Delcath Systems, Inc. — Q2 2012 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2012. Delcath develops the CHEMOSAT hepatic chemosaturation system for regional treatment of liver cancers. The company transitioned from development-stage reporting to commercial operations in April 2012 after receiving CE Mark authorization for its Generation 2 hemofiltration cartridge. U.S. FDA approval had not been obtained.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Revenue | $0.1 million | $0.1 million |
| Gross profit | $0.1 million | $0.1 million |
| Operating loss | $15.3 million | $29.9 million |
| Net loss | $14.5 million | $29.4 million |
| Loss per share | $0.26 | $0.57 |
| Net cash used in operating activities | Not separately provided | $27.2 million |
- Reported gross margin was 100% because the units sold used materials and manufacturing costs expensed before April 2012. Management estimated the underlying gross margin on these sales would have been approximately 80% if costs had been recognized.
- Cash and cash equivalents were $29.3 million at June 30, 2012, compared with $25.8 million at December 31, 2011. Cash, cash equivalents and certificates of deposit totaled $29.3 million, versus $31.1 million at June 30, 2011.
- Total assets were $35.1 million; current liabilities were $13.3 million, including a $5.9 million warrant liability. No separate debt balance is clearly provided, although the filing includes a loan and security agreement with Silicon Valley Bank.
- Stockholders’ equity declined to $21.5 million from $26.1 million at December 31, 2011.
- Cash provided by financing activities was $27.0 million, primarily reflecting equity issuance. Capital expenditures were $1.3 million.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased from zero to $0.1 million, representing the company’s first CHEMOSAT system sales in Europe. All reported units were sold directly to end customers.
- Six-month net loss increased to $29.4 million from $7.3 million, while the quarterly net loss increased to $14.5 million from $5.5 million.
- Six-month operating expenses increased to $30.0 million from $18.3 million. Selling, general and administrative expense rose to $14.6 million from $9.4 million, and research and development expense rose to $15.3 million from $8.9 million.
- Operating cash use increased to $27.2 million from $14.3 million, driven by NDA preparation, European commercialization, higher staffing costs and Generation 2 research and development activities.
- Full-time employees increased to 94 from 51 at June 30, 2011.
- The company completed a May 2012 offering of 15.3 million shares and warrants for 4.6 million shares, generating approximately $21.1 million of net cash proceeds. It also had approximately $33.6 million available under its at-the-market equity program at June 30, 2012.
- The warrant liability increased to $5.9 million from $2.4 million at December 31, 2011. Fair-value changes produced $0.6 million of derivative instrument income for the six-month period and introduced material non-cash volatility into reported earnings.
Guidance, Outlook, Risks and Unusual Items
- Management expected to submit its U.S. NDA in mid-August 2012 after completing the clinical database lock, statistical analysis and report writing. The filing text does not confirm subsequent FDA acceptance or approval.
- The Generation 2 product was accepted for inclusion in the FDA expanded-access program, future clinical trials and compassionate-use cases. The company intended to include additional Generation 2 data in the NDA.
- Management expected continuing losses and believed available capital would fund operations through 2012, but stated that additional capital would be required to fully commercialize the product or fund additional development. Potential sources included equity, borrowing and strategic alliances.
- Management expected gross margin and average selling price volatility as distributor sales expand, previously expensed materials are consumed, and production efficiencies develop.
- Subsequent to quarter-end through August 8, 2012, the company sold approximately 1.2 million shares under its at-the-market program for approximately $2.5 million of net proceeds; approximately $31.0 million remained available.
- Key risks include FDA approval uncertainty, clinical and regulatory delays, limited commercialization and manufacturing experience, supplier and intellectual-property risks, dependence on additional financing, competition and continued operating losses.
- The filing reported no legal proceedings and no material changes to the risk factors previously disclosed in the 2011 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor Verification Items
- Verify whether the planned NDA was submitted in mid-August 2012 and whether FDA review, approval or additional deficiencies followed.
- Assess the company’s cash runway using the $27.2 million six-month operating cash burn and continuing commercialization expenditures.
- Review subsequent equity issuances, dilution, warrant exercises or expirations and the remaining at-the-market capacity.
- Separate reported gross margin from sustainable gross margin after previously expensed inventory is exhausted and distributor sales increase.
- Confirm the terms, borrowings and covenants, if any, under the Silicon Valley Bank loan and security agreement.
- Monitor European launch-center adoption, commercial orders, reimbursement and regulatory approvals in additional markets.