs.
- Cash and cash equivalents were $7.671 million at year-end, with restricted cash of $4.151 million, for total cash, cash equivalents and restricted cash of $11.822 million versus $26.953 million a year earlier.
- Total assets were $17.862 million and total liabilities were $23.721 million, resulting in stockholders’ deficit of $5.859 million.
- Debt included $10.916 million of net Avenue loan payable and $4.772 million of net convertible notes payable. The Avenue loan carried a 15.2% interest rate at year-end, was secured by substantially all company assets including intellectual property, and matures August 1, 2024.
- Current liabilities were $14.735 million, including $7.846 million of current loan payable, compared with $5.954 million at December 31, 2021.
- The company raised approximately $5.0 million in July 2022 and $6.2 million in December 2022 through private placements of common stock and pre-funded warrants.
Material changes versus the prior comparable period
- Product revenue nearly doubled as Delcath transitioned to direct European CHEMOSAT sales, but total revenue declined because 2021 included $2.255 million of other revenue, including accelerated recognition of approximately $1.7 million related to termination of the medac distribution agreement.
- R&D spending increased $4.805 million, primarily due to pre-NDA preparation and third-party costs associated with the HEPZATO NDA resubmission.
- SG&A increased $3.666 million, driven by U.S. commercialization preparation and a $1.2 million accrual related to the medac settlement.
- Interest expense increased to $2.685 million from $1.186 million, primarily because the Avenue loan was outstanding for a full year.
- Share-based compensation expense was $7.941 million. The company revised previously reported 2022 quarterly results, increasing cumulative net loss by $1.671 million through September 30, 2022. The revision was non-cash and related to application of the accelerated method for stock-based compensation.
- Product revenue growth did not offset operating cash burn; year-end liquidity declined by approximately $15.1 million from the prior year.
Guidance, outlook, risks and unusual items
- Management stated that existing cash and cash equivalents were expected to support current operations only through the first quarter of 2023, not beyond, and disclosed substantial doubt about the company’s ability to continue as a going concern.
- The company expects continuing losses in 2023 and does not expect significant revenue for the foreseeable future unless HEPZATO receives regulatory approval and is successfully commercialized.
- On February 14, 2023, Delcath resubmitted the HEPZATO NDA. On March 20, 2023, the FDA accepted the resubmission as complete and assigned an August 14, 2023 PDUFA target action date. Approval was not assured and the company could receive another complete response letter.
- Reported commitments over the next twelve months included $6.9 million of accounts payable, accrued expenses and lease liabilities and $8.6 million of loan principal payments. Additional future commitments included $5.0 million of convertible note principal payments if not converted.
- On March 15, 2023, Delcath returned $4.0 million of restricted cash to Avenue to reduce the loan balance and monthly principal payments.
- The company’s SVB deposits became accessible after government action following the bank’s March 2023 closure; the filing states that no loss was experienced, but the event exposed the company to temporary liquidity and credit risk.
- The medac dispute was settled in December 2022. Delcath recorded approximately $1.2 million of liabilities and agreed to future royalties and minimum annual payments.
- Lachman Consultant Services filed a lawsuit seeking approximately $0.9 million plus interest, costs and attorneys’ fees; Delcath had accrued $0.9 million and intended to defend the matter.
- Management identified a material weakness in internal control over financial reporting related to detecting and applying the company’s stock-based compensation expense policy. Disclosure controls were deemed ineffective as of December 31, 2022, and remediation was ongoing.
- Key risks include the need for near-term financing, potential default or acceleration under the Avenue loan, regulatory rejection or delay, clinical and product safety risks, reimbursement uncertainty, manufacturing and supply constraints, competition, dilution and possible inability to continue as a going concern.
Most important facts for investors to verify
- Whether HEPZATO received FDA approval by the August 14, 2023 target date and what labeling, safety conditions or post-approval requirements applied.
- Actual cash runway and subsequent financing activity, including equity dilution, warrant exercises, debt amendments and compliance with Avenue loan covenants.
- Whether CHEMOSAT utilization and European reimbursement expanded sufficiently to produce recurring revenue and positive contribution margins.
- Final resolution and financial impact of the Lachman litigation and any additional medac royalty obligations.
- Progress in remediating the material weakness and whether subsequent filings contain further revisions or restatements.
- The company’s ability to fund clinical programs, manufacturing scale-up and commercialization without materially reducing operations or entering restructuring or bankruptcy proceedings.