Delcath Systems, Inc. 10-Q Summary
Business Context and Reporting Period
Delcath Systems, Inc. is an interventional oncology company focused on primary and metastatic liver cancers. Its lead candidate, HEPZATO, is a drug/device combination intended to deliver high-dose chemotherapy to the liver. The company commercializes CHEMOSAT, a related medical device, in selected European markets.
This filing covers the three and nine months ended September 30, 2021. The company had 7,356,289 common shares outstanding as of November 9, 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $522 thousand | $466 thousand | $1.447 million | $1.139 million |
| Gross profit | $295 thousand | $278 thousand | $906 thousand | $705 thousand |
| Gross margin | 56.5% | 59.7% | 62.6% | 61.9% |
| Operating loss | $6.696 million | $4.980 million | $19.874 million | $14.323 million |
| Net loss | $7.125 million | $4.991 million | $20.302 million | $17.127 million |
| Loss per share | $0.94 | $1.16 | $2.93 | $7.75 |
| Operating cash flow used | Not provided | Not provided | $16.193 million | $17.829 million |
At September 30, 2021, cash and cash equivalents were $24.865 million and restricted cash was $4.151 million, for total cash, cash equivalents and restricted cash of $29.016 million. Current assets were $32.318 million versus current liabilities of $5.361 million.
Total debt was approximately $17.436 million, consisting of $10.834 million of net Avenue term debt and $4.602 million of net convertible debt, together with the $2.000 million Rosalind convertible note included in the stated convertible debt balances. Debt maturities extend through 2024. The Avenue loan is secured by substantially all company assets, including intellectual property.
Financing activities provided $16.513 million during the first nine months, including $14.437 million of net Avenue debt proceeds and $2.458 million from warrant exercises. Capital expenditures were $144 thousand.
Material Changes Versus Prior Comparable Period
- Revenue increased 12% in the third quarter and 27% for the first nine months, primarily from higher CHEMOSAT unit sales to medac and related royalty income.
- Research and development expense decreased 9% in the third quarter as the FOCUS trial dosing phase was completed in May 2021, but increased 20% year to date due to higher clinical, personnel, NDA-preparation and stock-option costs.
- Selling, general and administrative expense increased 102% in the third quarter and 62% year to date, largely because of stock-based compensation.
- Net loss increased $2.134 million in the third quarter and $3.175 million year to date. Nine-month results benefited from the absence of the $2.832 million warrant-liability fair-value expense recorded in 2020, but this was more than offset by higher operating costs and $6.224 million of stock-option compensation.
- The company entered into the Avenue term loan in August 2021 and amended the $2.000 million Rosalind convertible notes, extending their maturity to October 30, 2024 and subordinating them to Avenue debt.
- Common shares outstanding increased from 5,996,101 at December 31, 2020 to 7,356,289 at September 30, 2021, primarily from preferred-stock conversions and warrant exercises. Dilution exposure also remains substantial from options, warrants, preferred-stock conversions and convertible notes.
Guidance, Outlook, Risks and Unusual Items
- Management planned to submit an FDA New Drug Application for HEPZATO for metastatic ocular melanoma in the first quarter of 2022, subject to completion of clinical-site monitoring and other requirements.
- A preliminary FOCUS analysis covering 87% of enrolled patients showed 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 prespecified success threshold. The filing cautions that preliminary analyses may change as data mature.
- The company reported that the FOCUS trial's final patient was treated on May 18, 2021. The ALIGN Phase 3 trial in intrahepatic cholangiocarcinoma remained paused because of enrollment difficulties and could potentially be restarted.
- COVID-19 slowed FOCUS recruitment and site monitoring, increased volatility in European revenue and could delay the planned NDA submission.
- The company had not achieved European Medical Device Regulation certification as of September 30, 2021. Its existing CE Mark was stated to remain effective through April 2024.
- The company disclosed substantial doubt about its ability to continue as a going concern within one year after issuance of the financial statements. It expects continuing losses and requires additional capital or strategic alliances; failure to obtain financing could force reductions or discontinuation of development and commercialization activities.
- The Avenue facility has a maximum commitment of $20 million, but $4 million of the initial tranche is restricted pending specified FOCUS efficacy, safety and subsequent equity-financing conditions. The company may request an additional $5 million tranche in late 2022, subject to lender approval.
- In October 2021, the company notified medac that it was terminating the license agreement effective April 12, 2022 because of nonpayment of a claimed €1.0 million FOCUS efficacy milestone. medac disputed the termination and threatened damages; disputes are subject to binding arbitration. The milestone was not recognized as revenue at September 30, 2021.
- The company settled former executives’ compensation claims confidentially in 2021 for less than the $1.140 million accrued amount. The related arbitration was dismissed with prejudice on June 1, 2021.
- On November 4, 2021, the CEO was appointed interim Principal Accounting Officer effective November 15, 2021.
Important Facts for Investors to Verify
- Whether the FOCUS trial final analysis supports the preliminary efficacy results and whether the FDA accepts the planned NDA submission timing.
- The availability and timing of additional financing, including the release of restricted Avenue funds and potential equity issuance under the $25 million ATM program.
- The company’s ability to fund operations while generating minimal revenue and remaining substantially loss-making.
- The status and economic consequences of the medac milestone dispute, license termination and any potential arbitration.
- Debt covenants, collateral rights, conversion features, maturity payments and the impact of the Avenue security interest on the company’s assets and intellectual property.
- Progress toward MDR certification and the effect of COVID-19 or regulatory delays on CHEMOSAT sales and HEPZATO development.
- Potential dilution from 1.698 million outstanding stock options, 3.895 million warrants, preferred-stock conversion rights and convertible notes.