Rockwell Medical, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Rockwell develops renal drug therapies and manufactures hemodialysis concentrates. Concentrates and related products accounted for substantially all sales.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Sales | $14.6 million | $13.6 million; up 7.1% |
| Gross profit / margin | $2.4 million / 16.2% | $1.7 million / 12.4% |
| Operating loss | $5.0 million | $4.6 million |
| Net loss | $4.7 million; $0.09 per share | $4.8 million; $0.10 per share |
| Operating cash flow | $(5.2) million | $(1.1) million |
| Cash and investments | $52.7 million at March 31 | Cash alone was $11.9 million; available-for-sale investments were $40.8 million |
| Working capital | $64.4 million | Current assets $74.8 million; current liabilities $10.4 million |
| Debt | No long-term debt | — |
Revenue growth came primarily from domestic concentrate volumes, including $0.6 million of Baxter orders that management said were not recurring-demand orders. International sales declined $0.1 million. Gross profit improved with higher sales and lower drug-business costs, including the absence of $0.3 million of value-added taxes incurred in Q1 2016. SG&A rose $1.1 million to $6.1 million, mainly from $0.9 million of higher legal costs and increased Triferic marketing. Research and product development expense declined to $1.2 million from $1.3 million.
Cash fell $5.3 million during the quarter. Operating cash use included a $2.3 million increase in inventory; inventory reached $16.3 million, including $2.8 million of Triferic active ingredient classified as non-current. The company reported no income tax expense, versus $0.4 million in Q1 2016.
Outlook, material risks and unusual items
- Management said liquidity was adequate to fund planned investment in inventory, research and development, and receivables. It expects to generate positive operating cash flow with increased drug-product sales, but provides no quantified forecast or timing.
- Triferic sales are expected to remain insignificant until the reimbursement issue is resolved. The company is pursuing transitional add-on reimbursement and has accumulated inventory ahead of potential commercialization; failure to achieve sufficient sales over the next one to two years could require an inventory write-off.
- Calcitriol launch was delayed by contract-manufacturer production issues and the need for FDA approval of a manufacturing change. Management expected availability later in 2017, subject to timely approval.
- Baxter arbitration concerns alleged breaches by both parties under a 10-year distribution agreement and could affect distribution rights, payments, and the company’s financial position. Baxter seeks termination rights, recovery of part of its $20 million upfront fee, and unspecified damages; Rockwell alleges unpaid receivables and a disputed West Coast facility fee of up to $10 million. Rockwell also asserted Baxter missed minimum purchases and gave notice of loss of exclusivity; the outcome is for arbitration, then anticipated to conclude in Q3 2017.
- Rockwell filed a separate suit against certain shareholders over alleged securities-filing violations; a decision on its preliminary-injunction request was pending as of the report.
- Available-for-sale investments are exposed to interest-rate movements, though management did not expect a hypothetical 100-basis-point change to materially affect their value. Revenue recognition guidance effective in 2018 was still under evaluation, particularly for licensing arrangements.
Important facts for investors to verify
- Progress and outcome of the Baxter arbitration, including distribution exclusivity, disputed amounts, and any potential repayment of the upfront fee.
- Whether Triferic receives transitional reimbursement status and achieves commercial sales sufficient to support the inventory investment.
- FDA approval and manufacturing readiness for Calcitriol, and whether the anticipated launch timing remains achievable.
- Cash burn, inventory growth and composition, and the company’s ability to convert its cash and investments into sustained operating progress.
- Recurring demand behind concentrate sales, given that some Q1 Baxter orders were identified as non-recurring.