Delcath Systems, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; filed August 14, 2018. The interim financial statements are unaudited. Delcath develops interventional oncology products for primary and metastatic liver cancers. CHEMOSAT is commercially available in Europe, while Melphalan/HDS remains investigational and not approved for sale in the United States.
Financial Results and Position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0.858 million | $0.584 million | $1.560 million | $1.327 million |
| Gross profit | $0.638 million | $0.449 million | $1.193 million | $0.973 million |
| Gross margin | 74.4% | 76.9% | 76.5% | 73.3% |
| Operating loss | $(6.092) million | $(4.601) million | $(13.595) million | $(8.814) million |
| Net income (loss) | $(6.658) million | $(1.943) million | $0.527 million | $(13.276) million |
| Net cash used in operations | Not separately provided | Not separately provided | $(9.277) million | $(8.137) million |
- Q2 revenue increased approximately 47% year over year; six-month revenue increased approximately 18%. Management attributed the increase primarily to Germany’s ZE reimbursement code for CHEMOSAT procedures.
- Research and development expense rose to $4.089 million in Q2 and $9.781 million for the six months, principally from the FOCUS trial and other clinical development activities.
- Q2 net loss increased substantially, despite a $2.513 million gain from the change in fair value of warrant liabilities, because of higher operating expenses and a $2.826 million loss on issuance of a financial instrument.
- Six-month net income was driven by a $17.209 million non-cash gain from warrant-liability fair-value changes and materially lower interest expense. The result does not indicate operating profitability.
- At June 30, 2018, cash and cash equivalents were $1.283 million, restricted cash was $1.062 million, and total current assets were $4.374 million.
- Total liabilities were $18.563 million versus total assets of $5.473 million, resulting in stockholders’ deficit of $13.090 million.
Material Changes and Financing
- Cash declined from $3.999 million at December 31, 2017 to $1.283 million at June 30, 2018. Six-month operating cash use increased to $9.277 million from $8.137 million.
- In February 2018, Delcath raised approximately $4.3 million net through common stock, pre-funded warrants and warrants. The warrants were recorded as derivative liabilities and had an estimated fair value of $18.3 million at issuance.
- On June 4, 2018, the Company issued $3.3 million face amount of 8% senior secured convertible notes for $2.4 million of cash proceeds, together with Series D warrants. The notes are secured by substantially all personal property and include a $2.5 million tranche maturing in six months.
- At June 30, 2018, current convertible notes payable were $0.387 million, non-current convertible notes payable were $0.027 million, and warrant liabilities were $6.883 million.
- The Company completed a 1-for-500 reverse stock split on May 2, 2018, following a prior 1-for-350 reverse split in November 2017. Share and per-share data were retrospectively adjusted.
Liquidity, Outlook, and Risks
- Management stated that capital resources at June 30, 2018 were insufficient to fund planned 2018 operations and that the Company needed to raise approximately $20 million to $25 million of outside capital during 2018.
- Management expected existing resources to fund operations only through August 2018. The filing states that substantial doubt exists regarding the Company’s ability to continue as a going concern.
- Subsequent to quarter-end, Delcath received $1.6 million of gross proceeds from additional secured convertible notes and warrants on July 20, 2018.
- On August 3, 2018, the SEC declared effective a rights-offering registration statement covering rights to purchase up to 28,571,429 shares, subject to a maximum of $50 million of subscription proceeds.
- The FOCUS Phase 3 trial was amended in July 2018 to a single-arm study of 80 patients with objective response rate as the primary endpoint. Management projected enrollment completion by the end of the first half of 2019; the amendment invalidated the prior SPA.
- The ALIGN registration trial for intrahepatic cholangiocarcinoma is planned to enroll approximately 295 patients, subject to available financial resources.
- Key risks include continued operating losses, dependence on additional financing, possible dilution and secured debt obligations, clinical-trial delays or failure, regulatory non-approval, product safety risks, reimbursement uncertainty, manufacturing and supply-chain dependence, and competition.
- On July 27, 2018, Hudson Bay Master Fund Ltd. filed a lawsuit alleging breaches of participation rights in future offerings and seeking damages reportedly exceeding $1 million plus specific performance. Delcath denies liability, and the outcome was described as premature to assess.
Important Facts for Investors to Verify
- Whether the subsequent rights offering and additional financing provided sufficient liquidity beyond August 2018.
- The maturity, conversion terms, collateral provisions, and potential dilution from the secured convertible notes and Series D warrants.
- Whether the amended FOCUS trial achieved enrollment and generated results sufficient to support a U.S. regulatory submission.
- Progress, funding, enrollment, and regulatory status of the ALIGN trial.
- Whether European reimbursement expansion translated into sustained CHEMOSAT procedure growth and materially higher revenue.
- The financial impact and resolution of the Hudson Bay litigation.
- The extent to which reported six-month income was attributable to non-cash warrant-liability remeasurement rather than operating performance.