Delcath Systems, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Delcath is an interventional oncology company developing HEPZATO, a drug/device combination for liver cancers, and commercializing CHEMOSAT, the corresponding hepatic delivery system, in Europe. HEPZATO was not approved for sale in the United States as of the filing date.
- The FOCUS trial met its prespecified endpoint in December 2021.
- Management held a pre-NDA meeting with the FDA in April 2022 and planned to submit an NDA by the end of the third quarter of 2022, subject to vendor-delivered reports.
- CHEMOSAT received European Medical Device Regulation certification on February 28, 2022. Delcath assumed direct European sales, marketing, and distribution responsibilities beginning March 1, 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Product revenue | $0.207 million | $0.261 million | Down $0.054 million |
| Other revenue | $0.171 million | $0.127 million | Up $0.044 million |
| Total revenue | $0.378 million | $0.388 million | Down $0.010 million |
| Gross profit | $0.345 million | $0.276 million | Up $0.069 million |
| Gross margin | Approximately 91% | Approximately 71% | Improved |
| Research and development | $4.240 million | $3.707 million | Up $0.533 million |
| SG&A | $3.648 million | $3.296 million | Up $0.352 million |
| Operating loss | $7.543 million | $6.727 million | Loss increased $0.816 million |
| Net loss | $8.203 million | $6.747 million | Loss increased $1.456 million |
| Loss per common share | $1.00 | $1.04 | Improved on higher share count |
| Cash used in operating activities | $6.375 million | $4.567 million | Use increased $1.808 million |
Cash, cash equivalents, and restricted cash totaled $20.491 million at March 31, 2022, including $16.340 million of unrestricted cash and $4.151 million of restricted cash. Total cash declined from $26.953 million at December 31, 2021. Restricted cash included $4.0 million held under the Avenue loan agreement, $0.101 million securing letters of credit, and $0.050 million securing credit cards.
Total assets were $27.317 million and total liabilities were $22.092 million at March 31, 2022. Debt included $11.153 million of net Avenue loan payable, including a $2.520 million current portion, and $4.675 million of convertible notes payable. The Avenue loan bears interest at 10.95% at March 31, 2022, is secured by substantially all company assets including intellectual property, and matures August 1, 2024.
The company reported an accumulated deficit of $429.179 million and stated that substantial doubt exists regarding its ability to continue as a going concern within one year after issuance of the financial statements. Management expects additional capital will be required and stated that financing may not be available on acceptable terms, or at all.
Material changes versus the prior comparable period
- Total revenue decreased modestly, primarily because product revenue declined during the transition to direct European sales; other revenue increased.
- Gross profit increased despite lower revenue, principally because cost of goods sold fell to $0.033 million from $0.112 million. Management attributed the decrease to the European distribution transition.
- R&D expense increased 14%, primarily due to preparation for the FDA pre-NDA meeting and planned NDA submission.
- SG&A expense increased 11%, primarily reflecting preparation for potential U.S. commercialization of HEPZATO.
- Interest expense increased to $0.645 million from $0.041 million, primarily due to the Avenue financing and amortization of related debt discounts.
- Operating cash use increased, while no financing cash proceeds were received in Q1 2022. Q1 2021 included $2.376 million of proceeds from warrant exercises.
- Inventories increased to $2.011 million from $1.412 million, including $0.289 million of finished goods at March 31, 2022.
Guidance, outlook, commentary, risks, and unusual items
- Management planned to submit the HEPZATO NDA by the end of Q3 2022. The filing states that, based on FDA feedback, management did not believe additional preclinical or clinical studies were required to re-file the NDA; official meeting minutes were still pending.
- Management expects continued losses until significant sales, if ever, are generated. It identified additional financing through debt, equity, or strategic alliances as necessary to support operations.
- Capital commitments over the next 12 months included approximately $6.1 million of accounts payable, accrued expenses, and lease liabilities and $2.9 million of loan principal payments. Commitments beyond 12 months included approximately $9.8 million of loan principal and $5.0 million of convertible-note principal, if not converted.
- The company disclosed risks related to regulatory approval, clinical development, commercialization, reimbursement, manufacturing and component supply, intellectual property, competition, key personnel, COVID-19 restrictions, and the Russia-Ukraine war.
- Delcath is in an arbitration with former European distribution partner medac regarding an approximately €1.0 million milestone invoice. Delcath terminated the license agreement effective April 12, 2022; medac disputed the payment obligation and reserved potential damages claims. The parties agreed to pause arbitration temporarily while pursuing settlement discussions. Delcath purchased approximately $0.2 million of inventory from medac in March 2022.
- The company early adopted ASU 2020-06 and adopted ASU 2020-10 and ASU 2021-04 on January 1, 2022; management reported no immediate or material financial statement impact.
Key facts investors should verify
- Whether the HEPZATO NDA was submitted by the targeted Q3 2022 timing and the FDA’s subsequent regulatory response.
- The company’s ability to raise capital before cash resources are depleted, given the going-concern uncertainty and quarterly operating cash use of $6.4 million.
- Availability and release conditions for the $4.0 million restricted under the Avenue loan agreement, as well as debt maturities and covenant compliance.
- Progress and outcome of the medac arbitration, including any settlement, damages claim, or recovery of the disputed milestone.
- Commercial traction, reimbursement, and gross margins following Delcath’s assumption of direct European CHEMOSAT distribution.
- Potential dilution from 2.238 million outstanding stock options, 3.894 million warrants, convertible notes, and preferred-stock conversion rights.