Delcath Systems, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Delcath is an interventional oncology company focused on primary and metastatic liver cancers. Its lead U.S. product candidate is HEPZATO, a melphalan drug/device combination, while CHEMOSAT is commercially available in Europe as a hepatic delivery system. The filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited. The company had 7,356,289 common shares outstanding as of August 10, 2021.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $536 thousand | $379 thousand | $924 thousand | $672 thousand |
| Gross profit | $334 thousand | $211 thousand | $610 thousand | $426 thousand |
| Gross margin | 62.3% | 55.7% | 66.0% | 63.4% |
| Operating loss | $(6.451) million | $(4.269) million | $(13.178) million | $(9.344) million |
| Net loss | $(6.430) million | $(4.275) million | $(13.177) million | $(12.136) million |
| Net loss per common share | $(0.96) | $(1.90) | $(2.00) | $(10.40) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(11.669) million | $(13.082) million |
Product revenue was $398 thousand in the second quarter and $659 thousand year to date; other revenue was $138 thousand and $265 thousand, respectively. Research and development expense increased to $3.497 million in the quarter and $7.204 million year to date. Selling, general and administrative expense increased to $3.288 million and $6.584 million, respectively.
At June 30, 2021, cash and cash equivalents were $19.274 million and restricted cash was $151 thousand, for total cash of $19.425 million. This compares with $28.756 million at December 31, 2020. Total liabilities were $9.758 million, including $2.000 million of convertible notes payable classified as non-current at June 30, 2021. Stockholders’ equity was $15.159 million, and accumulated deficit was $408.504 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 41% and six-month revenue increased 38%, primarily from higher CHEMOSAT unit sales to medac and related royalty income.
- Gross margin improved to approximately 62% in the quarter from 56%, while gross profit increased by $123 thousand.
- Second-quarter operating expenses increased 51%, driven by higher clinical, NDA-preparation, professional-service and compensation costs, including $1.626 million of stock-option expense.
- Six-month operating expenses increased 41%. Stock-option expense rose to $3.774 million from $660 thousand in the prior-year period.
- The six-month net loss increased by $1.041 million, despite the absence of the $2.832 million warrant-liability fair-value expense recorded in the first quarter of 2020.
- Common shares outstanding increased substantially, reflecting preferred-stock conversions and warrant exercises. The company received $2.393 million from warrant exercises during the first six months of 2021.
Guidance, Outlook, Risks and Unusual Items
Management planned to submit an FDA New Drug Application for HEPZATO for metastatic ocular melanoma in the first quarter of 2022, contingent on completing clinical-site monitoring and the FOCUS trial. COVID-19 slowed patient recruitment and data monitoring and created volatility in European revenue; the filing states that the timing could shift.
A preliminary FOCUS analysis based on 87% of enrolled patients reported a 29.2% objective response rate in the intent-to-treat population, with a 95% confidence interval of 20.1% to 39.8%, exceeding the predefined 8.3% success threshold. In the per-protocol analysis, HEPZATO showed a 32.9% response rate versus 13.8% for best alternative care and median progression-free survival of 9.0 months versus 3.1 months. The filing cautions that the analysis was preliminary and that duration of response and overall survival were not yet evaluable. The company reported no treatment-related deaths in the trial.
The global ALIGN Phase 3 trial for intrahepatic cholangiocarcinoma was paused because of enrollment difficulties. The company is evaluating additional indications and may restart the trial. CHEMOSAT also faces the transition to European Medical Device Regulation; as of June 30, 2021, MDR certification had not been achieved, although the existing CE Mark remained effective until April 2024.
The company disclosed substantial doubt about its ability to continue as a going concern for at least one year after issuance of the financial statements. It has incurred losses since inception, expects continued losses and requires additional working capital. Management stated that failure to obtain additional financing or strategic alliances could require delaying, reducing or eliminating development and commercialization activities.
A disputed former-executive compensation claim was settled confidentially in May 2021 and the related arbitration was dismissed with prejudice on June 1, 2021. The company had accrued $1.140 million but paid less than that amount in settlement.
After quarter-end, the company entered into an Avenue venture loan with aggregate principal capacity of up to $20.000 million. The initial tranche was $15.000 million, including $4.000 million held in a restricted account subject to performance and equity-raising conditions. The loan bears interest at the greater of prime plus 7.70% or 10.95%, is secured by global company assets including intellectual property, and matures August 1, 2024. The company also amended $2.000 million of convertible notes, reducing the conversion price and extending maturity to October 30, 2024.
Investor Verification Checklist
- Verify the availability and release conditions of the Avenue loan proceeds, including the required clinical and equity-raising milestones.
- Monitor cash burn, additional financing needs and the disclosed going-concern uncertainty.
- Confirm completion and final results of the FOCUS trial, including final objective response rate, duration of response, overall survival and regulatory submission timing.
- Assess the regulatory and commercial impact of obtaining MDR certification before the current CE Mark expires.
- Review dilution from outstanding options, warrants, preferred-stock conversion rights and convertible notes; 6.190 million potentially dilutive securities were excluded from June 30, 2021 loss-per-share calculations.
- Determine whether and when the disputed $1.178 million medac milestone becomes collectible and recognizable as revenue; it was not recognized because medac disputed payment.
- Evaluate whether the ALIGN trial will restart and the costs and timelines associated with additional indications.