Rockwell Medical, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; filed November 9, 2018.
Business context
Rockwell Medical develops renal therapies and manufactures hemodialysis concentrates. Concentrates and related products generated substantially all sales; concentrates represented approximately 96% of revenue for the first nine months of 2018. The company says it supplies approximately 25% of the U.S. dialysis-concentrate market. Dialysate Triferic is FDA-approved, while IV Triferic remained in development and subject to FDA approval.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $16.7 million | $14.6 million | $46.5 million | $42.5 million |
| Gross profit (loss) | $2.0 million | $1.1 million | $(2.8) million | $4.9 million |
| Gross margin, calculated | 11.8% | 7.3% | (6.0)% | 11.6% |
| Operating loss | $(5.0) million | $(5.0) million | $(23.0) million | $(16.7) million |
| Net loss | $(5.0) million | $(5.1) million | $(22.7) million | $(16.9) million |
| Net loss per share | $(0.10) | $(0.10) | $(0.44) | $(0.33) |
For the nine months, operating cash use was $14.6 million, compared with $16.3 million in 2017. Investing activities provided $10.5 million, largely reflecting net sales of short-term investments; financing activities used approximately $2,000. Cash and cash equivalents were $4.3 million and available-for-sale investments were $13.4 million at September 30, totaling $17.7 million. Working capital was $19.4 million; accumulated deficit was $263.0 million.
Total assets were $38.1 million and total liabilities were $25.4 million at September 30, 2018. The filing does not report borrowings or a separate debt balance; deferred license revenue was $15.0 million, including current and non-current portions.
Material changes and unusual items
- Q3 sales increased 14% year over year, mainly from higher domestic concentrate sales, including pass-through delivery costs billed to Baxter, and increased purchases by international customers. Nine-month sales rose 10%.
- Nine-month gross profit deteriorated to a loss, principally due to Triferic inventory write-downs and weaker concentrate economics. The company reported $7.8 million of Triferic inventory reserves/write-offs through September 30; additional write-offs could be required depending on launch timing and demand.
- Q3 SG&A increased to $6.2 million from $4.8 million, largely from legal, professional, recruiting and insurance costs associated with executive and director changes and related litigation. Nine-month SG&A declined to $15.2 million from $17.4 million, including lower stock compensation and salary costs, partly offset by higher legal and professional fees.
- The company accrued a $1.5 million settlement with former executives and directors, paid $0.8 million by quarter-end, and recorded approximately $1.0 million net settlement expense after an expected $0.5 million insurance reimbursement. The reimbursement was collected in October.
- On October 15, 2018, the company raised $22.0 million gross by selling 5,541,562 shares at $3.97 each and warrants to purchase up to 2,770,781 additional shares at $4.96. Management said this financing provided sufficient funds for operating requirements for at least 12 months from filing, while noting future funding may still be needed.
Outlook, risks and contingencies
- The company planned a Dialysate Triferic commercial launch in the first half of 2019, initially within the existing dialysis payment bundle. CMS guidance issued November 1, 2018 said Dialysate Triferic would not qualify for TDAPA add-on reimbursement.
- Rockwell believed IV Triferic could qualify for separate payment for two years if FDA-approved on or after January 1, 2020. It targeted a first-half 2020 launch, subject to approval, and was assessing NDA timing. These are expectations, not assured outcomes.
- Management expected SG&A and research and development spending to rise as commercialization and clinical-development activities proceed. A pediatric Dialysate Triferic study was planned for 2019, subject to liquidity and capital availability. The filing gives no numerical revenue or earnings guidance.
- The company warned that additional capital may be needed; financing may be unavailable or dilutive. Commercialization, reimbursement, regulatory approval, inventory expiry, supply-chain costs and the ability to build sales and distribution capabilities pose material risks. The Baxter agreement may also constrain secured borrowing against concentrate-business assets.
- Two putative securities class actions alleging misleading disclosures were consolidated in October 2018; they seek damages and fees. The SEC had issued a subpoena concerning CMS reimbursement status and the former CEO/CFO terminations, and the company said it was cooperating. A separate August settlement resolved litigation involving former executives and directors.
- Disclosure controls were deemed ineffective as of September 30, 2018 because of material weaknesses, including insufficient segregation of duties, IT-control evaluation deficiencies, compensation-control deficiencies and inventory-reserve control failures. The company had restated its Q1 2018 financial statements and said its remediation efforts might not fully correct the weaknesses.
Most important facts for investors to verify
- Whether Dialysate Triferic launched on schedule and generated adoption and sales despite being reimbursed within the bundle.
- Whether IV Triferic’s FDA filing, approval timing and potential separate-reimbursement eligibility support the targeted 2020 launch.
- Cash burn, remaining liquidity and additional financing needs, including dilution from the October offering and warrants.
- Whether Triferic inventory can be sold before expiry or requires further write-downs.
- Progress in remediating internal-control weaknesses and any developments in the SEC inquiry and securities litigation.