Delcath Systems, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Delcath is an interventional oncology company developing HEPZATO, a drug-device combination for liver cancers, and commercializing the CHEMOSAT hepatic delivery system in Europe. The filing covers the three and nine months ended September 30, 2020; all financial statements are unaudited and amounts are in thousands unless otherwise noted.
The FOCUS Phase 3 trial for metastatic ocular melanoma treated its final enrolled patient on October 2, 2020. The ALIGN trial for intrahepatic cholangiocarcinoma was paused while management reevaluates its design and prioritizes completion of FOCUS and a subsequent FDA filing.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $466 | $380 | $1,139 | $1,063 |
| Gross profit | $278 | $208 | $705 | $623 |
| Gross margin | 59.7% | 54.7% | 61.9% | 58.6% |
| Operating loss | $(4,980) | $(5,572) | $(14,323) | $(15,370) |
| Net loss | $(4,991) | $(7,519) | $(17,127) | $(21,371) |
| Net loss attributable to common stockholders | $(4,991) | $(7,519) | $(17,182) | $(21,371) |
| Loss per diluted share | $(1.16) | $(73.82) | $(7.75) | $(207.58) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(18,268) | $(18,322) |
Q3 revenue comprised $340 of product revenue and $126 of other revenue. Nine-month revenue comprised $778 of product revenue and $361 of other revenue. Research and development expense was $3,260 in Q3 and $8,457 for nine months, while selling, general and administrative expense was $1,998 and $6,571, respectively.
At September 30, 2020, cash and cash equivalents were $10,899, restricted cash was $181, and total cash shown in the cash flow statement was $11,080. Total assets were $16,565, total liabilities were $13,289, and stockholders’ equity was $3,276. Convertible notes payable totaled $2,000 and were classified as current, with a stated maturity of July 16, 2021. Operating lease liabilities totaled approximately $1,098.
Material changes versus the prior comparable periods
- Q3 revenue increased $86, or approximately 23%, while nine-month revenue increased $76, or approximately 7%.
- Gross margin improved to 59.7% in Q3 from 54.7% and to 61.9% for nine months from 58.6%.
- Q3 net loss improved by $2,528, primarily from lower financial instrument and interest-related expense and lower operating expenses.
- Nine-month net loss improved by $4,244, primarily due to a $3,240 reduction in other expense and a $965 reduction in operating expenses.
- Research and development spending increased by $1,482 in Q3 and $1,668 for nine months as FOCUS trial activities resumed in January 2020.
- SG&A declined by $2,004 in Q3 and $2,633 for nine months, primarily because of reduced headcount and personnel costs.
- The company raised net proceeds of $19,377 from a May 2020 public offering, $601 from warrant exercises, and $66 from its ATM offering through September 30, 2020.
- The 2019 warrants were reclassified from liability to equity in February 2020. The company recorded a $2,832 fair-value loss during the nine months, but had no warrant liability at September 30, 2020.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected existing cash and the ATM offering to fund operations through the second quarter of 2021, but stated that additional capital would be required thereafter. Management also stated that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Top-line FOCUS trial data were expected in early 2021, with an NDA submission to the FDA targeted for the first quarter of 2022. These timelines depend on clinical-site access and data monitoring.
- COVID-19 slowed patient recruitment, treatment, and data monitoring, and reduced European CHEMOSAT commercial activity. The ultimate financial and liquidity impact could not be reasonably estimated.
- On September 9, 2020, the FDA conditionally accepted the HEPZATO KIT trade name; final approval was expected to be requested with the NDA.
- The company faces an arbitration claim from former executives seeking approximately $1,140 in unpaid compensation, plus potential statutory damages, fees, costs, and interest. The company accrued the full claimed unpaid compensation and intends to defend the matter; mediation was scheduled to place arbitration on hold.
- Subsequent to September 30, 2020, the company received $93.5 from warrant exercises and $814.7 from additional ATM sales.
- Subsequent events included the October 1 appointment of Gerard Michel as CEO and John Purpura as COO, along with significant option grants. The company also entered into or amended several lease and sublease arrangements.
Most important facts for investors to verify
- Actual cash runway, ATM issuance pace, and the timing and terms of required future financing.
- FOCUS trial top-line results, regulatory progress, and whether the targeted first-quarter 2022 NDA submission remains achievable.
- The effect of COVID-19 and hospital access restrictions on clinical execution and CHEMOSAT revenue.
- The company’s ability to resolve its going-concern condition and fund operations beyond the second quarter of 2021.
- Potential dilution from 4,362,373 outstanding warrants, preferred-stock conversion rights, equity offerings, and employee option grants.
- Resolution and potential financial exposure from the former executive arbitration claim and other contingencies.