Delcath Systems, Inc. — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Delcath Systems is a late-stage clinical development company with early European commercial activity focused on liver cancers. Its principal product is Melphalan/HDS, marketed in Europe as the CHEMOSAT hepatic delivery system. The company is developing the product for ocular melanoma liver metastases, hepatocellular carcinoma, intrahepatic cholangiocarcinoma and other liver cancers.
This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015. As of May 4, 2016, 24.1 million common shares were outstanding.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $0.37 million | $0.44 million | Down $0.07 million |
| Gross profit | $0.26 million | $0.31 million | Down $0.05 million |
| Gross margin | Approximately 70% | Approximately 70% | Broadly stable |
| Operating expenses | $3.72 million | $4.02 million | Down $0.30 million |
| Operating loss | $3.46 million | $3.71 million | Improved $0.25 million |
| Net loss | $1.81 million | $3.49 million | Improved $1.68 million |
| Basic and diluted loss per share | $0.08 | $0.32 | Improved |
| Cash used in operating activities | $3.82 million | $4.41 million | Improved $0.60 million |
The improvement in net loss was driven primarily by lower operating expenses and a $1.67 million non-cash gain from the change in fair value of warrant liabilities. Without that warrant-related item, operating losses remained substantial.
Cash and cash equivalents were $9.55 million at March 31, 2016, compared with $12.61 million at December 31, 2015 and $18.46 million at March 31, 2015. Total assets were $12.53 million and total liabilities were $4.67 million. The company reported a $2.05 million current warrant liability and approximately $0.99 million of remaining lease restructuring liabilities. The filing does not show conventional term debt as a material balance-sheet item.
Financing activities provided $0.77 million, including proceeds from stock sales and warrant exercises. Investing activities used $0.02 million. The company sold 50,000 shares under its at-the-market program for net proceeds of approximately $17,500 and had approximately $39.9 million remaining under that program, subject to market conditions and applicable limitations.
Material Changes Versus the Prior Comparable Period
- Revenue decreased approximately 17% to $0.37 million, while gross margin remained approximately 70%.
- Selling, general and administrative expense declined by $0.66 million to $2.38 million, primarily due to lower severance-related accruals.
- Research and development expense increased by $0.37 million to $1.34 million as clinical development activity expanded.
- Net loss improved by approximately 48%, largely because of the non-cash warrant-liability gain and lower operating expenses.
- Operating cash burn declined by approximately 14%, but remained $3.82 million for the quarter.
- Cash declined by $3.06 million during the quarter, and was approximately 48% below the March 31, 2015 balance.
- During the quarter, 2.2 million July 2015 Series B warrants were exercised for approximately $0.8 million of net proceeds; the remaining 7.1 million Series B warrants expired. The exercises resulted in issuance of an additional 1.7 million Series A warrants.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing capital resources were expected to fund operations through the third quarter of 2016, but that additional working capital would be required to continue operations. The financial statements explicitly disclose substantial doubt about the company’s ability to continue as a going concern. Management expects additional losses until significant sales, if any, are generated.
The company intends to seek additional capital through borrowings, equity sales or strategic alliances. Failure to obtain funding on acceptable terms could require abandoning some or all clinical development and commercialization efforts.
- The FOCUS global Phase 3 trial in hepatic-dominant ocular melanoma was initiated in January 2016 under an FDA Special Protocol Assessment. The planned trial is expected to enroll 240 patients and uses overall survival as the primary endpoint.
- Melphalan/HDS had not been approved for sale in the United States. The FDA issued a complete response letter in 2013, and the company must successfully complete additional clinical and regulatory work before potential approval.
- In Europe, CHEMOSAT had CE Mark status and early commercial activity. Germany established a national ZE reimbursement code, but reimbursement rates still required negotiation. UK reimbursement remained uncertain, and NICE had indicated that the evidence base was limited.
- Clinical trials remain subject to enrollment delays, regulatory changes, manufacturing issues, changing standards of care and potential failure to demonstrate safety or efficacy.
- Historical and disclosed product risks include severe bone marrow suppression, febrile neutropenia, hepatic injury, severe hemorrhage, gastrointestinal perforation, stroke and myocardial infarction. The company states that product and procedure refinements were intended to improve safety.
- The warrant liability is a Level 3 derivative liability subject to mark-to-market changes. Its fair value was $2.05 million at March 31, 2016, and future changes may materially affect reported earnings without corresponding operating cash flow.
- Two directors resigned in April 2016, and the board was reduced from seven to six directors while a replacement search began.
- The company reported no material changes to previously disclosed risk factors, no material legal proceedings and no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the company’s cash runway and the timing, size and terms of any required financing.
- Assess whether the FOCUS trial is enrolling on schedule and whether future results can support an FDA filing.
- Monitor U.S. regulatory progress following the 2013 complete response letter and the 2016 Special Protocol Assessment.
- Track European procedure volumes, product revenue, German reimbursement rates and progress toward UK reimbursement.
- Separate recurring operating performance from non-cash gains or losses caused by warrant-liability fair-value adjustments.
- Review dilution risk from approximately 10.4 million outstanding warrants, plus stock options and restricted shares excluded from diluted loss-per-share calculations.
- Reconcile future lease restructuring payments and other liabilities with projected cash needs.
- Evaluate whether clinical safety improvements are supported by sufficiently robust prospective data rather than limited commercial or investigator-sponsored studies.