Rockwell Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparisons are to the quarter and nine months ended September 30, 2011, and the December 31, 2011 balance sheet. Rockwell manufactures and sells hemodialysis concentrates and related products and is developing renal drug therapies, principally Soluble Ferric Pyrophosphate (SFP).
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $12.69 million | $11.98 million | $36.84 million | $37.07 million |
| Gross profit / margin | $1.65 million / 13.0% | $1.38 million / 11.5% | $4.99 million / 13.5% | $4.10 million / 11.1% |
| Operating loss | $17.92 million | $5.12 million | $40.58 million | $12.73 million |
| Net loss | $17.88 million | $5.04 million | $40.35 million | $12.49 million |
| Loss per share, basic and diluted | $0.86 | $0.28 | $1.99 | $0.71 |
- Research and product development expense was $16.24 million in Q3 and $36.52 million for nine months, compared with $4.22 million and $9.94 million, respectively, in 2011. The increase primarily reflected SFP Phase III clinical testing.
- For nine months, operating cash use was $23.58 million, versus $7.25 million in 2011. Investing activities provided $1.06 million; financing provided $17.98 million, principally from share issuance and warrant exercises. Cash declined to $1.17 million from $5.72 million at year-end 2011.
- At September 30, cash and available-for-sale investments totaled approximately $11.25 million. Current assets were $20.00 million and current liabilities $23.05 million, a $3.05 million working-capital deficit. Accrued liabilities increased to $14.69 million from $8.23 million at year-end.
- Total assets were $24.22 million and shareholders’ equity $1.17 million, down from $31.94 million and $18.24 million, respectively, at year-end. Common shares outstanding increased to 21.30 million from 18.71 million. Capitalized lease obligations were approximately $3,000; the filing reports no material borrowings.
Changes, outlook, and risks
- Q3 sales rose 6.0%, driven by domestic volume and product mix. Nine-month sales slipped about 0.6%; lower sales to one international distributor were partly offset by higher sales elsewhere. Management said dry-acid concentrate conversions reduce sales per treatment but improve margins through lower shipping costs.
- Gross margin improved in both comparisons, attributed to product/customer mix and lower operating costs. SG&A rose to $3.33 million for Q3 and $9.05 million for nine months, largely because of higher non-cash equity compensation.
- Management expects substantial R&D spending through 2013 and operating losses until SFP is approved and marketed. It said the dialysis-products business generates positive cash flow excluding R&D and expects positive operating cash flow over the next year on that basis, assuming relatively stable revenue and fuel and raw-material markets. This is not a forecast of total-company cash flow.
- The company said it would need additional cash to meet obligations and complete planned development. Potential sources include warrant exercises, licensing arrangements, and equity or debt financing. It warned that insufficient funding could delay, limit, reduce, or suspend SFP development; the filing does not provide a clear quantified cash runway.
- Rockwell completed a February 2012 share offering, receiving approximately $16.2 million net, and received approximately $1.8 million from warrant exercises. It also made a final $550,000 payment for rights to market Calcitriol; management expected to begin marketing it in the first half of 2013, subject to FDA approval for a manufacturing-location change.
- Key risks include reliance on a small number of dialysis-provider customers, competition from a larger competitor, SFP trial and FDA-approval uncertainty, recurring losses and financing needs, regulation, and dependence on clinical-trial contractors. Available-for-sale bond funds had been in an unrealized loss position for over 12 months; management did not consider them other-than-temporarily impaired.
- Management reported disclosure controls effective at the reasonable-assurance level. A previously reported material weakness involving timely recording of clinical-trial R&D expenses was reported remediated by March 31, 2012; no material internal-control changes were reported for the latest quarter.
Most important facts for investors to verify
- Current status, remaining cost, milestones, and regulatory prospects of SFP Phase III trials and approval.
- Cash burn, working-capital deficit, upcoming obligations, and the timing and availability of additional financing; no explicit runway is quantified.
- Revenue concentration by customer and distributor, and whether improved gross margins can be sustained.
- Basis and timing for the Calcitriol manufacturing approval and anticipated launch.
- Whether the reported remediation of R&D accrual controls remains effective as clinical-trial spending grows.