Rockwell Medical, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2020. Rockwell Medical sells hemodialysis concentrates and is developing and commercializing its ferric pyrophosphate citrate (FPC) products for anemia. Triferic Dialysate sales began in 2019; the FDA approved the intravenous formulation, Triferic AVNU, on March 27, 2020.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $15.86 million | $15.56 million |
| Gross profit / margin | $1.11 million / 7.0% | $1.01 million / 6.5% |
| Operating loss | $8.05 million | $8.81 million |
| Net loss | $7.98 million | $8.68 million |
| Basic and diluted loss per share | $0.12 | $0.15 |
| Cash used in operating activities | $6.54 million | $5.42 million |
At March 31, 2020, cash and cash equivalents were $37.4 million and available-for-sale investments were $11.5 million, totaling approximately $48.9 million. Working capital was $46.1 million. Total liabilities were $45.1 million, including a term loan with a $22.5 million principal balance and $20.7 million carrying value, net of financing costs and discount.
Material changes and financing
- Sales increased 1.9% year over year, principally from Triferic Dialysate. Concentrate products generated $15.6 million of Q1 revenue; drug products generated $255,000, including approximately $200,000 of U.S. Triferic Dialysate sales.
- Gross profit rose modestly; higher Triferic sales were partly offset by higher labor and material costs in concentrate products. Selling and marketing expense declined by $1.0 million and general and administrative expense by $0.9 million. Research and product development expense increased to $1.8 million from $0.5 million as the company invested in its medical platform.
- Q1 financing included approximately $8.0 million net proceeds from a common-stock offering and approximately $21.2 million net proceeds from the initial Innovatus loan tranche. The loan facility permits up to $35 million in total, with additional $5.0 million and $7.5 million tranches subject to milestones. The initial rate was 8.75% (effective rate 10.9%); the loan is secured by company assets and matures in March 2025.
- Common shares outstanding increased from 65.4 million at December 31, 2019 to 69.0 million at March 31, 2020, in part from the offering.
Outlook, risks, and unusual items
- Management said available working capital, equity proceeds, and debt financing were expected to fund operations for at least 12 months from the filing date. The company also stated it will need additional capital for its longer-term plans and may not obtain financing on acceptable terms.
- The company planned to start a Triferic AVNU sample-evaluation program in Q3 2020, ahead of a planned commercial launch. It gave no numerical revenue or earnings guidance. Management expected research and development costs to increase.
- COVID-19 could disrupt sales access to dialysis providers, the planned AVNU launch, clinical studies, suppliers, and access to capital. The timing and extent of impacts were uncertain.
- Triferic faces adoption and reimbursement challenges because both formulations are reimbursed within the existing dialysis payment bundle. At March 31, Triferic inventory was approximately $3.4 million before a $2.4 million reserve; further write-offs could affect reported results. Calcitriol inventory was fully reserved at $0.7 million, and the company planned to withdraw its application.
- Contingencies include a supplier demand for $3.0 million plus raw-material costs, which the company disputes, and an ongoing SEC investigation. A securities class-action settlement was court-approved; the company’s share was approximately $0.1 million, with the remainder expected to be covered by insurance. Related derivative actions were in settlement discussions.
- Disclosure controls were deemed ineffective because of previously reported material weaknesses in internal control over financial reporting. Management described remediation efforts but gave no assurance they would succeed.
- After quarter-end, CEO Stuart Paul resigned on April 17, 2020, and Russell Ellison was appointed CEO. The filing estimated approximately $2.4 million of stock-compensation expense reduction from forfeited awards; Ellison also received a new equity grant.
Most important facts for investors to verify
- Whether Triferic Dialysate gains adoption and Triferic AVNU launches as planned, given bundled reimbursement and COVID-related access risks.
- Cash burn, financing needs, and compliance with Innovatus liquidity and Triferic sales covenants; confirm the terms and availability of milestone-dependent loan tranches.
- Triferic inventory levels, shelf life, reserves, and any additional write-offs.
- Developments in the SEC investigation, supplier claim, and derivative actions, including potential uninsured exposure.
- Progress in remediating internal-control material weaknesses and the effect of the CEO transition on strategy and execution.