Business Context and Reporting Period
Delcath Systems, Inc. filed its Form 10-K for the fiscal year ended December 31, 2017. The company is an interventional oncology business developing Melphalan/HDS for primary and metastatic liver cancers. CHEMOSAT is commercially available in Europe as a Class IIb medical device, but Melphalan/HDS was not approved for sale in the United States.
The primary development programs were the global Phase 3 FOCUS trial in hepatic-dominant ocular melanoma and a planned pivotal trial in intrahepatic cholangiocarcinoma (ICC). The filing also provides unaudited fourth-quarter 2017 results.
Financial Performance and Position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $2.715 million | $1.992 million | +36.3% |
| Gross profit | $2.014 million | $1.442 million | +39.6% |
| Gross margin | 74.2% | 72.4% | +1.8 percentage points |
| Operating loss | $18.165 million | $16.440 million | Worsened by $1.725 million |
| Net loss | $45.117 million | $17.971 million | Worsened by $27.146 million |
| Basic and diluted loss per share | $6.50 | $3,706.50 | Impacted by reverse splits and share issuance |
| Cash used in operating activities | $15.398 million | $14.213 million | Use increased by $1.185 million |
| Cash and cash equivalents | $3.999 million | $4.409 million | Down $0.410 million |
| Total assets | $8.887 million | $35.239 million | Down $26.352 million |
| Stockholders’ equity | $0.678 million | $(1.490) million | Improved by $2.168 million |
FY 2017 revenue was generated from European product sales, particularly in Germany following implementation of the ZE reimbursement code. Cost of goods sold was $0.701 million, producing gross profit of $2.014 million. Operating expenses were $20.179 million, including $9.684 million of selling, general and administrative expense and $10.495 million of research and development expense. Operating and net margins remained deeply negative.
At December 31, 2017, current liabilities were $7.814 million versus current assets of $7.589 million. Convertible notes had been repaid or settled and were no longer outstanding; the remaining warrant liability was $0.560 million. The company had an accumulated deficit of $324.8 million.
Fourth-Quarter 2017 Results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $0.704 million | $0.676 million |
| Operating loss | $4.725 million | $4.383 million |
| Net loss | $19.246 million | $8.486 million |
| Basic loss per share | $0.75 | $1,292.02 |
Material Changes Versus the Prior Comparable Period
- Revenue increased 36.3% year over year, reflecting higher European product sales and increased market acceptance.
- Research and development expense increased to $10.495 million from $8.448 million, primarily due to continued work on the FOCUS trial.
- SG&A increased modestly to $9.684 million from $9.434 million, driven by higher Delaware corporate taxes, audit and internal-control testing costs, and shareholder meeting expenses.
- Net loss increased substantially because of $29.924 million of losses on debt settlements and extinguishments and $21.703 million of interest expense, partially offset by a $15.103 million non-cash gain from changes in warrant fair value and a $9.613 million gain on warrant extinguishment.
- During 2017, significant convertible debt was exchanged or settled through equity, preferred stock, warrants and cash. The transactions resulted in substantial dilution and complex derivative accounting.
- The company completed a one-for-350 reverse stock split in November 2017 and moved its common stock from Nasdaq to the OTCQB.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available capital was expected to fund operations only through May 2018 and that substantial additional financing was required.
- The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern. The financial statements do not include adjustments that could result from this uncertainty.
- Enrollment in the FOCUS trial proceeded more slowly than anticipated in 2017, and cash constraints limited efforts to accelerate enrollment. Management later stated that the trial was unlikely to support an FDA NDA submission in 2019.
- The ICC pivotal trial was designed to enroll approximately 295 patients, but initiation was dependent on available financial resources.
- Melphalan/HDS remained subject to the FDA’s 2013 Complete Response Letter, which requires additional controlled clinical evidence focused on overall survival and a demonstration that benefits outweigh risks. A Special Protocol Assessment does not guarantee approval.
- CHEMOSAT reimbursement in Germany was subject to annual negotiations, while Dutch guideline inclusion was viewed as a step toward potential reimbursement. UK use remained primarily within research or private-pay pathways.
- The February 2018 registered offering generated approximately $5.0 million of gross proceeds through issuance of common stock, pre-funded warrants and Series D warrants. The company sought shareholder approval to increase authorized shares and permit exercise of the warrants and a further reverse split.
- Key risks include continued operating losses, limited cash, dependence on additional equity or strategic financing, clinical-trial delays or failure, regulatory rejection, procedure-related toxicity, reimbursement uncertainty, manufacturing and supply constraints, dilution, warrant obligations and OTCQB trading volatility.
Most Important Facts for Investors to Verify
- Whether the company obtained sufficient post-year-end financing to continue operations beyond May 2018.
- The status, enrollment rate and eventual results of the FOCUS Phase 3 trial.
- Whether the ICC pivotal trial was initiated and adequately funded.
- FDA interactions following the Complete Response Letter and the likelihood and timing of a new NDA.
- The impact of the February 2018 financing, Series D warrants, authorized-share proposal and any subsequent reverse split on dilution and capitalization.
- Actual European treatment volumes, reimbursement rates and recurring product revenue growth.
- The company’s ability to convert reported gross profit into sustainable operating cash flow, given its substantial accumulated deficit and continuing losses.