Business Context and Reporting Period
Delcath Systems, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company develops and commercializes interventional oncology products for primary and metastatic liver cancers. Its Melphalan/HDS product is investigational in the United States and marketed in Europe as CHEMOSAT, a Class IIb medical device.
The company’s principal programs include the global Phase 3 FOCUS trial in hepatic-dominant ocular melanoma and a planned pivotal trial in intrahepatic cholangiocarcinoma (ICC), expected to begin in fall 2017. As of May 8, 2017, 167.9 million common shares were outstanding.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $0.7 million | $0.4 million | +100.8% |
| Gross profit | $0.5 million | $0.3 million | +102.3% |
| Gross margin | 70.5% | 70.0% | +0.5 points |
| Operating loss | $(4.2) million | $(3.5) million | Worsened $0.8 million |
| Net loss | $(11.3) million | $(1.8) million | Worsened $9.5 million |
| Basic and diluted loss per share | $(0.25) | $(1.25) | Improved due primarily to share issuance |
| Cash used in operating activities | $(3.8) million | $(3.8) million | Unchanged |
- Revenue growth was attributed primarily to Germany’s ZE reimbursement code for CHEMOSAT procedures.
- Operating expenses were $4.7 million, including $2.4 million of selling, general and administrative expense and $2.3 million of research and development expense. Research and development increased from $1.3 million, largely due to the Phase 3 program.
- Interest expense was $8.4 million, principally from amortization of debt discounts and deferred financing costs related to the 2016 convertible notes. This was largely non-cash.
- Derivative warrant income was $1.2 million, compared with $1.7 million in the prior-year period, reflecting changes in the fair value of warrant liabilities.
- Cash and cash equivalents were $6.4 million at March 31, 2017, compared with $4.4 million at December 31, 2016 and $9.5 million at March 31, 2016. Restricted cash was $20.7 million, primarily related to the convertible notes.
- Total assets were $31.0 million, total liabilities were $31.6 million, and stockholders’ deficit was $0.6 million at March 31, 2017.
- Convertible notes payable had $22.1 million of principal outstanding and a net carrying value of $9.3 million after debt discounts. The notes mature December 29, 2017 and are secured by substantially all company personal property.
Material Changes Versus the Prior Comparable Period
- Revenue approximately doubled, but remains modest and primarily reflects European commercial activity.
- Research and development spending increased approximately $1.0 million as the company advanced the FOCUS Phase 3 trial.
- Net loss increased more than fivefold, primarily because of an $8.3 million increase in non-cash interest expense and a $0.5 million reduction in warrant fair-value income.
- Common shares issued increased from 4.1 million at December 31, 2016 to 118.6 million at March 31, 2017. Approximately 114.3 million shares were issued during the quarter as installment payments and conversions of convertible notes, creating substantial dilution.
- Restricted cash decreased by $6.6 million during the quarter, while unrestricted cash increased by $2.0 million. The company reported $6.1 million of financing cash inflow from the release of restricted cash.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that available capital resources were expected to fund operations through the end of 2017, but the filing also disclosed substantial doubt about the company’s ability to continue as a going concern and a need for substantial additional capital over time.
- On April 2, 2017, the company agreed to pay approximately $7.9 million from controlled accounts to repurchase and cancel the Series C warrants. Management expected the remaining controlled-account cash to fund operations through the end of 2017. The transaction was expected to eliminate an approximately $18.0 million warrant liability and resolve the minimum stockholders’ equity shortfall related to Nasdaq continued-listing requirements.
- The convertible notes require fourteen installment payments. If equity conditions are not met, the company may be required to make cash repayments and may lack sufficient funds to do so. The notes mature in December 2017.
- The company expects continuing losses and does not provide formal revenue or earnings guidance. Future financing may involve additional borrowing, equity issuance, or strategic alliances.
- Key operating risks include clinical-trial delays or failure, regulatory nonapproval, safety concerns, manufacturing and supply constraints, limited reimbursement, competition, dependence on key personnel, and the need to commercialize CHEMOSAT successfully.
- Melphalan/HDS has not been approved for sale in the United States. The FDA previously issued a complete response letter requiring an additional well-controlled randomized trial demonstrating that benefits outweigh risks.
- The company’s products and procedures have involved serious potential risks, including bone marrow suppression, hepatic injury, severe hemorrhage, gastrointestinal perforation, stroke, myocardial infarction, and other procedure-related complications.
- The filing identifies no material changes to previously disclosed risk factors and no material legal proceedings.
Most Important Facts to Verify
- Whether the remaining restricted cash and other resources were sufficient to fund operations through year-end 2017 after the $7.9 million warrant repurchase.
- The timing, terms, and cash-versus-equity settlement of remaining convertible-note installments through the December 2017 maturity.
- The extent of further dilution from note conversions, warrants, equity offerings, and other financing needs.
- Enrollment progress, safety data, and potential success of the FOCUS trial and the planned ICC pivotal trial.
- Whether European reimbursement expansion, particularly in Germany and the United Kingdom, produces sustained commercial revenue growth.
- The effect of the April 2017 warrant cancellation on Nasdaq listing compliance, warrant liabilities, and future cash requirements.