Delcath Systems, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Delcath Systems, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company is an interventional oncology business developing and commercializing CHEMOSAT/Melphalan/HDS, a system designed to deliver high-dose regional chemotherapy to the liver while filtering the returned blood. CHEMOSAT has CE Mark authorization and limited commercial availability in Europe, but Melphalan/HDS was not approved for sale in the United States.
The company’s principal development programs were the global Phase 3 FOCUS trial in hepatic-dominant ocular melanoma, Phase 2 programs in hepatocellular carcinoma and intrahepatic cholangiocarcinoma, European commercial registry activities, and investigator-initiated trials.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Product revenue | $2.0 million | $1.7 million | Up approximately 14% |
| Cost of goods sold | $0.6 million | $0.5 million | Up approximately 19% |
| Gross profit | $1.4 million | $1.3 million | Up approximately 12% |
| Approximate gross margin | 72% | 74% | Declined modestly |
| SG&A expense | $9.4 million | $10.0 million | Down approximately 6% |
| R&D expense | $8.4 million | $6.5 million | Up approximately 30% |
| Operating loss | $16.4 million | $15.2 million | Worsened approximately 8% |
| Net loss | $18.0 million | $14.7 million | Worsened approximately 22% |
| Net loss per share | $10.59 | $14.56 | Improved on a reverse-split-adjusted basis |
| Cash used in operating activities | $14.2 million | $16.4 million | Improved by $2.2 million |
The increase in research and development expense primarily reflected initiation of the Phase 3 FOCUS trial. The net loss also reflected approximately $14.3 million of interest expense, principally amortization of debt discounts, partially offset by $12.8 million of non-cash derivative instrument income from changes in the fair value of warrant liabilities.
At December 31, 2016, cash and cash equivalents were $4.4 million, compared with $12.6 million at December 31, 2015. Restricted cash was $27.3 million, primarily associated with the 2016 note financing. Total assets were $35.2 million, total liabilities were $36.7 million, and stockholders’ equity was negative $1.5 million.
The company had $34.4 million of convertible notes principal outstanding, recorded net of debt discounts at $13.3 million. The notes were payable in 14 installments beginning in January 2017 and could generally be settled in cash or shares, subject to conditions. The company also had $18.8 million of warrant liability at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased as European product sales and market acceptance improved, although revenue remained immaterial relative to operating costs.
- R&D spending increased substantially because the FOCUS Phase 3 trial began in 2016.
- SG&A expense declined due primarily to lower corporate expenses and depreciation.
- Net loss increased despite improved operating cash usage, largely because of non-cash debt discount amortization and related interest expense.
- On June 13, 2016, the company issued $35.0 million of senior secured convertible notes for approximately $32.2 million of gross cash proceeds. Approximately $26.2 million remained restricted at year-end and was subject to release upon satisfaction of equity conditions.
- Shareholders approved and the company effected a one-for-sixteen reverse stock split on July 21, 2016. Historical share and per-share amounts were retroactively adjusted.
- Common stockholders’ equity declined from $8.6 million at December 31, 2015 to a deficit of $1.5 million at December 31, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that available capital was expected to fund operating activities through the first quarter of 2018, but also stated that substantial additional funding would be required. The company expected continued operating losses and planned to seek capital through additional debt, equity offerings, or strategic alliances. The filing does not provide revenue or profitability guidance.
The independent auditor included a going-concern explanatory paragraph. Recurring losses, an accumulated deficit of $279.2 million, negative operating cash flow, upcoming note installments, and dependence on additional financing raised substantial doubt about the company’s ability to continue as a going concern. The financial statements included no adjustments related to this uncertainty.
- The FDA issued a 2013 Complete Response Letter for the prior Melphalan/HDS application, requiring additional well-controlled randomized evidence using overall survival as the primary endpoint. The product remained unapproved in the United States.
- The FOCUS Phase 3 trial was conducted under an FDA Special Protocol Assessment and targeted 240 patients, but clinical trials remained subject to enrollment delays, safety findings, regulatory changes, manufacturing issues, and possible failure.
- CHEMOSAT commercialization in Europe depended heavily on country-specific reimbursement. German reimbursement levels were negotiated annually, while reimbursement in the United Kingdom and other markets remained uncertain.
- The notes were secured by substantially all of the company’s assets. Failure to meet installment or other obligations could require cash repayment, trigger default remedies, and permit foreclosure on collateral.
- Settlement of the notes in shares and exercise of related warrants could cause significant dilution. The company had approximately 7.2 million warrants outstanding at year-end, excluding other potentially dilutive securities.
- NASDAQ notified the company in February 2017 that its stock had traded below the $1.00 minimum bid price for 30 consecutive trading days. The company had until August 14, 2017 to regain compliance, subject to possible extensions or appeal.
- From January 1 through March 28, 2017, the company issued approximately 109.3 million shares to noteholders as payment on the convertible notes and obtained release of approximately $6.6 million from restricted cash.
- The company relied on third-party suppliers, including a sole source of branded melphalan in the United States and a limited source of melphalan in Europe.
- Future lease obligations, net of sublease receipts, totaled approximately $3.1 million at December 31, 2016.
Most Important Facts for Investors to Verify
- Whether additional financing was obtained on terms sufficient to fund operations and satisfy note installments.
- The actual release and availability of restricted cash under the note financing conditions.
- FOCUS trial enrollment, safety, overall survival results, and the timing and requirements for a potential FDA submission.
- Whether the company regained compliance with NASDAQ’s minimum bid price and stockholders’ equity requirements.
- The number of shares issued or issuable under the convertible notes, Series C warrants, and other anti-dilution provisions.
- European CHEMOSAT procedure volumes, reimbursement rates, gross margins, and whether commercial growth is sufficient to offset operating losses.
- Any changes to the auditor’s going-concern assessment and the company’s ability to maintain operations beyond the stated first-quarter 2018 funding horizon.