Delcath Systems, Inc. — Form 10-Q Summary
Business context and reporting period
Delcath is an interventional oncology company developing treatments for primary and metastatic liver cancers. Its lead product candidate, HEPZATO, is a drug/device combination that has not been approved for sale in the United States. CHEMOSAT, the corresponding hepatic delivery device, is approved and sold in Europe. The filing covers the quarter and nine months ended September 30, 2022, with comparative periods ended September 30, 2021.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Product revenue | $0.9 million vs. $0.4 million | $1.9 million vs. $1.1 million |
| Total revenue | $0.9 million vs. $0.5 million | $2.1 million vs. $1.4 million |
| Gross profit | $0.7 million vs. $0.3 million | $1.6 million vs. $0.9 million |
| Gross margin | Approximately 74% vs. 57% | Approximately 78% vs. 63% |
| Operating loss | $7.8 million vs. $6.7 million | $24.3 million vs. $19.9 million |
| Net loss | $8.5 million vs. $7.1 million | $26.4 million vs. $20.3 million |
| Loss per common share | $0.92 vs. $0.94 | $3.09 vs. $2.93 |
| Operating cash flow | Not separately provided | $(17.6) million vs. $(16.6) million |
Cash and cash equivalents were $9.8 million at September 30, 2022, while restricted cash was $4.2 million, resulting in total cash, cash equivalents and restricted cash of $14.0 million. Total assets were $20.2 million, compared with $33.1 million at December 31, 2021. The company reported stockholders’ deficit of $5.2 million, compared with equity of $12.0 million at year-end 2021.
Net debt consisted principally of approximately $11.5 million under the Avenue loan and $4.7 million of convertible notes. The Avenue loan is secured by substantially all company assets, including intellectual property, matures August 1, 2024, and carried a 13.2% interest rate at September 30, 2022, increasing to 13.95% in October 2022. Current loan liabilities were $6.5 million.
Material changes versus the prior comparable period
- Revenue increased primarily because Delcath assumed direct European sales, marketing and distribution of CHEMOSAT beginning in March 2022, increasing average selling prices.
- Nine-month research and development expense increased to $13.6 million from $10.2 million, primarily due to preparation for the pre-NDA meeting and planned NDA submission.
- Nine-month selling, general and administrative expense increased to $12.3 million from $10.6 million, reflecting commercialization preparation and the medac matter settlement charge.
- Interest expense increased to $2.0 million from $0.5 million for the nine-month period, largely due to the Avenue financing and related debt discount amortization.
- Common shares outstanding increased to 8.6 million at September 30, 2022 from 7.9 million at December 31, 2021. The July 2022 private placement generated approximately $5.0 million of gross proceeds through common shares and pre-funded warrants.
- Total cash declined by $13.0 million during the first nine months, compared with a $0.3 million increase in the prior-year period.
Guidance, outlook, risks and unusual items
- Management planned to submit an NDA for HEPZATO to the FDA by the end of 2022, subject to vendor delays in delivering certain reports. Management stated that the FDA’s April 2022 pre-NDA feedback did not indicate a need for additional preclinical or clinical studies to re-file the NDA.
- The company has substantial doubt about its ability to continue as a going concern because of recurring losses, a $447.3 million accumulated deficit and expected additional financing needs. Management expects additional losses until significant sales, if ever, are generated.
- Cash used in operations was $17.6 million for the first nine months of 2022. Management stated that additional capital through equity, debt or strategic alliances will be required and that failure to obtain funding could force reductions or delays in research, development and commercialization activities.
- Near-term stated obligations included approximately $8.6 million of accounts payable, accrued expenses and lease liabilities and $7.1 million of loan principal payments. Longer-term obligations included $5.5 million of loan principal, $1.2 million related to the estimated medac settlement and $5.0 million of convertible note principal if not converted.
- Nasdaq notified Delcath on October 26, 2022 that its market value of listed securities had been below the $35 million continued-listing requirement. The company had until April 24, 2023 to regain compliance, subject to possible extension and appeal procedures. The notice had no immediate effect on trading.
- The medac dispute involved an approximately €1.0 million milestone claim and termination of the European distribution agreement. The parties reached a tentative settlement in October 2022, subject to a definitive agreement. Delcath recorded an estimated $1.2 million settlement liability and expense. The proposed settlement included royalties and minimum annual payments tied to future CHEMOSAT sales.
- Additional risks include regulatory approval and commercialization uncertainty, clinical development results, manufacturing and supply-chain constraints, reimbursement, competition, inflation and macroeconomic conditions, and potential effects from COVID-19 and the war in Ukraine.
Most important facts for investors to verify
- Whether the HEPZATO NDA was submitted by the stated year-end 2022 target and the subsequent FDA review status.
- Actual cash burn, financing activity and available liquidity relative to the company’s going-concern disclosure.
- Repayment, refinancing or conversion of the $6.5 million current loan liability and other debt obligations.
- Whether the medac settlement was finalized and the resulting royalty and minimum-payment obligations.
- Whether Delcath regained Nasdaq market-value compliance and maintained its listing.
- Growth in CHEMOSAT sales and whether direct European distribution can produce sufficient gross profit to offset operating losses.