Delcath Systems, Inc. — Q1 2021 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. development product is HEPZATO, a drug/device combination designed to deliver high-dose chemotherapy directly to the liver. HEPZATO was not approved for U.S. sale as of March 31, 2021. In Europe, the company commercially sells CHEMOSAT, a related hepatic delivery system.
This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported 6.25 million common shares outstanding at March 31, 2021 and 6.47 million as of May 11, 2021.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $388.5 thousand | $293.4 thousand | 32.4% increase |
| Product revenue | $261 thousand | $176 thousand | Increase |
| Other revenue | $127 thousand | $118 thousand | Increase |
| Gross profit | $276 thousand | $216 thousand | 27.8% increase |
| Gross margin | Approximately 71.0% | Approximately 73.6% | Decrease |
| Operating expenses | $7.0 million | $5.3 million | 32.4% increase |
| Operating loss | $6.7 million | $5.1 million | Worsened |
| Net loss | $6.7 million | $7.9 million | Loss decreased |
| Basic and diluted loss per share | $1.04 | $108.07 | Improved primarily due to higher share count |
| Net cash used in operating activities | $4.6 million | $5.2 million | Cash use decreased |
Research and development expense was $3.7 million, including $630 thousand of stock-option compensation. Selling, general and administrative expense was $3.3 million, including $1.5 million of stock-option compensation. Total stock-option compensation was $2.1 million, compared with $55 thousand in the prior-year quarter.
Cash, cash equivalents and restricted cash totaled $26.7 million at March 31, 2021, down from $28.8 million at December 31, 2020. Current assets were $30.2 million and current liabilities were $10.1 million. The company had $2.0 million of current convertible notes payable, bearing 8% interest and maturing July 16, 2021, plus lease liabilities. Total liabilities were $12.3 million.
Material changes versus the prior comparable period
- Revenue increased by approximately $95 thousand, driven partly by higher CHEMOSAT unit sales to medac and a 5% increase in the royalty income calculation beginning January 1, 2021.
- Cost of goods sold increased to $112 thousand from $78 thousand, partly reflecting higher sales volume.
- Operating expenses increased by $1.7 million, primarily because of substantially higher stock-option compensation.
- Net loss improved by $1.1 million because Q1 2020 included a $2.8 million unfavorable change in the fair value of a warrant liability. This benefit was partly offset by higher 2021 stock-option compensation.
- Operating cash burn declined by $663 thousand year over year. Financing activities provided $2.4 million from warrant exercises during Q1 2021.
- During the quarter, 237,520 common shares were issued upon warrant exercises and 150 preferred shares were converted into 15,000 common shares.
Guidance, outlook, risks and unusual items
- The company released preliminary FOCUS trial results on March 31, 2021 based on 87% of enrolled patients. Independent review 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% objective response rate versus 13.8% for best alternative care, median progression-free survival of 9.0 months versus 3.1 months, and disease control rate of 70.9% versus 37.9%. Duration of response and overall survival were not yet evaluable, and the preliminary results may change as data matures.
- The company intends to submit a New Drug Application to the FDA in the first quarter of 2022 for metastatic ocular melanoma, subject to completion of the FOCUS trial and continued access to clinical sites.
- COVID-19 slowed FOCUS enrollment and clinical-site monitoring, delayed the timing of trial data, and increased volatility in European commercial revenue. The ultimate effect on operations, liquidity and capital resources could not be reasonably estimated.
- The ALIGN Phase 3 trial in intrahepatic cholangiocarcinoma was paused because of enrollment difficulties. Management is evaluating whether and when to restart it.
- The company has incurred losses since inception and expects additional losses for several years. Management stated that substantial doubt exists about the company’s ability to continue as a going concern for at least one year after issuance of the financial statements. Additional financing or strategic alliances are required; failure to obtain funding could force reductions or delays in development and commercialization activities.
- A former CEO and former CFO are pursuing arbitration claims for approximately $1.14 million of alleged unpaid compensation, plus potential damages, fees and interest. The company accrued the full claimed compensation amount as of March 31, 2021. Arbitration was placed on hold while non-binding mediation proceeded.
- After quarter-end, additional warrants were exercised for approximately $2 thousand and $61 thousand of proceeds, and the company invoiced medac $1.178 million for a FOCUS-related milestone.
Important facts for investors to verify
- Whether the FOCUS preliminary efficacy and safety results remain consistent after the complete dataset is analyzed, including duration of response and overall survival.
- Whether the company can complete the FOCUS trial and submit the planned FDA application in the first quarter of 2022.
- The timing and terms of financing needed to address the stated going-concern uncertainty and the potential dilution from future equity issuance.
- Repayment, conversion or refinancing of the $2.0 million convertible notes maturing in July 2021.
- The effects of COVID-19, European reimbursement conditions and the transition to the European Medical Device Regulation on CHEMOSAT revenue.
- The outcome of the former executive compensation dispute and any amount exceeding the accrued claim.
- The potential dilution from 3.99 million outstanding warrants, 1.08 million stock options, preferred-stock conversion rights and convertible-note conversion rights.