Delcath Systems, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Delcath is an interventional oncology company focused on primary and metastatic liver cancers. Its lead product, HEPZATO, is a drug-device combination under FDA review for unresectable hepatic-dominant metastatic ocular melanoma. HEPZATO was not approved for U.S. sale as of March 31, 2023. CHEMOSAT, the related hepatic delivery system, was approved for sale in Europe, where Delcath assumed direct sales and distribution responsibility in March 2022.
The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company filed an NDA resubmission for HEPZATO on February 14, 2023; the FDA accepted it as complete on March 20, 2023 and set a PDUFA target action date of August 14, 2023.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $0.6 million | $0.4 million | Increase of approximately 58% |
| Product revenue | $0.6 million | $0.2 million | Increase of approximately $0.4 million |
| Cost of goods sold | $0.2 million | $0.03 million | Higher with direct European sales |
| Gross profit | $0.4 million | $0.3 million | Gross margin approximately 70% versus 91% |
| Research and development | $4.6 million | $4.5 million | Relatively flat |
| SG&A | $4.2 million | $4.2 million | Relatively flat |
| Operating loss | $8.3 million | $8.3 million | Approximately flat |
| Net loss | $9.0 million | $9.0 million | Flat |
| Loss per common share | $0.77 | $1.10 | Improved due primarily to higher share count |
| Cash used in operating activities | $4.3 million | $6.4 million | Improved by $2.1 million |
All financial statement amounts are presented in thousands unless otherwise noted. Gross profit was $416,000, or approximately 70% of revenue. Interest expense was $688,000, compared with $645,000 in the prior-year quarter.
Financial position, debt and liquidity
- Cash and cash equivalents were $24.2 million at March 31, 2023, compared with $7.7 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $24.3 million versus $11.8 million.
- The increase in cash primarily reflected approximately $23.0 million of net private-placement proceeds, partially offset by $4.3 million of operating cash use and $6.3 million of debt repayments.
- Total liabilities were $25.3 million and stockholders’ equity was a deficit of $13.1 million. Series F-1 preferred stock was classified as $18.4 million of mezzanine equity.
- Reported debt at March 31, 2023 included approximately $4.8 million of net Avenue loan debt, $2.0 million of Rosalind convertible notes and $2.8 million of the convertible portion of the Avenue loan, for approximately $9.6 million of net debt and convertible notes.
- The Avenue loan bears interest at 15.45% at March 31, 2023, is secured by substantially all company assets, including intellectual property, and matures August 1, 2024.
- The company expects approximately $9.6 million of payments for accounts payable, accrued expenses and lease liabilities and $4.4 million of loan principal payments during the next twelve months.
- Management stated that existing cash and cash equivalents were expected to provide liquidity beyond the anticipated August 14, 2023 PDUFA date, but a substantial approval delay could require additional debt or equity financing.
Material changes versus the prior comparable period
- Revenue increased primarily because of the transition to direct European CHEMOSAT sales beginning in March 2022. The filing reported no other revenue in Q1 2023, compared with $171,000 of other revenue in Q1 2022.
- Cost of goods sold increased as direct sales expanded, reducing the gross margin despite higher gross profit.
- Operating expenses remained broadly stable, while net loss remained $9.0 million.
- Weighted-average shares increased to 11.6 million from 8.2 million, reducing reported loss per share to $0.77 from $1.10.
- On March 29, 2023, the company issued $24.9 million of Series F-1 convertible preferred stock and related warrants. Subject to stockholder approval, the preferred stock may convert into approximately 7.6 million common shares.
- The preferred and common warrants were recorded as derivative warrant liabilities, with a $4.9 million warrant liability recognized at issuance. The transaction also created $18.4 million of mezzanine equity at quarter-end.
- The company corrected previously issued Q1 2022 financial information for $797,000 of additional share-based compensation expense. The revision increased Q1 2022 net loss from $8.2 million as previously reported to $9.0 million and did not affect cash.
- Management disclosed that disclosure controls and procedures were not effective as of March 31, 2023 because of previously reported material weaknesses in internal control over financial reporting.
Guidance, outlook, risks and unusual items
- The principal near-term catalyst is the FDA decision on the HEPZATO NDA resubmission. The filing elsewhere identifies August 14, 2023 as the PDUFA target date, while one MD&A disclosure references August 4, 2023; this date discrepancy should be verified.
- Stockholder approval is required for conversion of the Series F-1 preferred stock and exercisability of the related warrants. If all applicable warrants are exercised, management estimates approximately $60.0 million of proceeds, which it believes could fund HEPZATO commercialization if approved.
- The Avenue loan interest-only period was deferred to September 30, 2023 and may be extended to December 31, 2023 if FDA approval is obtained and at least $10 million of net equity or warrant-exercise proceeds are received by September 30, 2023.
- The company has incurred losses throughout its history and has no assurance of achieving profitability. A delayed or unsuccessful FDA decision, inability to raise capital, limited reimbursement, manufacturing or supply issues, and unfavorable clinical or regulatory outcomes could materially affect operations.
- Other risks include inflation, higher interest rates, market volatility, geopolitical disruptions and banking-system exposure. The company reported that it recovered all funds held at Silicon Valley Bank after its March 2023 closure and did not incur a loss.
- Delcath accrued approximately $1.3 million related to the medac settlement, including future minimum payments and royalties on CHEMOSAT sales. It also accrued approximately $0.9 million in connection with litigation brought by Lachman Consulting Services, while stating that it intends to defend the claims.
Facts investors should verify
- FDA action on the HEPZATO NDA resubmission and the correct PDUFA target date.
- Stockholder approval, conversion of Series F-1 preferred stock, and the timing and potential exercise of the related warrants.
- Actual cash burn relative to the $24.3 million cash, cash equivalents and restricted cash balance.
- Upcoming Avenue loan principal and interest obligations, maturity requirements and compliance with amended terms.
- European CHEMOSAT sales growth, gross margin and reimbursement progress following the shift to direct distribution.
- Status and ultimate cost of the Lachman litigation and the medac settlement obligations.
- Remediation of the disclosed material weaknesses in internal control over financial reporting.