Delcath Systems, Inc. - 10-Q Summary (Q3 2009)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Delcath Systems, Inc. is a development-stage company focused on the Delcath Percutaneous Hepatic Perfusion (PHP) System, a drug delivery device for treating liver cancers. The Company has no commercial revenues and is currently conducting a Phase III clinical trial for metastatic melanoma in the liver, which reached full enrollment (92 patients) in October 2009.
Key Financial Metrics
| Metric | Q3 2009 (3 Months) | YTD 2009 (9 Months) | YTD 2008 (9 Months) |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Net Loss | $(7,585,904) | $(16,359,010) | $(4,355,877) |
| Operating Loss | $(3,820,657) | $(8,496,758) | $(5,442,863) |
| Derivative Instrument Expense | $(3,830,801) | $(8,296,958) | Income: $807,347 |
| Cash and Cash Equivalents | $6,038,590 | $6,038,590 | $12,930,867 |
| Total Current Liabilities | $11,708,366 | $11,708,366 | $1,151,807 |
| Stockholders' Equity (Deficit) | $(4,942,263) | $(4,942,263) | $10,206,875 |
Liquidity: The Company reported a net cash outflow from operating activities of $7.6 million for the nine months ended September 30, 2009. Cash balances decreased by approximately $900,000 during the period.
Material Changes vs. Prior Period
- Net Loss Expansion: The net loss for the nine months ended September 30, 2009, increased by $12.0 million compared to the same period in 2008. This is primarily driven by a $9.1 million increase in derivative instrument expense.
- Derivative Liability: The derivative instrument liability related to warrants issued in 2007 and 2009 increased from $448,318 at year-end 2008 to $10,936,255 at September 30, 2009. This non-cash expense significantly impacted the bottom line.
- Operating Expenses: General and administrative expenses increased 45.3% year-over-year (YTD) due to executive leadership changes (separation of former CEO and hiring of new CEO/CFO). Research and development costs increased 61.2% YTD due to accelerated enrollment in the Phase III trial.
- Equity Position: The Company moved from positive stockholders' equity of $10.2 million in December 2008 to a deficit of $4.9 million in September 2009, largely due to the mark-to-market adjustment of warrant liabilities.
Outlook, Risks, and Unusual Items
- Clinical Progress: Enrollment for the pivotal Phase III trial is complete (92 patients). The Company anticipates spending will steady on the trial but accelerate regarding FDA submission preparation and the new manufacturing facility in Kingsbury, NY.
- Capital Requirements: Management believes current capital is sufficient through 2009. However, the Company expects to require additional financing to complete development and commercialization. A $60 million shelf registration (Form S-3) is effective for future capital raises.
- Unusual Items: The significant derivative expense is a non-cash accounting item resulting from the fair value adjustment of warrants. Management expects this liability to be credited to equity if warrants are exercised or expire.
- Risks: The Company has no approved products and no revenue. Continued losses are expected. Success depends on FDA approval, which is uncertain, and the ability to raise additional capital.
Investor Verification Checklist
- Derivative Liability Impact: Verify the sustainability of the $10.9 million warrant liability and its potential dilution or cash impact upon exercise.
- Cash Runway: Confirm the sufficiency of the $6.0 million cash balance to fund operations through 2009 and into 2010 given the accelerated burn rate.
- Executive Compensation: Review the specific costs associated with the separation of the former CEO and the compensation packages for the new CEO and CFO.
- Manufacturing Lease: Assess the financial commitment of the new lease with option to purchase for the Kingsbury, NY facility ($400k-$440k purchase price).
- Phase III Trial Status: Monitor the timeline for data readout and FDA submission following the completion of patient enrollment.