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 candidate, HEPZATO, is a drug/device combination designed to deliver high-dose chemotherapy to the liver. HEPZATO was not approved for sale in the United States as of June 30, 2022. The company sells the related CHEMOSAT hepatic delivery system in Europe.
This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. The company had 8,597,682 common shares outstanding as of August 8, 2022.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Product revenue | $0.8 million | $0.4 million | $1.0 million | $0.7 million |
| Other revenue | None | $0.1 million | $0.2 million | $0.3 million |
| Total revenue | $0.8 million | $0.5 million | $1.2 million | $0.9 million |
| Gross profit | $0.6 million | $0.3 million | $1.0 million | $0.6 million |
| Gross margin | Approximately 77% | Approximately 62% | Approximately 82% | Approximately 66% |
| Operating loss | $(9.0) million | $(6.5) million | $(16.5) million | $(13.2) million |
| Net loss | $(9.7) million | $(6.4) million | $(17.9) million | $(13.2) million |
| Loss per share | $(1.18) | $(0.96) | $(2.18) | $(2.00) |
- Research and development expense was $5.5 million in Q2 and $9.7 million for the first six months, increasing 56% and 35%, respectively, primarily due to pre-NDA and NDA preparation activities.
- Selling, general and administrative expense was $4.1 million in Q2 and $7.8 million for the first six months, reflecting preparation for potential U.S. commercialization and higher personnel-related costs.
- Cash used in operating activities was $12.4 million for the six months ended June 30, 2022, compared with $11.7 million in the prior-year period. Capital expenditures were $0.1 million.
- Cash, cash equivalents and restricted cash totaled $14.4 million at June 30, 2022, including $10.2 million of unrestricted cash and $4.2 million of restricted cash. Unrestricted cash declined from $22.8 million at December 31, 2021.
- Total liabilities were $23.9 million, including $11.3 million of net Avenue loan debt and $4.7 million of convertible notes. The Avenue loan bears interest at 11.7% at June 30, 2022, increasing to 12.45% in July and 13.2% in August 2022, and is secured by substantially all company assets, including intellectual property.
- Debt maturities include approximately $0.7 million of loan principal in 2022, $8.6 million in 2023, and $8.4 million of loans and convertible notes in 2024.
- Stockholders’ equity was a deficit of $2.8 million at June 30, 2022, compared with positive equity of $12.0 million at December 31, 2021. Accumulated deficit was $438.8 million.
Material Changes Versus the Prior Comparable Period
- Q2 total revenue increased approximately 49%, driven by higher CHEMOSAT product revenue. The company attributed the increase primarily to transitioning to direct European sales in March 2022, which increased average revenue per unit.
- Six-month total revenue increased approximately 27%, while gross margin improved to approximately 82% from 66%.
- Operating loss increased approximately 25% for Q2 and approximately 25% for the six-month period, as increased revenue was more than offset by higher research, development, and commercialization-related expenses.
- Net loss increased approximately 50% in Q2 and approximately 36% for the six-month period, partly because of higher interest expense and debt-discount amortization related to the Avenue financing.
- Cash decreased by $12.6 million during the first six months, compared with a $9.3 million decrease in the prior-year period.
- Inventories increased to $2.0 million from $1.4 million at year-end 2021, and accounts payable and accrued expenses increased to $7.5 million from $4.7 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The FOCUS clinical trial met its prespecified endpoint in December 2021. Following an April 2022 pre-NDA meeting, management stated that it did not believe additional preclinical or clinical studies were required to refile the HEPZATO NDA.
- Because of vendor delays in receiving certain reports, management planned to submit the HEPZATO NDA by the end of the third quarter of 2022. Two Expanded Access Program sites had been opened.
- CHEMOSAT received European Medical Device Regulation certification on February 28, 2022. Delcath assumed direct responsibility for European sales, marketing, and distribution beginning March 1, 2022.
- The financial statements were prepared on a going-concern basis, but management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance. The company expects additional losses and requires additional working capital.
- Management identified approximately $7.8 million of accounts payable, accrued expenses, and lease liabilities and $5.0 million of loan principal payments due within the next twelve months. Additional capital may be required to maintain operations and fund clinical and commercialization activities.
- On July 20, 2022, after quarter-end, the company completed a private placement of 690,954 common shares and 566,751 pre-funded warrants for gross proceeds of approximately $5.0 million before offering expenses. The proceeds are intended for working capital and general corporate purposes.
- The company faces risks related to regulatory approval, clinical and product development, commercialization and reimbursement, manufacturing and supply-chain execution, intellectual property, competition, dependence on key personnel, COVID-19 disruptions, and the war in Ukraine.
- Delcath is in arbitration with former European distribution partner medac regarding an approximately €1.0 million milestone payment tied to the FOCUS trial. The company has not recognized the receivable because medac disputes the payment obligation. medac also reserved potential claims for damages related to termination of the distribution agreement. The parties agreed to pause arbitration temporarily while pursuing settlement discussions.
- The company has $8.0 million of unrecognized stock-based compensation expense expected to be recognized over a weighted-average period of two years.
Facts Investors Should Verify
- Whether the HEPZATO NDA was submitted by the stated third-quarter 2022 target and the status, timing, and completeness of FDA review.
- Whether the $5.0 million post-quarter-end financing provides sufficient near-term liquidity given the company’s operating cash burn and debt maturities.
- The company’s ability to raise additional capital or form strategic alliances, and the potential dilution or security interests associated with such financing.
- Current European CHEMOSAT sales, reimbursement progress, direct-distribution costs, and customer adoption.
- The status and potential financial outcome of the medac arbitration and any related counterclaims.
- Compliance with the Avenue loan covenants, restricted-cash conditions, repayment schedule, and rising variable interest rate.