Delcath Systems, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Delcath is a late-stage clinical development company with early commercial activity in Europe focused on liver cancers. Its principal product is CHEMOSAT, a medical device used with melphalan for percutaneous hepatic perfusion. The company is pursuing clinical development in ocular melanoma liver metastases, hepatocellular carcinoma and intrahepatic cholangiocarcinoma, while seeking broader European adoption and reimbursement.
The filing covers the three and nine months ended September 30, 2015. The financial statements are unaudited. As of November 3, 2015, 21,763,872 common shares were outstanding.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $0.4 million | $0.2 million | $1.3 million | $0.8 million |
| Gross profit | $0.3 million | $0.2 million | $0.9 million | $0.6 million |
| Gross margin | 77.4% | 77.0% | 72.5% | 73.1% |
| Operating loss | $(3.7) million | $(5.1) million | $(11.0) million | $(16.0) million |
| Net loss | $(2.4) million | $(4.6) million | $(9.6) million | $(14.4) million |
| Loss per share | $(0.12) | $(0.48) | $(0.67) | $(1.54) |
| Cash used in operations | Not provided | Not provided | $(12.2) million | $(12.4) million |
Q3 operating expenses were $4.0 million, comprising $2.3 million of selling, general and administrative expense and $1.7 million of research and development expense. Nine-month operating expenses were $11.9 million. The company recorded non-cash income from changes in the fair value of warrant liabilities of $1.3 million in Q3 and $1.4 million for the nine months.
Cash and cash equivalents were $16.7 million at September 30, 2015, down from $20.5 million at December 31, 2014. Total assets were $19.6 million, total liabilities were $6.1 million and stockholders’ equity was $13.5 million. Current liabilities included a $2.9 million warrant liability. The filing does not present a material funded debt balance; it references an ongoing revolving-line facility fee.
Financing activities generated $8.7 million during the first nine months, principally from stock sales and warrant exercises. The company had approximately $39.9 million remaining under its ATM equity program, subject to market conditions and limitations.
Material changes versus the prior comparable period
- Revenue increased 84% in Q3 and 68% for the first nine months, reflecting greater product sales.
- Net loss decreased 47% in Q3 and 33% for the first nine months, primarily because of lower operating expenses and higher gross profit.
- Q3 SG&A declined by $2.3 million, and nine-month SG&A declined by $5.1 million, following workforce and lease restructurings and the completion of a strategic-options evaluation.
- Research and development expense increased 146% in Q3 and 13% for the first nine months as clinical development activity expanded.
- Shares outstanding increased substantially following equity financings. The weighted-average diluted share count rose to 19.7 million in Q3 2015 from 9.4 million in Q3 2014.
- Warrant exposure increased materially following the February and July 2015 financings. Approximately 18.1 million warrants were excluded from diluted loss-per-share calculations at September 30, 2015 because they were anti-dilutive.
Guidance, outlook, risks and unusual items
Management stated that existing capital resources were expected to fund operations into the first half of 2016, but that additional working capital would be required. The company expects continuing losses and must raise additional capital through equity, debt or strategic transactions to continue clinical development and commercialization. Failure to obtain financing could require abandonment or reduction of development and commercialization efforts.
The company was advancing plans for a global Phase 3 overall-survival trial in ocular melanoma liver metastases and conducting Phase 2 programs in HCC and ICC. Melphalan/HDS had not been approved for sale in the United States; the FDA previously issued a complete response letter requiring additional well-controlled randomized clinical evidence. CHEMOSAT had European CE Mark authorization, but reimbursement remained uneven. Germany established a national supplemental reimbursement code in October 2015, with hospital rate negotiations expected to begin in February 2016. United Kingdom reimbursement and funding remained uncertain.
Historical clinical experience identified serious procedure risks, including severe bone marrow suppression, febrile neutropenia, stroke, myocardial infarction, hepatic injury, hemorrhage and gastrointestinal perforation. Clinical trials may be delayed or fail because of regulatory requirements, manufacturing issues, enrollment, changing standards of care or funding constraints.
A material weakness in internal control over financial reporting was identified relating to valuation of the complex Series B warrants issued in July 2015. The company engaged an outside expert, corrected the valuation in the reported financial statements and stated that remediation steps had been taken, subject to effectiveness testing. The company also disclosed that its disclosure controls were not effective as of September 30, 2015.
Several shareholder litigation matters were settled after the quarter-end. The securities class-action settlement established an $8.5 million settlement fund, and derivative litigation involved a $495,000 fee and expense award. The company stated that insurance was expected to cover these amounts and that no additional financial-statement expense was expected.
Important facts for investors to verify
- Whether the company obtained sufficient financing after the reported cash runway into the first half of 2016.
- Actual enrollment, timing and results of the planned Phase 3 ocular melanoma trial and Phase 2 HCC/ICC studies.
- FDA requirements and the timing and probability of any U.S. approval.
- European reimbursement rates, procedure volumes and commercial revenue growth, particularly in Germany and the United Kingdom.
- Remediation and auditor testing of the material weakness involving Series B warrant valuation.
- The dilutive effect and cash proceeds associated with the approximately 18.1 million outstanding warrants.
- Whether litigation settlements were fully covered by insurance without material cash or earnings impact.