Delcath Systems, Inc. — 2018 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Delcath develops Melphalan/HDS, an investigational liver-directed chemotherapy system, and commercially sells CHEMOSAT in Europe. The company is focused on ocular melanoma liver metastases and intrahepatic cholangiocarcinoma, with ongoing FOCUS and ALIGN clinical programs.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $0.8 million | $0.7 million | $2.4 million | $2.0 million |
| Gross profit | $0.6 million | $0.5 million | $1.8 million | $1.5 million |
| Gross margin | 71.7% | 74.9% | 74.8% | 73.8% |
| Operating loss | $(5.8) million | $(4.6) million | $(19.4) million | $(13.4) million |
| Net loss | $(8.9) million | $(12.6) million | $(8.4) million | $(25.9) million |
| Operating cash flow | Not separately provided | Not separately provided | $(12.9) million | $(11.7) million |
Revenue growth was attributed primarily to Germany’s ZE reimbursement code for CHEMOSAT procedures. Research and development expense increased to $4.1 million in the quarter and $13.9 million year to date, mainly because of the FOCUS trial. Selling, general and administrative expense declined to $2.3 million in the quarter and $7.3 million year to date.
The reported net loss benefited from non-cash items, including a $1.2 million Q3 gain and an $18.4 million year-to-date gain from changes in the fair value of warrant liabilities. Interest expense was $3.2 million in Q3 and $3.4 million year to date. Year-to-date results also included a $1.1 million loss on debt extinguishment and a $2.8 million loss on issuance of a financial instrument.
Balance sheet, debt and liquidity
- September 30 cash and cash equivalents were $8.9 million, plus $1.1 million of restricted cash, for total cash, cash equivalents and restricted cash of $10.0 million, compared with $5.3 million at December 31, 2017.
- Current assets were $11.8 million versus current liabilities of $17.0 million. Total liabilities were $17.7 million, and stockholders’ deficit was $4.9 million.
- Convertible notes had $9.4 million of principal, $6.6 million of unamortized discount and $2.8 million of net carrying value at September 30, 2018. The notes bear 8% interest, are secured by substantially all company personal property and generally have substantial maturities beginning six months after issuance.
- During the first week of October 2018, the company repaid $4.9 million of outstanding notes. In November 2018, it raised $0.85 million through the issuance of Series D preferred stock.
- Management stated that September 30 capital resources were insufficient to fund planned 2018 operations and that additional financing was required. Including the November financing, management expected resources to fund operations into December 2018. The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Nine-month revenue increased 18.5% to $2.4 million, while gross profit increased 20.2% to $1.8 million.
- Nine-month operating loss worsened by $5.9 million as research and development spending increased $6.8 million, despite a $0.5 million reduction in selling, general and administrative expense.
- Nine-month net loss improved by $17.5 million, largely because 2017 included substantially higher non-cash interest and warrant-related expenses.
- Cash used in operations increased by $1.2 million to $12.9 million, reflecting continued clinical and operating cash consumption.
- The company completed a September rights offering that generated approximately $7.0 million of net proceeds and issued substantial convertible debt and warrants during June through September.
- Common shares outstanding increased to approximately 9.0 million as of November 8, 2018 from 263,275 shares at December 31, 2017, reflecting financing activity and the May 2018 1-for-500 reverse stock split. Warrants outstanding totaled approximately 70.2 million at September 30, 2018, creating significant potential dilution.
Guidance, outlook, commentary and risks
- The company expected to complete enrollment in the amended FOCUS trial by the end of the first half of 2019. The trial was changed from randomized to single-arm, with objective response rate as the primary endpoint; the prior SPA was invalidated by the amendment.
- The ALIGN trial for ICC began enrolling in October 2018 and is planned to enroll approximately 295 patients at approximately 40 sites, subject to available financial resources.
- Melphalan/HDS has not been approved for sale in the United States. The company previously received an FDA complete response letter, and future approval depends on clinical, safety, regulatory and manufacturing outcomes.
- Clinical trials are costly and uncertain, with risks involving enrollment, safety, efficacy, regulatory requirements, manufacturing, competing treatments and timing.
- European commercialization remains limited, and reimbursement varies by country. UK use remains primarily within research settings, while German reimbursement levels are renegotiated annually.
- Hudson Bay Master Fund filed a lawsuit alleging breaches of participation rights in future offerings and seeking damages exceeding $1 million and specific performance. Delcath denies liability, but the outcome and financial impact were not determinable.
- The filing identifies substantial financing risk: without additional capital, Delcath may need to curtail or abandon portions of its clinical development and commercialization programs.
Most important facts for an investor to verify
- Cash runway following the October $4.9 million debt repayment and November $0.85 million preferred-stock financing.
- Terms, maturity schedule, security interests, conversion provisions and dilution implications of the 2018 convertible notes and warrants.
- FOCUS enrollment progress, amended endpoint strategy and the regulatory implications of invalidating the prior SPA.
- ALIGN trial initiation, enrollment pace and funding requirements.
- Status and potential exposure from the Hudson Bay litigation.
- Whether European reimbursement expansion can materially increase CHEMOSAT revenue, which remained only $2.4 million for the first nine months.
- The company’s going-concern disclosures and ability to raise additional capital on acceptable terms.