Delcath Systems, Inc. 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, although the request references 2015 Q4. Delcath is a late-stage pharmaceutical and medical-device company developing Melphalan/HDS, marketed in Europe as CHEMOSAT for liver cancers. The product had CE Mark authorization in Europe but was not approved for sale in the United States.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.747 million | $1.069 million | +63.5% |
| Cost of goods sold | $0.462 million | $0.291 million | Higher with increased sales |
| Gross profit | $1.285 million | $0.778 million | +65.2% |
| Gross margin | Approximately 73.6% | Approximately 72.8% | Improved modestly |
| Operating expenses | $16.495 million | $20.082 million | -17.9% |
| Operating loss | $15.210 million | $19.304 million | Improved |
| Net loss | $14.704 million | $17.381 million | Improved 15.4% |
| Basic loss per share | $0.91 | $1.84 | Improved; loss per share |
| Cash used in operations | $16.420 million | $15.552 million | Use increased |
| Cash and cash equivalents at year-end | $12.607 million | $20.469 million | Down $7.862 million |
Revenue consisted entirely of product sales in 2015 and increased primarily because of greater European product sales and market acceptance. Management reported that gross margin may remain volatile as inventory costs, production efficiencies, volume forecasts and selling prices change.
Selling, general and administrative expense declined to $10.009 million from $15.783 million, reflecting workforce and lease restructuring and operating efficiencies. Research and development expense increased to $6.486 million from $4.299 million, primarily because of clinical development initiatives.
The balance sheet showed total assets of $15.733 million, current assets of $14.601 million, current liabilities of $6.312 million and stockholders’ equity of $8.601 million. The company reported no conventional funded debt balance, but had $3.785 million of warrant liabilities and could not access its Silicon Valley Bank revolving facility because applicable cash and borrowing-base conditions were not met. Future minimum operating lease payments, net of sublease receipts, totaled approximately $2.5 million.
Material changes versus the prior comparable period
- Revenue increased by $0.678 million, while gross profit increased by $0.507 million.
- Total operating expenses decreased by $3.587 million, driven by lower SG&A, partially offset by higher clinical-development spending.
- Net loss decreased by $2.677 million, although the 2015 result included a smaller derivative warrant gain than in 2014.
- Cash declined from $20.469 million to $12.607 million, and operating cash burn increased by $0.868 million.
- The company issued equity and warrants in February and July 2015, generating aggregate net proceeds of approximately $8.5 million, and sold additional shares under its at-the-market program.
- Outstanding common shares increased materially during 2015. At December 31, 2015, 21.8 million shares were outstanding, compared with 9.7 million at December 31, 2014.
- Warrant liabilities increased from $0.225 million to $3.785 million, creating material non-cash earnings volatility.
Guidance, outlook, commentary and risks
Management stated that cash resources were expected to fund operations only through the third quarter of 2016 and that substantial additional capital would be required. Potential funding sources included additional equity or debt financing and strategic alliances. The filing states that the company expects continuing operating losses and does not expect significant revenue for the foreseeable future.
In January 2016, Delcath reached an FDA Special Protocol Assessment agreement for the FOCUS global Phase 3 trial in hepatic-dominant ocular melanoma. The trial was designed to enroll 240 patients and use overall survival as the primary endpoint; the first patient was enrolled in February 2016. The FDA had previously issued a 2013 Complete Response Letter requiring an additional well-controlled randomized trial demonstrating that benefits outweigh risks.
In Europe, Germany established a national Zusatzentgelt reimbursement code for CHEMOSAT procedures, but reimbursement rates still required negotiation. United Kingdom reimbursement remained uncertain, and NICE had recommended that use occur in a research context because available safety and efficacy evidence was limited.
- Going concern: Grant Thornton’s March 18, 2016 audit report and the financial statement notes disclosed substantial doubt about the company’s ability to continue as a going concern. The company had an accumulated deficit of $261.2 million.
- Regulatory risk: U.S. approval remained uncertain and depended on successful clinical, manufacturing, human-factors and safety work.
- Clinical risk: Trials could be delayed, fail to enroll, produce unfavorable efficacy or safety results, or be halted by regulators.
- Safety risk: The procedure has been associated with serious or potentially life-threatening complications, including bone marrow suppression, hepatic injury, hemorrhage, stroke, myocardial infarction and other adverse events.
- Commercial and reimbursement risk: European sales depended on hospital adoption, adequate reimbursement and physicians obtaining melphalan separately.
- Supply-chain risk: The company relied on third parties, including sole-source suppliers and a sole approved European melphalan manufacturer.
- Financing and dilution risk: Continued losses may require additional equity financing. Warrants and equity programs could materially dilute existing holders.
- NASDAQ listing risk: The company failed to meet the $1.00 minimum bid-price requirement and received an extension through August 8, 2016; a reverse stock split could have been required.
- Internal controls: Management concluded disclosure controls were effective, but the filing disclosed a prior material weakness involving valuation of the July 2015 Series B warrants and the use of an outside specialist.
Important facts for investors to verify
- Whether subsequent financing was completed and whether available cash extended beyond the third quarter of 2016.
- FOCUS trial enrollment, safety findings, overall-survival results and the timing of any future FDA submission.
- Actual German reimbursement rates and utilization under the national reimbursement code.
- European product revenue, gross margin and procedure volumes, including the degree of dependence on individual reimbursement requests.
- Current warrant balances, exercise-price adjustments, expirations and potential share dilution.
- NASDAQ listing status and whether a reverse stock split or other action was required.
- Whether the going-concern uncertainty was resolved in subsequent filings.
- The outcome of the IRS examination and any changes to the company’s valuation allowance or tax attributes.