Delcath Systems, Inc. — Q2 2014 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2014. Delcath is an oncology specialty pharmaceutical and medical device company developing Melphalan HDS for liver cancers. CHEMOSAT is marketed in Europe under a CE Mark, while Melphalan HDS was not approved for sale in the United States. The company remained loss-making and focused on European commercialization, reimbursement, and Phase 2 hepatocellular carcinoma development.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $0.25 million | $0 | $0.56 million | $0.38 million |
| Gross profit/(loss) | $0.19 million | $(0.33) million | $0.40 million | $0.02 million |
| Gross margin | 73.7% | Not meaningful | 71.5% | 4.7% |
| Operating expenses | $6.09 million | $10.26 million | $11.37 million | $20.81 million |
| Loss from operations | $(5.90) million | $(10.59) million | $(10.96) million | $(20.79) million |
| Net loss | $(4.60) million | $(5.48) million | $(9.88) million | $(18.33) million |
| Basic loss per share | $(0.49) | $(0.91) | $(1.06) | $(3.22) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(8.49) million | $(21.50) million |
At June 30, 2014, cash and cash equivalents were $27.3 million, compared with $31.2 million at December 31, 2013. Total assets were $31.3 million and total liabilities were $6.1 million. Current liabilities included $1.1 million of warrant liability; the filing does not provide a clear total debt balance. The company had $25.2 million of stockholders’ equity.
Material changes versus the prior comparable period
- Q2 product revenue increased to $0.25 million from none; six-month product revenue increased to $0.56 million from $0.08 million, although 2013 also included $0.30 million of previously deferred revenue.
- Gross profit improved by $0.52 million in Q2 and $0.38 million year to date, driven by product sales and lower cost of goods sold.
- SG&A declined 27% in Q2 and 32% year to date, while R&D declined 63% in Q2 and 65% year to date. Reductions reflected workforce restructuring, operating efficiencies, and the absence of 2013 NDA-submission costs.
- Net loss improved 16% in Q2 and 46% year to date. The improvement was partly offset by lower non-cash income from changes in the fair value of warrant liabilities.
- Operating cash burn declined to $8.5 million for the first six months from $21.5 million in the prior-year period. Financing activities provided $4.5 million, primarily from equity issuance and warrant exercises.
- The company completed a one-for-sixteen reverse stock split effective April 8, 2014, reducing shares outstanding from approximately 150.9 million to approximately 9.4 million and helping restore Nasdaq minimum bid-price compliance.
Guidance, outlook, commentary, risks, and unusual items
- Management believed available capital was sufficient to fund operations through the first half of 2015, but stated that additional working capital would likely be required. Potential sources include equity, debt, or strategic alliances.
- The company expected continued losses and did not provide revenue or profitability guidance. There can be no assurance that significant revenue or profitability will be achieved.
- The U.S. Melblez Kit NDA received a Complete Response Letter from the FDA in September 2013. The FDA requested additional well-controlled randomized trial evidence using overall survival as the primary efficacy endpoint; U.S. commercial approval remained unavailable.
- The company planned Phase 2 HCC programs in Europe and the United States. The U.S. IND amendment became effective in March 2014, with the first U.S. site expected in the second half of 2014 and initial data from the first 11 patients expected in the first half of 2015, subject to enrollment.
- European commercialization remained dependent on reimbursement and clinical adoption. German reimbursement primarily relied on case-by-case Individual Funding Requests, while U.K. funding under the Commissioning Through Evaluation process was uncertain and potentially delayed.
- During Q2, the company reduced its workforce by seven employees as part of broader restructuring. Total restructuring charges related to 57 employees were approximately $4.8 million, with approximately $1.5 million remaining in reserves at June 30, 2014.
- The company vacated approximately half of its New York office space and entered a sublease. Remaining gross rent obligations were approximately $3.6 million, expected sublease receipts were approximately $2.6 million, and a lease restructuring reserve of approximately $0.9 million was recorded, plus approximately $0.2 million of related costs and write-offs.
- Warrant liabilities were measured using Level 3 valuation inputs. The company recorded $1.3 million of warrant-related income in Q2 and $1.1 million year to date; the liability was $1.1 million at June 30, 2014. This income was non-cash and subject to stock-price volatility.
- Material litigation included a securities class action and shareholder derivative matters concerning alleged disclosures relating to the Melblez NDA and manufacturing facilities. The company denied wrongdoing and intended to defend the actions vigorously.
Important facts for investors to verify
- Whether cash resources and available financing facilities were sufficient to support operations beyond the company’s stated first-half-2015 estimate.
- The timing, enrollment, safety, and efficacy results of the Phase 2 HCC programs and any subsequent FDA discussions or approval pathway.
- Actual European procedure volumes, product revenue growth, gross-margin sustainability, and reimbursement progress in Germany and the United Kingdom.
- Remaining obligations under the New York office lease, employee retention program, restructuring reserves, and other commitments.
- Potential dilution from the ATM program, CEFF facility, warrants, stock options, and future capital raises.
- Developments and potential financial exposure in the securities and derivative shareholder litigation.