Delcath Systems, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Delcath is an interventional oncology company developing Melphalan/HDS for primary and metastatic liver cancers. CHEMOSAT is commercially available in Europe, while Melphalan/HDS was not approved for sale in the United States.
The company’s principal clinical programs are the FOCUS trial for ocular melanoma liver metastases and the ALIGN Phase 3 trial for intrahepatic cholangiocarcinoma.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenue | $379 thousand | $412 thousand | $672 thousand | $682 thousand |
| Gross profit | $211 thousand | $240 thousand | $426 thousand | $414 thousand |
| Gross margin | 55.7% | 58.3% | 63.4% | 60.7% |
| Operating loss | $(4.269) million | $(4.127) million | $(9.344) million | $(9.800) million |
| Net loss | $(4.275) million | $(5.959) million | $(12.136) million | $(13.853) million |
| Net loss attributable to common stockholders | $(4.330) million | $(5.959) million | $(12.191) million | $(13.853) million |
| Loss per share | $(1.90) | $(58.50) | $(10.40) | $(134.55) |
Research and development expense was $2.223 million in Q2 and $5.197 million for the first six months, increasing year over year as the FOCUS trial became enrolled. Selling, general and administrative expense declined to $2.257 million in Q2 and $4.573 million for the first six months, primarily due to reduced headcount.
Cash and cash equivalents were $16.011 million at June 30, 2020, with total cash, cash equivalents and restricted cash of $16.192 million. Operating activities used $13.082 million during the first six months, compared with $5.962 million in the prior-year period. Total assets were $20.443 million and total liabilities were $12.741 million. The company had $2.0 million of long-term convertible notes payable and no warrant liability at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly unchanged, declining approximately 8% in Q2 and 1% for the first six months.
- Q2 net loss improved by $1.684 million, and six-month net loss improved by $1.717 million, primarily because interest expense declined substantially as convertible note principal fell from $10.5 million at June 30, 2019 to $2.0 million at June 30, 2020.
- Six-month interest expense declined to $109 thousand from $4.064 million, partly offset by a $2.832 million warrant-liability fair-value charge.
- On May 5, 2020, Delcath completed a public offering of common stock, pre-funded warrants and Series F warrants, generating approximately $22.0 million of gross proceeds and $19.378 million of net proceeds. The common stock began trading on Nasdaq in May.
- Common shares outstanding increased to 3.522 million at June 30, 2020 from 67 thousand at December 31, 2019, reflecting preferred-stock conversions, the public offering and other issuances. Historical share and per-share data reflect a 1-for-700 reverse stock split effective December 24, 2019.
- The 2019 warrants were reclassified from liability to equity in February 2020 after specified provisions expired. The reclassification eliminated the warrant liability but resulted in a six-month fair-value charge of $2.832 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that the May offering proceeds and existing cash were expected to fund operations through the second quarter of 2021, but additional capital may be required. The company has incurred losses since inception, expects continued losses for several years and disclosed substantial doubt about its ability to continue as a going concern. Management may need additional equity or equity-related financing, and there is no assurance that financing will be available.
COVID-19 materially disrupted clinical-site access, patient enrollment, treatment schedules and data monitoring. Delcath therefore could not report anticipated top-line FOCUS trial data in mid-2020. The company also expected COVID-19-related hospital restrictions to reduce CHEMOSAT procedures and revenue, although such revenue was not expected to be material. The ultimate effects on operations, liquidity and capital resources could not be reasonably estimated.
European implementation of the Medical Device Regulation was postponed to May 26, 2021. Management did not expect an immediate impact but noted that compliance requirements could adversely affect operations and results.
Former executives filed an arbitration claim after the quarter seeking approximately $1.14 million of alleged unpaid compensation, plus unspecified statutory damages, fees, costs and interest. The company had accrued the full alleged unpaid compensation amount as of June 30, 2020 and intends to defend the claims.
Subsequent events included the issuance of 372,500 common shares upon preferred-stock conversion, exercise of warrants for 41,827 shares and $418,270 of proceeds, and the July 31, 2020 purchase of the Queensbury, New York office location for $460,263.
Important Facts for Investors to Verify
- Whether cash burn and clinical-trial spending remain consistent with management’s stated runway through Q2 2021.
- The timing, enrollment status and eventual results of the FOCUS and ALIGN trials following COVID-19 disruptions.
- Future financing needs, dilution from preferred-stock conversions, outstanding warrants and the $2.0 million convertible notes due July 2021.
- The potential financial exposure and resolution of the former executives’ arbitration claims.
- The effect of COVID-19 on CHEMOSAT procedure volumes, European commercialization and reimbursement.
- Compliance costs and operational effects associated with the European Medical Device Regulation transition.
- The reconciliation of reported cash balances, including $16.011 million of cash and equivalents and $16.192 million including restricted cash.