Delcath Systems, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Delcath is an interventional oncology company developing Melphalan/HDS for primary and metastatic liver cancers. CHEMOSAT is commercially available in Europe, while Melphalan/HDS is investigational and not approved for sale in the United States. Key development programs are the FOCUS trial for ocular melanoma liver metastases and the ALIGN Phase 3 trial for intrahepatic cholangiocarcinoma.
This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company adopted ASC Topic 842 lease accounting on January 1, 2019, recognizing $2.1 million of operating lease liabilities and $2.1 million of right-of-use assets at March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $270,000 | $702,000 | Down 61.5% |
| Product revenue | $90,000 | $702,000 | Down 87.2% |
| Other revenue | $180,000 | — | New in 2019 |
| Gross profit | $174,000 | $555,000 | Down 68.6% |
| Gross margin | 64.4% | 79.1% | Down 14.7 percentage points |
| Operating loss | $5.673 million | $7.503 million | Improved $1.830 million |
| Net loss | $7.893 million | Net income of $7.187 million | Unfavorable $15.080 million swing |
| Operating cash flow | $(2.770) million | $(6.443) million | Use improved $3.673 million |
| Cash, cash equivalents and restricted cash | $1.326 million | $3.116 million | Down 57.4% |
Selling, general and administrative expense increased to $2.549 million from $2.366 million. Research and development expense declined to $3.298 million from $5.692 million, primarily because cash constraints reduced FOCUS trial enrollment and related professional services. Interest expense was $2.229 million, including $2.160 million of debt discount amortization.
At March 31, 2019, total assets were $6.164 million, total liabilities were $29.941 million, and stockholders’ deficit was $23.777 million. Current liabilities totaled $25.435 million, including $5.390 million of notes payable, $10.268 million of accounts payable and $8.360 million of accrued expenses. The company reported $6.1 million of debt principal, with $5.8 million of carrying value before considering subsequent events.
Material changes versus the prior comparable period
- Product revenue declined substantially following the European licensing arrangement with medac; $180,000 of other revenue was recognized in Q1 2019.
- Operating expenses fell 27.5%, driven by lower clinical development spending, but SG&A increased modestly.
- Q1 2018 results included a $14.697 million gain from changes in the fair value of warrant liabilities. The comparable Q1 2019 effect was only a $7,000 gain, making the year-over-year net income comparison unusually distorted by a non-cash item.
- The company issued 4.1 million common shares upon exercise of pre-funded Series D warrants. Shares outstanding increased to 14.4 million at March 31, 2019 from 10.3 million at December 31, 2018; the filing states that subsequent July 17, 2019 shares outstanding were 18.3 million.
- Debt was amended in March 2019 to make certain June, July and August 2018 notes non-convertible. The company also issued a $1.56 million senior secured promissory note, receiving $400,000 in cash and retiring Series D preferred stock with a stated value of $1.16 million.
Guidance, outlook, risks and unusual items
Management stated that available capital at March 31, 2019 was insufficient to fund planned 2019 operations. The company expected to require additional debt, equity financing or strategic alliances and warned that failure to obtain financing could require curtailment or abandonment of development and commercialization activities.
The financial statements include a going-concern qualification. Delcath has incurred losses since inception, expects continued losses for several years, and stated that substantial doubt exists about its ability to continue as a going concern.
- In April 2019, holders issued notices of default and acceleration relating to notes with outstanding principal of approximately $5.6 million and $0.5 million, respectively. These instruments were subsequently exchanged for Series E preferred stock and warrants in July 2019.
- After quarter-end, the company borrowed an aggregate $3.3 million through 8% secured, non-convertible promissory notes.
- In July 2019, the company announced a proposed private placement of approximately $20.0 million of Series E convertible preferred stock and warrants, before placement fees and other expenses; the filing also states that the financing closed on July 15, 2019.
- The company settled litigation concerning Series D warrants. It paid $440,000 in July 2019 after securing financing, in exchange for surrender of warrants and related rights.
- The FOCUS trial had slowed because of cash limitations. Management believed new capital would allow completion of enrollment in the second half of 2019. The ALIGN trial was described as financially prudent and dependent on available resources.
- CHEMOSAT has not received U.S. marketing approval. Clinical trials, regulatory review, patient enrollment, reimbursement, manufacturing, competition, product safety and financing remain significant risks.
- A vendor had demanded payment of a balance that was $2.1 million as of May 2018; the company was working under a payment plan.
Most important facts for investors to verify
- Whether the July 2019 preferred-stock financing actually closed on the stated terms and the amount of net proceeds available after fees.
- The status, settlement or acceleration of all secured debt and the extent of liens on company assets.
- Current cash, restricted cash, accounts payable, accrued liabilities and near-term debt maturities following the financing and debt exchanges.
- FOCUS and ALIGN enrollment, timelines, clinical outcomes and any changes to regulatory strategy or trial design.
- Whether CHEMOSAT sales, licensing revenue, reimbursement and European commercial adoption are increasing sufficiently to reduce reliance on external financing.
- The potential dilution from Series E preferred stock, outstanding warrants, options and future equity offerings.
- The consequences of the going-concern qualification and whether additional financing will be required to sustain operations.