Delcath Systems, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020, compared with the three months ended March 31, 2019. The filing was signed May 14, 2020. Delcath is an interventional oncology company developing Melphalan/HDS for liver cancers and commercially supplying CHEMOSAT in select European markets.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Product revenue | $176 thousand | $90 thousand | +$86 thousand |
| Other revenue | $118 thousand | $180 thousand | -$62 thousand |
| Total revenue | $294 thousand | $270 thousand | +$24 thousand |
| Gross profit | $216 thousand | $174 thousand | +$42 thousand |
| Gross margin | Approximately 73.5% | Approximately 64.4% | Improved |
| Operating loss | $5.074 million | $5.673 million | Improved by $599 thousand |
| Net loss | $7.861 million | $7.893 million | Improved by $32 thousand |
| Net loss per share | $108.07 | $75.11 | Higher loss per share |
| Operating cash flow | $(5.229) million | $(2.770) million | Higher cash use |
Research and development expense declined to $2.974 million from $3.298 million, primarily due to lower active enrollment in the FOCUS trial, which was fully enrolled during the quarter. Selling, general and administrative expense declined to $2.316 million from $2.549 million, primarily because of reduced personnel expenses.
The Q1 2020 net loss included a $2.832 million change in the fair value of the warrant liability. This was substantially non-cash and was partly offset by the reclassification of the warrant liability to equity. Q1 2019 included approximately $2.160 million of debt discount amortization, contributing to higher prior-year interest expense.
Cash, cash equivalents and restricted cash totaled $4.721 million at March 31, 2020, down from $10.183 million at December 31, 2019 and up from $1.326 million at March 31, 2019. Cash and cash equivalents excluding restricted cash were $4.540 million. Total current liabilities were $13.043 million versus $8.222 million of current assets, and stockholders’ deficit was $8.005 million.
Outstanding long-term convertible notes payable totaled $2.0 million and carried an 8% interest rate. The warrant liability was zero at March 31, 2020 after reclassification to equity. The company had $2.672 million of deferred revenue and $7.424 million of accrued expenses.
Material changes and financing
- Total revenue increased modestly, reflecting higher product revenue and lower other revenue.
- Gross profit improved despite revenue remaining below operating-cost requirements.
- Operating expenses declined 9.5%, but operating cash use increased to $5.229 million because of working-capital movements and the absence of certain prior-year non-cash adjustments.
- Common shares outstanding increased to 72.773 million at March 31, 2020 from 67.091 million at December 31, 2019, reflecting preferred-stock conversions and other issuances. Share counts reflect the one-for-700 reverse stock split effected December 24, 2019.
- On May 5, 2020, after quarter-end, Delcath closed an offering of approximately $22.0 million of gross proceeds through common stock or common-stock equivalents and Series F warrants. The company stated that offering proceeds and existing cash were expected to fund operations through the second quarter of 2021, although additional capital may be required.
- The company’s common stock began trading on the Nasdaq Capital Market on May 1, 2020. The conversion and exercise prices of certain Series E, Series E-1 and 2019 warrants were subsequently adjusted to $10.00.
Outlook, risks and unusual items
Delcath expects to continue incurring losses and does not expect significant revenue or profitability in the foreseeable future. Melphalan/HDS has not been approved for sale in the United States; CHEMOSAT is commercially available in select European markets.
COVID-19 disrupted clinical-site monitoring and was expected to reduce product revenue as hospitals prioritized COVID-19 patients. The pandemic also impaired enrollment and treatment activity in the FOCUS trial. Management therefore withdrew its anticipated mid-2020 timing for FOCUS top-line data and stated that timing would be reassessed when sites resume normal operations.
Liquidity remains dependent on continued access to capital markets, successful commercialization, clinical development, regulatory approvals, reimbursement, manufacturing and supplier arrangements. Management stated that failure to obtain sufficient financing could require curtailing operations, and there is no assurance that additional financing will be available.
The company reported no material changes to previously disclosed risk factors, no defaults upon senior securities and no material changes in internal control over financial reporting. Ordinary-course claims and litigation could result in damages, fines, penalties or injunctions, although no specific material proceeding was identified in the filing.
Investor verification items
- Verify the net cash runway after deducting underwriting discounts and offering expenses from the approximately $22.0 million May 2020 financing.
- Reconcile the warrant-liability fair-value expense with the non-cash reclassification of warrants to equity.
- Monitor FOCUS trial data timing, COVID-19-related site disruptions and progress of the ALIGN trial.
- Assess whether product revenue and European reimbursement can scale relative to recurring quarterly operating cash use.
- Review dilution from Series E and Series E-1 preferred-stock conversions, 2019 warrants, Series F warrants and future capital raises.
- Confirm the company’s ability to maintain funding beyond the stated second-quarter 2021 runway and progress toward regulatory approval in the United States.