Delcath Systems, Inc. — 2019 Q3 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 remains investigational in the United States. The principal clinical programs are the FOCUS trial for ocular melanoma liver metastases and the ALIGN trial for intrahepatic cholangiocarcinoma.
This unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. The company had 21,977,808 common shares outstanding as of November 14, 2019, before giving effect to subsequent preferred-stock conversions described in the filing.
Financial condition and key metrics
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 |
|---|---|---|---|---|
| Product revenue | $0.2 million | $0.8 million | $0.5 million | $2.4 million |
| Other revenue | $0.2 million | — | $0.5 million | — |
| Gross profit | $0.2 million | $0.6 million | $0.6 million | $1.8 million |
| Approximate gross margin | 55% | 72% | 59% | 75% |
| Operating expenses | $5.8 million | $6.4 million | $16.0 million | $21.2 million |
| Operating loss | $5.6 million | $5.8 million | $15.4 million | $19.4 million |
| Net loss | $7.5 million | $8.9 million | $21.4 million | $8.4 million |
| Net cash used in operating activities | Not separately provided | Not separately provided | $18.3 million | $12.9 million |
At September 30, 2019, cash and cash equivalents were $15.3 million, restricted cash was $0.2 million, and total cash, cash equivalents and restricted cash were $15.5 million, compared with $3.6 million at December 31, 2018. Total assets were $18.9 million and stockholders’ deficit was $18.8 million.
Current liabilities were $32.5 million, including a $20.4 million warrant liability, $6.5 million of accrued expenses and $4.9 million of accounts payable. Debt included $2.0 million of long-term convertible notes; previously issued 2018 and 2019 notes were exchanged or retired in connection with the 2019 financing. Lease liabilities totaled $1.0 million.
Material changes versus the prior comparable period
- Combined quarterly revenue declined to $0.4 million from $0.8 million, and nine-month revenue declined to $1.1 million from $2.4 million. The company attributed the change primarily to the medac licensing arrangement, which shifted some revenue from product sales to other revenue.
- Quarterly SG&A increased to $4.0 million from $2.3 million, primarily due to approximately $0.9 million of non-cash settlement expense and $0.6 million of litigation expense. Nine-month SG&A increased to $9.2 million from $7.3 million.
- Research and development expense declined to $1.8 million from $4.1 million for the quarter and to $6.8 million from $13.9 million for the nine months, primarily because cash constraints reduced FOCUS trial enrollment and related professional services.
- The nine-month 2019 net loss was substantially higher than in 2018, largely because 2018 included an $18.4 million favorable change in warrant fair value. The 2019 warrant fair-value benefit was approximately $0.5 million.
- Gross margin declined, reflecting lower revenue and changes in cost-of-goods-sold allocations.
- In July and August 2019, the company raised $29.5 million of gross proceeds through Series E and Series E-1 convertible preferred stock and warrant financings. Net proceeds were approximately $26.5 million. The financing also exchanged or equitized certain outstanding debt and obligations.
- The financing generated substantial potential dilution. At September 30, 2019, approximately 701.4 million warrants were outstanding, and Series E and Series E-1 preferred stock was convertible at an initial $0.06 conversion price, subject to adjustments. From October 1 through November 14, 2019, the company issued 3.7 million common shares upon preferred-stock conversions.
Guidance, outlook, risks and unusual items
Management stated that the July and August financings were expected to fund operations through the second quarter of 2020, but that additional capital would be required. The company expects continuing operating losses and significant clinical and regulatory expenditures. Management identified debt and equity financings and strategic alliances as potential funding sources, but stated that additional financing may not be available on acceptable terms.
The financial statements were prepared on a going-concern basis, but management disclosed substantial doubt about the company’s ability to continue as a going concern. Failure to obtain additional funding could require curtailment or abandonment of clinical development and commercialization activities.
The FOCUS trial was amended from a randomized design to a single-arm study and had experienced slower enrollment because of cash limitations. Management believed new capital could support completion of enrollment during the second half of 2019. The ALIGN trial remains a planned approximately 295-patient Phase 3 study, pursued as resources permit.
Melphalan/HDS had not been approved for sale in the United States. Key risks include clinical-trial enrollment and outcomes, FDA approval, safety of the procedure, manufacturing and supply requirements, European reimbursement, competition, intellectual-property challenges and the company’s limited operating history and liquidity.
The company approved a 1-for-100 reverse stock split, but the filing states that the October 2019 charter amendment was rescinded after FINRA withdrew its prior confirmation. The company was awaiting renewed FINRA confirmation and intended to refile the amendment. Registration-rights amendments and a waiver and forbearance agreement were also entered into after quarter-end in connection with potential registration defaults and related remedies.
A vendor demand letter concerning an approximately $2.1 million balance remained disclosed. The company also reported litigation and settlement expenses during the quarter, including a settlement completed in July and August 2019.
Most important facts for an investor to verify
- Current cash runway and whether additional financing was obtained after September 30, 2019.
- Status and terms of the Series E and Series E-1 preferred-stock conversions, warrants, anti-dilution provisions and resulting fully diluted share count.
- Whether the proposed reverse stock split was ultimately completed and the effect on the company’s trading status and exchange-listing prospects.
- FOCUS enrollment, trial completion timing, clinical results and regulatory plans; separately, the funding and progress of the ALIGN trial.
- FDA approval prospects for Melphalan/HDS and the status of European reimbursement and medac commercialization.
- Potential registration-rights liquidated damages, vendor obligations, litigation settlements and other contingencies.
- Reliability of reported cash-use comparisons, because the MD&A contains an unclear sentence regarding quarterly versus nine-month operating cash usage; the cash-flow statement clearly reports $18.3 million used in operating activities for the nine months ended September 30, 2019.