Rockwell Medical, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results. Rockwell Medical develops renal therapies, including Triferic, and manufactures hemodialysis concentrates; concentrates and related products account for substantially all current sales.
Financial performance
Amounts are in U.S. dollars. Q2 and six-month comparisons are to the corresponding 2018 periods.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $14.85 million | $14.91 million | $30.41 million | $29.86 million |
| Gross profit (loss) | $0.73 million | $(4.02) million | $1.74 million | $(4.74) million |
| Gross margin | 4.9% | (26.9)% | 5.7% | (15.9)% |
| Operating loss | $(10.37) million | $(12.30) million | $(19.18) million | $(18.02) million |
| Net loss | $(10.29) million | $(12.23) million | $(18.97) million | $(17.78) million |
| Basic and diluted loss per share | $(0.18) | $(0.24) | $(0.33) | $(0.35) |
Cash flow and liquidity: Operating cash use was $15.8 million in the first half, versus $9.9 million in 2018. Investing activities used $3.8 million and financing activities provided $18.3 million, principally from equity offerings. Cash and equivalents were $21.4 million at June 30; available-for-sale investments were $13.8 million, for combined cash and investments of $35.2 million. Working capital was $33.4 million. Management said post-quarter offering proceeds supported operating requirements for at least 12 months from the filing date, while noting additional capital will be needed for longer-term plans.
Debt and other obligations: The filing reports a $1.9 million short-term insurance financing note, bearing 4.65% interest and due in installments through April 2020. Operating lease liabilities totaled $3.33 million. The filing does not identify other conventional borrowing as a material balance-sheet debt item.
Changes versus prior period
- Q2 sales were essentially flat year over year; first-half sales increased $0.5 million, mainly from higher domestic Baxter and international concentrate sales.
- Gross profit improved substantially, primarily because Triferic inventory-reserve expense fell to $0.2 million in Q2 and $0.2 million in the first half, compared with $5.4 million and $7.7 million, respectively, in 2018. Concentrate product gross profit declined due to higher labor, material, and overhead costs.
- Q2 selling and marketing expense rose to $2.2 million from $0.2 million, reflecting Triferic launch preparation. First-half expense rose to $5.3 million from $0.4 million. First-half R&D was $3.5 million versus $3.2 million, including a $1.3 million I.V. Triferic NDA fee. First-half G&A increased $3.1 million to $11.7 million.
- First-half net loss widened despite improved gross profit, reflecting higher operating expenses. The company issued 5.83 million shares in a June public offering, raising approximately $16.1 million net, and raised approximately $2.1 million net through its ATM program. Shares outstanding increased to 63.4 million from 57.0 million at year-end 2018.
Outlook, risks, and notable items
- Triferic commercialization and regulation: Commercial sales of Dialysate Triferic began in May 2019. The FDA accepted the I.V. Triferic NDA for filing on August 2, 2019, with a PDUFA date of March 28, 2020; approval is not assured. The company expects higher R&D costs, including a planned pediatric study.
- CMS reimbursement risk: A July 2019 proposed CMS rule could exclude certain NDA classifications, potentially including I.V. Triferic, from the two-year TDAPA add-on reimbursement program. FDA classification was not yet known. If finalized and applicable, the company said the rule could adversely affect the U.S. commercial opportunity. Comments were due September 27, 2019; Rockwell said it planned to oppose the change.
- Capital and execution risk: The company has an accumulated deficit of $291.4 million and continued operating cash use. Management expects to need additional capital for its longer-term plan; future financing may not be available on favorable terms or at all. Commercial launch delays or weak uptake could require cost reductions and further financing.
- Inventory and product decisions: Triferic inventory had a net carrying value of approximately $1.8 million after reserves; further write-offs may be required depending on launch timing and uptake. Management determined U.S. Calcitriol commercialization was not viable at present and maintained a $0.7 million inventory reserve.
- Contracts and license obligations: A new DaVita supply agreement, effective July 1, 2019 through December 31, 2023, provides higher product prices than the prior agreement. The Baxter agreement includes a potential refund obligation under specified trigger events; deferred Baxter and Wanbang license revenue totaled $13.2 million at June 30.
- Legal matters: On August 7, 2019, the company agreed to a $3.7 million securities class-action settlement, subject to court approval. Rockwell expected to contribute approximately $0.4 million, with the remainder covered by D&O insurance. Derivative lawsuits remained at an early stage, and an SEC investigation was ongoing.
- Controls: Management concluded disclosure controls were not effective at June 30 because of previously reported material weaknesses in internal control over financial reporting. Remediation efforts were underway, with no assurance they would succeed.
Investor verification priorities
- Track Dialysate Triferic sales, gross margins, inventory utilization, and any additional reserve or write-off.
- Verify the FDA’s I.V. Triferic review outcome and NDA classification, and the final CMS TDAPA rules and reimbursement effect.
- Monitor operating cash burn, remaining liquidity, equity issuance and dilution, and the timing and terms of any additional financing.
- Confirm court approval and insurance funding of the class-action settlement, and developments in the SEC investigation and derivative litigation.
- Assess progress in remediating internal-control material weaknesses and whether controls are ultimately determined effective.
- Verify execution and economics of the DaVita agreement and any Baxter refund-trigger exposure.