Rockwell Medical, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results. Rockwell sells hemodialysis concentrates and is developing renal drug products, principally Triferic.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $13.1 million | $12.7 million | $38.4 million | $36.8 million |
| Gross profit | $1.63 million | $1.65 million | $4.60 million | $4.99 million |
| Gross margin | 12.5% | 13.0% | 12.0% | 13.5% |
| Operating loss | $(12.36) million | $(17.92) million | $(39.53) million | $(40.58) million |
| Net loss | $(13.21) million | $(17.88) million | $(40.45) million | $(40.35) million |
| Loss per share, diluted | $(0.34) | $(0.86) | $(1.32) | $(1.99) |
Cash flow and liquidity: Nine-month cash used in operations was $42.5 million, versus $23.6 million in 2012; investing used $10.5 million, and financing provided $69.5 million. Cash rose by $16.5 million to $21.2 million. Cash, cash equivalents and investments totaled $31.2 million at quarter-end. Current assets were $38.9 million and current liabilities $18.1 million.
Debt and equity: The company had $20.0 million principal outstanding under a June 2013 loan, with an effective interest rate of 14.5%; $571,355 was current and $19.4 million long-term. The loan is secured by substantially all assets, has interest-only payments through August 2014, and matures March 2017. Shareholders’ equity was $6.1 million, compared with a $10.0 million deficit at year-end 2012. Shares outstanding increased to 40.0 million from 21.5 million.
Material changes and management commentary
- Sales increased 3.2% in Q3 and 4.3% year to date, led by domestic CitraPure growth and, to a lesser extent, expansion of the largest-customer supply agreement.
- Gross margin declined, which management attributed mainly to inflation in raw-material costs; year-to-date operating costs also reflected inflation and regulatory costs.
- Research and development expense fell to $10.6 million in Q3 from $16.2 million, and to $33.6 million year to date from $36.5 million, as certain Triferic Phase 3 testing was completed. R&D remained the principal operating expense.
- Management reported successful top-line results from both pivotal Triferic efficacy studies, meeting primary and key secondary endpoints, and described the safety profile as favorable. The company was preparing an FDA new drug application and expected to launch after approval, if received.
- Management said available resources were adequate to fund current Triferic regulatory and commercialization plans. It expected substantial development spending in 2013 and regulatory costs in 2014, and anticipated operating losses in 2013. No specific revenue or earnings guidance was provided.
- Calcitriol had FDA approval as a generic drug, but the company still needed FDA manufacturing approval before launch. Management expected Calcitriol revenue, if approved, to benefit gross margins.
Risks, contingencies and controls
- Sales depend substantially on a small number of large dialysis customers; loss of a major customer could materially harm results and cash flow. The company also faces a larger competitor and variable international ordering patterns.
- Triferic commercialization depends on FDA review and approval; clinical, regulatory, financing and market-adoption outcomes remain uncertain. The company also cited possible need for additional financing, which could dilute shareholders or constrain operations.
- The loan imposes financial and operating restrictions, is secured by company assets, and carries material interest and fees. The company reported compliance and no event of default at September 30, 2013.
- Short-term bond investments are exposed to interest-rate-driven fair-value changes; management did not expect an immediate 100-basis-point move to have a material portfolio impact. International business is conducted in U.S. dollars, and management reported no material currency exposure.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- FDA application timing, review progress and eventual approval and launch prospects for Triferic and Calcitriol.
- Whether clinical-program spending and operating cash use decline as expected, and how long the reported $31.2 million in cash and investments will fund operations.
- Largest-customer concentration, supply-agreement volume commitments, and the ability to sustain or improve gross margins amid cost inflation.
- Loan repayment schedule, effective financing cost, covenants and collateral, as well as any need for additional capital and potential shareholder dilution.
- Triferic clinical findings and safety claims against the underlying study disclosures; the filing’s discussion does not quantify future commercial uptake or revenue.