Delcath Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2019, compared with the same periods in 2018. Delcath is an interventional oncology company developing Melphalan/HDS for primary and metastatic liver cancers. CHEMOSAT is commercially available in Europe, while Melphalan/HDS was not approved for sale in the United States. The principal clinical programs are the FOCUS trial for ocular melanoma liver metastases and the ALIGN trial for intrahepatic cholangiocarcinoma.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Product revenue | $0.2 million vs. $0.9 million | $0.3 million vs. $1.6 million |
| Other revenue | $0.2 million vs. none reported | $0.4 million vs. none reported |
| Total revenue | $0.4 million vs. $0.9 million | $0.7 million vs. $1.6 million |
| Gross profit | $0.2 million vs. $0.6 million | $0.4 million vs. $1.2 million |
| Approximate gross margin | 58% vs. 74% | 61% vs. 76% |
| Operating loss | $4.1 million vs. $6.1 million | $9.8 million vs. $13.6 million |
| Net loss | $6.0 million vs. $6.7 million | $13.9 million vs. $0.5 million net income |
| Operating cash flow | Not separately provided | $(6.0) million vs. $(9.3) million |
At June 30, 2019, cash and cash equivalents were $0.4 million and restricted cash was $1.1 million, for total cash, cash equivalents and restricted cash of $1.4 million. Total assets were $5.6 million, compared with $6.8 million at December 31, 2018. Total liabilities were $35.4 million and stockholders’ deficit was $29.7 million.
Current debt included $9.8 million of notes payable and $0.5 million of convertible notes payable, net of debt discounts. Current and long-term lease liabilities totaled $1.9 million. Accounts payable and accrued expenses were $10.7 million and $9.1 million, respectively.
Material changes versus the prior comparable period
- Product revenue declined 74% in the first six months, primarily reflecting the impact of the medac European licensing arrangement; other revenue of $0.4 million partially offset the decline.
- Research and development expense declined to $5.0 million from $9.8 million, principally because cash constraints reduced FOCUS trial enrollment and related professional services.
- Selling, general and administrative expense increased to $5.2 million from $5.0 million, partly due to litigation-related costs and non-cash equity compensation.
- Interest expense increased to $4.1 million from $0.3 million, driven largely by debt discounts and financing-related items.
- The prior-year six-month results included a $17.2 million gain from the change in fair value of warrant liabilities. The 2019 amount was approximately $17,000, making the year-over-year net loss comparison substantially affected by this non-cash item.
- Shares outstanding increased to 18.3 million at June 30, 2019 from 10.3 million at December 31, 2018, and weighted-average basic shares increased substantially due to exercises of pre-funded warrants.
- The Company adopted the new lease accounting standard on January 1, 2019, recording right-of-use assets and lease liabilities; management stated that adoption did not materially affect results or cash flows.
Guidance, outlook, risks, contingencies and unusual items
Management stated that June 30 capital resources were insufficient to fund planned 2019 operations and that the Company expects continuing operating losses and negative cash flow. The financial statements disclose substantial doubt about the Company’s ability to continue as a going concern. Additional debt, equity financing or strategic alliances will be required; failure to obtain funding could require curtailment or abandonment of development and commercialization activities.
After quarter-end, the Company completed a $20.0 million private placement of Series E convertible preferred stock and warrants. Gross proceeds were subject to $2.0 million of specified Roth Capital fees, plus other transaction costs. Management stated that the financing was expected to fund operations through 2019, but also stated that additional capital would be needed during the year.
The financing was also used to exchange or settle outstanding debt and warrant obligations. A $440,000 settlement payment relating to the Series D warrant litigation was made on July 17, 2019. The legal action was then fully settled. Certain debt holders had issued default and acceleration notices in April 2019; the affected notes were subsequently exchanged for Series E preferred stock and new warrants.
The FOCUS trial was amended from a randomized design to a single-arm study with a minimum of 80 patients and an objective response rate primary endpoint. Management expected, following the July financing, to complete enrollment in the second half of 2019. The ALIGN trial is designed to enroll approximately 295 patients, but is to be pursued as financial resources permit. Neither U.S. marketing approval nor profitability is assured.
Key risks include clinical-trial enrollment, safety and efficacy outcomes, FDA and other regulatory approval, manufacturing and supply requirements, European reimbursement and commercial adoption, competition, intellectual-property challenges, substantial leverage, vendor obligations and the need for recurring external financing. The Company also reported a $2.1 million vendor demand letter from 2018 and stated that it was working with the vendor on a payment plan.
Most important facts for an investor to verify
- Verify the final net proceeds, terms, conversion mechanics, dilution and warrant coverage from the July 2019 Series E financing.
- Verify whether the financing and subsequent debt exchanges provided liquidity beyond 2019 and whether further capital was raised.
- Review the Company’s going-concern disclosure, monthly cash burn and current debt, accounts payable and accrued obligations.
- Track FOCUS enrollment, trial completion, regulatory interactions and the effect of the amended single-arm design on approval prospects.
- Track ALIGN enrollment, expenditures and whether the program remains adequately funded.
- Assess European CHEMOSAT revenue, medac milestones and royalties, reimbursement progress and procedure volumes.
- Review the potential dilution from approximately 53.4 million pre-funded warrants, other warrants, stock options and convertible preferred stock.
- Confirm the status and repayment terms of the vendor payment plan and any remaining litigation, default or settlement obligations.