Business Context and Reporting Period
Delcath Systems, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company develops interventional oncology products for primary and metastatic liver cancers. Its lead U.S. product candidate, HEPZATO KIT, remained unapproved for sale in the United States; CHEMOSAT was marketed in Europe as a hepatic delivery medical device.
On February 14, 2023, Delcath resubmitted its HEPZATO New Drug Application to the FDA. The FDA accepted the resubmission as complete and set an August 14, 2023 PDUFA target action date.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Total revenue | $0.5 million | $0.8 million | $1.1 million | $1.2 million |
| Gross profit | $0.3 million | $0.6 million | $0.8 million | $1.0 million |
| Gross margin | 69.7% | 77.4% | 69.7% | 81.8% |
| Operating loss | $(8.0) million | $(9.5) million | $(16.3) million | $(17.8) million |
| Net loss | $(7.2) million | $(10.2) million | $(16.2) million | $(19.2) million |
| Loss per common share | $(0.58) | $(1.24) | $(1.35) | $(2.34) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(13.9) million | $(12.4) million |
- Second-quarter product revenue was $0.5 million, down from $0.8 million, primarily due to lower CHEMOSAT demand. Six-month product revenue increased to $1.1 million from $1.0 million, but prior-year other revenue of $0.2 million resulted in lower total six-month revenue.
- Research and development expense declined to $3.6 million in the quarter and $8.1 million for the six months, compared with $5.6 million and $10.1 million, respectively, primarily because clinical trial activities were substantially completed in the prior-year period.
- Selling, general and administrative expense increased to $4.8 million for the quarter and $9.0 million for the six months, reflecting preparation for a potential HEPZATO commercial launch.
- The change in fair value of warrant liability generated $1.2 million of other income in the quarter and six-month period. This non-cash item contributed to the reduction in net loss.
- Cash, cash equivalents and restricted cash totaled $14.6 million at June 30, 2023, compared with $11.8 million at December 31, 2022. Unrestricted cash and cash equivalents were $14.5 million.
- Operating cash use was $13.9 million for the first six months. Financing activities provided $16.7 million, including $23.0 million of private-placement proceeds, partially offset by $6.3 million of debt principal repayments.
- Total liabilities were $21.3 million and stockholders’ equity was a deficit of $0.2 million at June 30, 2023. The balance sheet included $4.9 million of net convertible notes payable, $4.9 million of net Avenue loan payable, and a $3.8 million warrant liability.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 38% and gross profit declined 44%; six-month revenue declined 7% and gross profit declined 21%.
- Operating and net losses improved year over year, largely because of lower research and development spending and the non-cash warrant-liability gain.
- Interest expense declined as a result of $6.3 million of loan principal repayments during the first half of 2023.
- On March 29, 2023, Delcath completed a $24.9 million Series F preferred-stock offering and a separate approximately $0.1 million common-stock offering. Series F-1 preferred shares were converted into common stock or Series F-2 preferred stock following stockholder approval, increasing common shares outstanding to 15.3 million at June 30, 2023 from 10.0 million at December 31, 2022.
- The company recorded a $3.8 million warrant liability at June 30, 2023, compared with none at year-end 2022, and recognized a $1.2 million fair-value gain during the period.
- Prior-period 2022 results were revised for share-based compensation errors. The six-month 2022 net loss increased by $1.3 million to $19.2 million; the revision was non-cash and did not affect cash balances.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing cash was expected to fund operations past the anticipated August 14, 2023 PDUFA date. If HEPZATO approval were substantially delayed, management stated that additional capital would be required and that available funds would not be sufficient to meet obligations within twelve months from issuance of the financial statements.
- Capital commitments over the next twelve months were estimated at $6.6 million for accounts payable, accrued expenses and leases and $5.1 million of loan principal payments. Longer-term commitments included $5.0 million of convertible-note principal, subject to conversion, $1.0 million related to the medac settlement, and additional loan and lease obligations.
- The Avenue loan carried a 15.95% interest rate at June 30, 2023, was secured by substantially all company assets including intellectual property, and matured August 1, 2024. The interest-only period was deferred to September 30, 2023, with a possible extension to December 31, 2023 subject to FDA approval and at least $10 million of qualifying equity or warrant-exercise proceeds.
- The company’s independent registered public accounting firm had expressed substantial doubt about its ability to continue as a going concern. Delcath has a history of losses, negative operating cash flow and dependence on equity, debt and potential warrant proceeds.
- The current melphalan supplier received FDA Form 483 observations in an unrelated inspection and planned a several-month facility shutdown beginning in December 2023. Management believed inventory was sufficient through the shutdown but acknowledged supply interruption risk.
- Delcath settled the Lachman consulting dispute for $0.9 million on July 5, 2023, after recording the liability at June 30. The company also carried an estimated $1.3 million liability related to the medac settlement.
- Disclosure controls and procedures were not effective as of June 30, 2023 because previously disclosed material weaknesses in internal control over financial reporting remained unresolved. The weaknesses related to accounting for share-based compensation.
- Key risks include FDA rejection or delay, manufacturing and supplier compliance, reimbursement and market adoption, continued operating losses, dilution from securities conversions and warrant exercises, debt-default risk, litigation, and the need to raise additional capital.
Important Facts for Investors to Verify
- Verify the FDA’s action on the HEPZATO NDA after the August 14, 2023 PDUFA target date and any resulting commercialization requirements.
- Assess post-quarter cash balances, operating cash burn, debt repayments and whether additional equity or debt financing was completed.
- Review compliance with the Avenue loan amendment, including required payments, the September 30, 2023 conditions and potential default or acceleration consequences.
- Confirm the status and sufficiency of melphalan and other critical component supplies, including the supplier’s Form 483 remediation and planned shutdown.
- Track the potential dilution and cash proceeds from approximately $60 million of preferred warrant exercises, outstanding common warrants, preferred-stock conversions and stock options.
- Monitor remediation of the material weaknesses and any further revisions or restatements of previously reported financial information.