Delcath Systems, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2017, filed August 8, 2017. Delcath is an interventional oncology company developing Melphalan/HDS for primary and metastatic liver cancers. CHEMOSAT is commercially developed in Europe, while Melphalan/HDS remains investigational and unapproved for sale in the United States.
The principal programs were the global Phase 3 FOCUS trial in hepatic-dominant ocular melanoma and a planned pivotal ICC trial expected to begin enrollment in fall 2017. The company also continued European commercialization and reimbursement efforts.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $0.6 million vs. $0.5 million | $1.3 million vs. $0.9 million |
| Gross profit | $0.4 million vs. $0.4 million | $1.0 million vs. $0.6 million |
| Gross margin | Approximately 76.9% vs. 70.6% | Approximately 73.3% vs. 70.3% |
| Operating expenses | $5.1 million vs. $4.2 million | $9.8 million vs. $8.0 million |
| Operating loss | $4.6 million vs. $3.9 million | $8.8 million vs. $7.3 million |
| Net loss | $1.9 million vs. $6.7 million | $13.3 million vs. $8.5 million |
| Loss per share | $0.01 vs. $4.41 | $0.09 vs. $5.72 |
| Operating cash flow | Not separately provided | $(8.1) million vs. $(7.0) million |
Revenue growth was attributed primarily to Germany’s ZE reimbursement code for CHEMOSAT procedures. Research and development expense increased to $2.5 million in the quarter and $4.8 million year to date, mainly from ongoing Phase 3 trial activity.
Reported net loss benefited from a non-cash $9.6 million gain on extinguishment of Series C warrants. This was substantially offset by $6.9 million of quarterly interest expense and $15.3 million of year-to-date interest expense, primarily reflecting amortization of debt discounts and financing costs.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.8 million at June 30, 2017, down from $4.4 million at December 31, 2016.
- Restricted cash was $12.9 million, including approximately $11.8 million associated with the senior secured convertible notes that the company stated it could not access until completing a proposed reverse stock split.
- Net convertible notes payable was $12.6 million, based on $18.9 million principal less $6.3 million of debt discounts.
- Total liabilities were $17.7 million, compared with $36.7 million at December 31, 2016, primarily because the warrant liability declined from $18.8 million to $43,000.
- Stockholders’ equity was $0.9 million at June 30, 2017, compared with a deficit of $1.5 million at year-end 2016.
- The company used $8.1 million in operating cash during the first six months and had an accumulated deficit of $292.5 million.
Material Changes Versus Prior Comparable Period
- Six-month revenue increased approximately 51% to $1.3 million, while gross profit increased approximately 57% to $1.0 million.
- Six-month operating expenses increased approximately 23%, driven mainly by higher research and development spending.
- Six-month net loss increased approximately 57% because of substantially higher non-cash interest expense, despite the $9.6 million warrant-extinguishment gain and higher gross profit.
- The company issued approximately 420.2 million common shares during the first six months as payments on convertible notes. Shares outstanding increased from approximately 4.1 million at December 31, 2016 to approximately 424.4 million at June 30, 2017, before additional post-period issuances.
- On April 2, 2017, the company paid $7.9 million from controlled accounts to extinguish the Series C warrants, recognizing the $9.6 million gain.
Guidance, Outlook, Risks and Unusual Items
Management stated that, assuming completion of the proposed reverse stock split, existing capital resources were expected to fund operations through the end of 2017. The filing nevertheless reported substantial doubt about the company’s ability to continue as a going concern and stated that additional funding, equity financing, borrowing or strategic alliances would be required.
The company’s ability to access restricted cash and issue additional common stock was constrained by its authorized-share limit. A reverse stock split was proposed to create financing flexibility, support note amortization and assist continued NASDAQ listing compliance. The filing does not provide a guaranteed completion date or outcome for the proposal.
On July 2, 2017, after quarter-end, $4.2 million of convertible notes were exchanged for 4,200 shares of Series A Preferred Stock. On July 11, 2017, the company issued Series B Preferred Stock for $2.0 million of gross proceeds for general corporate purposes. These transactions may affect capital structure, voting power and future dilution.
Key risks include continued operating losses and cash burn, inability to access restricted cash or raise capital, potential cash repayment obligations under the convertible notes if equity conditions are not met, clinical-trial delays or failures, regulatory approval uncertainty, reimbursement limitations, manufacturing and supplier dependencies, procedure-related safety risks, and substantial potential dilution.
Melphalan/HDS had not been approved for U.S. commercial sale. The FOCUS trial and planned ICC pivotal trial remain subject to enrollment, execution, safety, efficacy and regulatory risks. The company also noted that prior FDA review resulted in a 2013 complete response letter requiring additional evidence that clinical benefits outweigh risks.
Most Important Facts for Investors to Verify
- Whether the proposed reverse stock split was approved and completed, and whether it enabled access to the approximately $11.8 million of restricted cash.
- The company’s subsequent cash balance, financing activity and ability to meet convertible-note amortization obligations.
- Actual enrollment, timing, safety data and interim or final results from the FOCUS and pivotal ICC trials.
- Progress toward U.S. regulatory approval and the effect of European reimbursement on CHEMOSAT procedure volumes and revenue.
- The extent of dilution from note conversions, preferred stock, warrants and other equity-linked instruments.
- Whether the going-concern uncertainty was resolved through financing, strategic transactions or improved operating cash flow.