Delcath Systems, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Delcath is an interventional oncology company developing Melphalan/HDS for liver cancers, including ocular melanoma liver metastases and intrahepatic cholangiocarcinoma. CHEMOSAT is commercially developed in Europe, while Melphalan/HDS remains investigational and unapproved for sale in the United States. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $0.684 million | $0.435 million | $2.011 million | $1.316 million |
| Gross profit | $0.512 million | $0.323 million | $1.484 million | $0.943 million |
| Gross margin | 74.9% | 74.3% | 73.8% | 71.7% |
| Operating loss | $(4.627) million | $(4.724) million | $(13.442) million | $(12.057) million |
| Net loss | $(12.596) million | $(1.004) million | $(25.873) million | $(9.485) million |
| Interest expense | $(5.042) million | $(4.963) million | $(20.324) million | $(6.584) million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(11.659) million | $(10.597) million |
Revenue increased 57.2% year over year in the quarter and 52.8% for the nine-month period, primarily due to German ZE reimbursement for CHEMOSAT procedures. Gross margin improved, but revenue remained modest relative to operating expenses. The nine-month operating expense base was $14.926 million, including $7.807 million of selling, general and administrative expense and $7.119 million of research and development expense.
At September 30, 2017, cash and cash equivalents were $2.495 million, restricted cash was $8.362 million, total assets were $14.486 million, and total liabilities were $16.336 million. Stockholders’ deficit was $1.850 million. Convertible notes payable, net of debt discount, totaled $9.736 million, with $11.437 million of principal outstanding. The company had $15.892 million of current liabilities.
Material changes versus the prior comparable period
- Revenue and gross profit increased, while gross margin improved by approximately 2.1 percentage points for the nine-month period.
- Research and development expense increased 19.1% for the first nine months, primarily because of the ongoing Phase 3 FOCUS trial. Selling, general and administrative expense increased 11.1%.
- Net loss increased by $16.388 million for the nine months. The principal drivers were a $13.740 million increase in interest expense, a $2.952 million loss on debt settlements, and higher operating expenses. These were partly offset by a $9.613 million gain on warrant extinguishment and a $1.227 million favorable change in warrant fair value.
- Cash used in operations increased to $11.659 million from $10.597 million. Financing activities provided $10.194 million, including releases of restricted cash, preferred-stock proceeds, and other financing-related transactions.
- The company issued 1.414 million common shares during the nine months as payments or conversions under its convertible notes, contributing to substantial dilution.
Guidance, outlook, risks, and unusual items
- Management stated that, in its reduced operating mode, available capital was expected to fund operations through at least January 2018. The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern and that additional financing or strategic alliances are required.
- Management expects continuing operating losses and does not provide a clear revenue or profitability forecast. If additional capital is unavailable, the company may have to reduce or abandon development and commercialization activities.
- The FOCUS global Phase 3 trial in hepatic-dominant ocular melanoma was ongoing under a Special Protocol Assessment. A planned pivotal ICC trial was described as financially dependent on available resources.
- On August 28, 2017, the company entered into a restructuring agreement involving note cancellation, preferred-stock redemptions, and proposed note restructuring. The additional restructuring did not occur by the required September 15 deadline because the required reverse-split approval was not obtained.
- After the reporting date, the company amended the restructuring agreement and completed a 1-for-350 reverse stock split on November 6, 2017. Its common stock began trading on the OTCQB after delisting from Nasdaq; all share and per-share amounts in the filing were retrospectively presented for the split.
- Series C Preferred Stock issued for $0.5 million was recorded as a liability because it was mandatorily redeemable. It was redeemed for $0.590 million on November 6, 2017.
- Clinical and regulatory risks remain significant. Melphalan/HDS has not been approved for U.S. sale; prior FDA review resulted in a complete response letter, and clinical trials may be delayed, fail, or require additional funding. The procedure carries risks including bone-marrow suppression, hepatic injury, hemorrhage, stroke, and myocardial infarction.
Most important facts for investors to verify
- Actual cash availability and restrictions on the $8.362 million of restricted cash, including amounts available to satisfy note obligations.
- Funding plans and whether the company can maintain operations beyond the stated January 2018 runway.
- Terms and execution status of the amended note restructuring, including future redemptions, conversions, warrants, maturity extensions, and potential dilution.
- Enrollment, timing, safety results, and financing status of the FOCUS and planned ICC pivotal trials.
- Progress toward U.S. regulatory approval and the sustainability of European reimbursement and CHEMOSAT sales.
- Post-split share count, OTCQB trading liquidity, and the effect of subsequent financings or warrant exercises on ownership dilution.