Delcath Systems, Inc. — Q2 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/Melphalan/HDS, a hepatic drug-delivery and blood-filtration system. The FDA has not approved the product for sale in the United States; CHEMOSAT is CE Marked and marketed as a Class IIb medical device in Europe.
This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The company reported 21,763,864 common shares outstanding as of August 4, 2015.
Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $0.466 million | $0.251 million | $0.910 million | $0.561 million |
| Gross profit | $0.329 million | $0.185 million | $0.640 million | $0.401 million |
| Gross margin | 70.6% | 73.7% | 70.3% | 71.5% |
| Operating loss | $(3.623) million | $(5.904) million | $(7.332) million | $(10.964) million |
| Net loss | $(3.699) million | $(4.600) million | $(7.189) million | $(9.878) million |
| Basic loss per share | $(0.30) | $(0.49) | $(0.62) | $(1.06) |
| Cash used in operations | Not separately reported for the quarter | $(8.957) million | $(8.485) million |
At June 30, 2015, cash and cash equivalents were $14.053 million, down from $20.469 million at December 31, 2014. Current assets were $15.891 million and current liabilities were $3.349 million. Total liabilities were $4.278 million, including a $0.761 million warrant liability; the filing does not report conventional term debt outstanding. Stockholders’ equity was $13.111 million.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 85.7% year over year, while six-month revenue increased 62.2%. Management attributed the growth to higher unit sales, partly offset by unfavorable currency movements.
- Gross profit increased 77.8% in Q2 and 59.6% for the six-month period, although gross margins declined modestly because of product mix, pricing, currency effects and commercialization costs.
- Q2 selling, general and administrative expense fell to $2.502 million from $4.597 million, primarily reflecting workforce and lease restructuring savings and the absence of approximately $1.1 million of 2014 lease restructuring expense.
- Six-month research and development expense declined to $2.430 million from $2.949 million, as restructuring and program savings partly offset increased clinical-development spending.
- Q2 net loss improved by $0.901 million, or 19.6%; the six-month net loss improved by $2.689 million, or 27.2%. The improvements included lower operating expenses and favorable changes in the fair value of warrant liabilities, a non-cash item.
- Cash used in operations increased by $0.472 million for the six-month period, primarily because the company paid severance, bonus and lease-restructuring liabilities.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available capital was expected to fund operations into the first half of 2016, but additional capital would be required to continue clinical development and fully commercialize the product. Potential sources include equity or debt financing and strategic alliances.
- On July 21, 2015, after quarter-end, the company completed a public offering of 9.35 million units for gross proceeds of $7.0 million and estimated net proceeds of approximately $6.0 million. The offering included common stock and Series A and Series B warrants. The February 2015 warrant exercise price was adjusted to $0.74.
- The company continued planning a global Phase 3 ocular melanoma overall-survival trial intended to address the FDA’s September 2013 Complete Response Letter. U.S. Melphalan/HDS approval remains contingent on additional clinical and regulatory work.
- Phase 2 programs for hepatocellular carcinoma and intrahepatic cholangiocarcinoma were enrolling patients in the United States and Europe. Clinical trials remain subject to enrollment, regulatory, manufacturing, safety and funding risks.
- European commercialization continued to depend heavily on reimbursement. Germany maintained NUB Value 4 status, while U.K. funding and reimbursement initiatives remained uncertain. NICE had recommended that use in the United Kingdom occur within research settings because evidence remained limited.
- The product and procedure carry potentially serious risks. Historical clinical data cited by the company included treatment-related deaths, stroke, myocardial infarction, severe bone marrow suppression, febrile neutropenia, hepatic injury, hemorrhage and gastrointestinal perforation. The company believes later product and procedure refinements have improved the safety profile, but this remains a material risk.
- The company has incurred losses since inception and does not generate positive operating cash flow. Failure to obtain additional financing could require reduction or abandonment of development and commercialization activities.
- Restructuring reserves at June 30, 2015 were approximately $0.471 million for employee costs and $1.134 million for lease obligations.
- A proposed $8.5 million securities-litigation settlement and a proposed $0.495 million derivative-litigation fee payment were expected to be covered by insurance, subject to court approval, and were not expected to create additional financial-statement expense.
- Jennifer Simpson was named President and Chief Executive Officer in May 2015 after serving as interim chief executive.
Most Important Facts for Investors to Verify
- Whether the July 2015 financing provides sufficient runway beyond management’s projected first half of 2016 and the extent of future dilution from issued and outstanding warrants.
- Progress, timing, enrollment and financing for the planned Phase 3 ocular melanoma trial and the Phase 2 HCC/ICC programs.
- Any FDA discussions or actions related to the Complete Response Letter and the requirements for potential U.S. approval.
- European procedure volumes, reimbursement approvals, pricing and gross-margin trends, particularly in Germany and the United Kingdom.
- Whether the reported safety improvements for the current-generation system are confirmed by controlled clinical data.
- Final court approval and insurance coverage for the securities and derivative litigation settlements.
- Changes in cash balances, operating cash burn, warrant-liability valuations and access to the remaining ATM and shelf-registration capacity.