Delcath Systems, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Delcath Systems is an interventional oncology company developing Melphalan/HDS for liver cancers, including ocular melanoma liver metastases and intrahepatic cholangiocarcinoma. CHEMOSAT is commercially available in Europe, while Melphalan/HDS remains investigational and unapproved in the United States. This report covers the three months ended March 31, 2018; financial statements are unaudited.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $0.7 million | $0.7 million | Down $0.04 million |
| Gross profit | $0.6 million | $0.5 million | Up $0.03 million |
| Gross margin | 79.1% | 70.5% | Improved |
| Operating expenses | $8.1 million | $4.7 million | Up $3.3 million |
| Operating loss | $7.5 million | $4.2 million | Loss increased $3.3 million |
| Net income (loss) | $7.2 million | $(11.3) million | Improved $18.5 million |
| Net cash used in operations | $(6.4) million | $(3.8) million | Use increased $2.6 million |
Revenue was generated from European CHEMOSAT product sales. Research and development expense increased to $5.7 million from $2.3 million, primarily because of accrued costs for the Phase 3 FOCUS trial. Selling, general and administrative expense was approximately $2.4 million in both periods.
Reported net income was substantially affected by non-cash items: $14.7 million of derivative warrant income from changes in the fair value of warrant liabilities and a $8.3 million year-over-year reduction in interest expense related to convertible notes extinguished in 2017. Excluding these items, the company remained loss-making at the operating level.
Financial position, cash, debt and liquidity
- Cash and cash equivalents were $2.0 million at March 31, 2018, down from $4.0 million at December 31, 2017 and $6.4 million at March 31, 2017.
- Restricted cash was $1.1 million, producing total cash and restricted cash of approximately $3.1 million.
- Total assets were $6.4 million, compared with $8.9 million at December 31, 2017.
- Current liabilities were $12.3 million, including $4.6 million of accounts payable, $3.5 million of accrued expenses and $4.2 million of warrant liability.
- Stockholders’ deficit was $6.2 million at March 31, 2018, compared with equity of $0.7 million at December 31, 2017.
- The filing does not report conventional borrowings outstanding at March 31, 2018; prior convertible notes had been fully satisfied in 2017. Warrant liabilities were classified as derivative liabilities and measured at fair value.
- February 2018 financing generated approximately $4.3 million of net cash proceeds from common stock and pre-funded warrants, together with warrants to purchase 1.0 million common shares.
Management stated that existing capital resources were not sufficient to fund planned 2018 operations, that the company expected to require $20–25 million of additional outside capital during 2018, and that available resources were expected to fund operations only through May 2018. The financial statements therefore identify substantial doubt about the company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Revenue remained modest and was broadly unchanged, with management attributing sales activity partly to German ZE reimbursement for CHEMOSAT procedures.
- Gross margin improved because cost of goods sold declined to $0.1 million from $0.2 million.
- Research and development expense increased approximately 145%, reflecting greater investment in clinical development, particularly the FOCUS trial.
- Operating losses and operating cash use increased despite the reported net profit.
- Net results changed from a $11.3 million loss to $7.2 million of income, primarily because of non-cash warrant fair-value income and lower interest expense.
- The company adopted the new revenue recognition standard and restricted-cash cash-flow guidance on January 1, 2018; management reported no material impact from adoption.
Guidance, outlook, commentary, risks and unusual items
The company did not provide conventional revenue or earnings guidance. Management planned to focus available resources on the FOCUS Phase 3 trial for ocular melanoma liver metastases and the newly initiated ALIGN pivotal trial for intrahepatic cholangiocarcinoma. The FOCUS trial had experienced slower-than-expected enrollment, and management stated that completion in time to submit an NDA in 2019 was unlikely.
In April 2018, the company announced initiation of the ALIGN trial, intended 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’s prior U.S. NDA received a Complete Response Letter in 2013, and future approval depends on clinical, safety, regulatory and manufacturing outcomes.
- Going-concern risk and dependence on substantial additional financing.
- Potential need to curtail development and commercialization activities if financing is unavailable or obtained on unfavorable terms.
- Clinical trial enrollment, safety, efficacy, timing and cost uncertainties.
- Regulatory risk, including the prior FDA Complete Response Letter and the lack of U.S. marketing approval.
- Significant procedure-related risks, including severe hematologic toxicity, hepatic injury, hemorrhage, stroke, myocardial infarction and other potentially life-threatening events.
- Reimbursement and market-adoption uncertainty in Europe, including annual renegotiation of German coverage and limited U.K. reimbursement.
- High warrant-liability volatility: the liability was $4.2 million at quarter-end, while the quarter included $14.7 million of non-cash fair-value income.
- Subsequent event: the company effected a 1-for-500 reverse stock split on May 2, 2018 and began trading on the OTCQB on a split-adjusted basis.
Important facts for investors to verify
- Whether the company obtained the planned $20–25 million of financing and the resulting dilution, terms and warrant obligations.
- Actual cash runway after March 31, 2018 and whether operations continued beyond the stated May 2018 funding horizon.
- FOCUS and ALIGN enrollment rates, trial costs, data quality, safety outcomes and revised regulatory timelines.
- The composition and valuation assumptions of the $4.2 million warrant liability, including potential dilution from approximately 1.0 million February 2018 warrants.
- European CHEMOSAT procedure volumes, revenue growth and reimbursement developments in Germany, the Netherlands and the United Kingdom.
- The effect of the May 2, 2018 reverse split and subsequent authorized-share increase on the company’s capital structure.