Rockwell Medical, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 10, 2020. The company develops iron-deficiency therapies, including Triferic, and manufactures hemodialysis concentrates. Results are unaudited.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $15.9 million | $14.8 million | $31.8 million | $30.4 million |
| Gross profit (margin) | $0.9 million (5.5%) | $0.7 million (4.9%) | $2.0 million (6.3%) | $1.7 million (5.7%) |
| Operating loss | $5.6 million | $10.4 million | $13.7 million | $19.2 million |
| Net loss | $6.9 million | $10.3 million | $14.9 million | $19.0 million |
| Basic and diluted loss per share | $0.10 | $0.18 | $0.22 | $0.33 |
- Revenue rose 7.1% in Q2 and 4.4% for the first half, primarily from dialysis concentrates; first-half Triferic Dialysate sales also increased by approximately $0.4 million year over year. Concentrates remained the dominant business.
- Gross profit improved, but margins remained low. Six-month cost of sales was $29.8 million against $31.8 million of sales.
- Operating losses narrowed as selling and marketing and general and administrative expenses fell. The Q2 comparison also benefited from lower research and development expense, including the absence of the $1.3 million Triferic AVNU application fee incurred in Q2 2019.
- Q2 2020 net loss included $0.8 million of warrant modification expense and $0.5 million of interest expense. First-half results also included $0.6 million of interest expense; there was no debt interest expense in the comparable 2019 periods.
- At June 30, cash and cash equivalents were $26.7 million and available-for-sale investments were $13.3 million, totaling approximately $40.0 million; working capital was also approximately $40.0 million. Operating cash use was $16.2 million for the first half, versus $15.8 million in 2019.
- Financing activities provided $30.4 million in the first half, including approximately $21.2 million net proceeds from a term loan, $8.0 million net from a public offering, and $2.0 million net from at-the-market share sales. Shares outstanding increased from 65.4 million at year-end 2019 to 70.2 million at June 30, 2020.
- The Innovatus loan had $22.5 million principal funded, with a June 30 carrying balance of $20.8 million net of unamortized costs and discount. It bears an initial 8.75% stated rate (10.9% effective rate), matures in March 2025, and is secured by substantially all company assets. Up to $12.5 million in additional tranches is milestone-dependent.
Material changes and business developments
- FDA approval of intravenous Triferic AVNU was received March 27, 2020. Triferic Dialysate sales began in Q2 2019; the company reported approximately $0.2 million of Q2 2020 U.S. product sales for it.
- Management attributed lower Q2 general and administrative expense partly to reduced stock compensation and legal costs, offset in part by severance expense related to the former CEO’s departure. For the first half, lower selling and marketing and G&A expenses helped reduce the operating loss.
- The company raised capital through equity offerings and the Innovatus loan. Management stated that available funding was expected to cover operating requirements for at least 12 months from the report filing date, while also warning that additional capital would be needed for its longer-term plan.
Outlook, risks, contingencies, and unusual items
- Management planned an AVNU sample-evaluation program in Q3 2020, with commercial launch expected in Q4 2020. COVID-19-related limits on customer access could push launch into Q1 2021. Triferic products are reimbursed within the existing dialysis payment bundle, which may slow adoption.
- COVID-19 was adversely affecting sales and marketing, research and development, partner activities, and financial markets. The filing identifies potential impacts on product launches, clinical trials, supply chains, and future financing availability.
- The company remains loss-making, with an accumulated deficit of $321.4 million, and says it will need additional financing if revenues do not support its business plan. Financing may not be available on acceptable terms, if at all.
- Loan covenants include liquidity and future Triferic sales requirements. The company reported compliance at June 30, 2020, but a future default could accelerate repayment and permit lenders to enforce security over company assets.
- Triferic inventory was $3.7 million gross, with a $2.5 million reserve; $0.8 million was classified as non-current. The company also reserved $0.7 million for Calcitriol inventory after deciding U.S. commercialization was not viable and withdrawing its ANDA in May 2020.
- A supplier dispute was settled July 31, 2020, after quarter-end: the settlement released $3.0 million of claimed penalties, established new minimums, and requires payment for certain raw materials in two installments; the filing does not state the total raw-material payment.
- The SEC had issued a subpoena concerning Triferic reimbursement status, inventory reserves, and prior executive terminations; the company said it was cooperating. A shareholder derivative settlement had preliminary court approval, with a final-approval hearing scheduled for August 10, 2020. The earlier securities class action settlement was court-approved and primarily funded by D&O insurance.
- Disclosure controls were deemed ineffective at June 30, 2020. A prior IT controls weakness related to change management and third-party management was remediated, but management was still evaluating user-access and segregation-of-duties controls and their broader effects.
- The former CFO’s resignation became effective July 3, 2020. The filing estimated approximately $0.7 million of stock-compensation expense would be reversed for forfeited awards in a subsequent quarter.
Important facts for investors to verify
- Whether Triferic Dialysate and AVNU gain adoption and generate sufficient sales, particularly under bundled reimbursement.
- Whether AVNU launch and clinical-program timelines are delayed by COVID-19 or other operating constraints.
- Cash burn, financing needs, and availability of remaining at-the-market capacity; assess dilution alongside the loan’s interest, collateral, and covenant terms.
- Progress against loan covenants, including the Triferic sales thresholds, and the conditions for drawing additional loan tranches.
- Triferic inventory reserve adequacy and the amount and timing of supplier-settlement raw-material payments.
- Outcome of the SEC inquiry and final court approval and implementation of the derivative settlement.
- Remediation of remaining IT access and segregation-of-duties weaknesses and any subsequent changes in control effectiveness.