Rockwell Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited. Comparisons are with the corresponding 2017 periods unless noted.
Business context
Rockwell Medical develops renal therapies and manufactures hemodialysis concentrates. Concentrates represented approximately 96% of revenue in the first half of 2018. The company’s strategy includes launching Triferic in the U.S. and commercializing Calcitriol, alongside its concentrate business.
Financial performance and liquidity
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $14.9 million; up 12.6% | $29.9 million; up about 7.3% |
| Gross profit (loss) | $(4.0) million; approximately (26.9)% margin | $(4.7) million; approximately (15.9)% margin |
| Operating loss | $(12.3) million | $(18.0) million |
| Net loss | $(12.2) million; $(0.24) per share | $(17.8) million; $(0.35) per share |
| Operating cash flow | Not presented quarterly | $(9.8) million |
Revenue growth chiefly reflected higher domestic concentrate sales, including increased delivery costs passed through to Baxter, and higher unit volumes. Gross losses reflected drug-business costs, particularly Triferic inventory reserves; concentrate gross profit also declined amid distribution costs and lower Baxter pricing. SG&A fell to $5.7 million in Q2 and $9.0 million for the half, primarily due to lower stock-based compensation. Research and product development expense was $1.6 million in Q2 and $3.2 million for the half.
At June 30, cash and cash equivalents were $1.7 million and available-for-sale investments were $20.9 million. Working capital was $24.3 million; current liabilities were $11.2 million. Total assets were $41.4 million, total liabilities $24.5 million, and shareholders’ equity $16.9 million. No debt balance is clearly disclosed in the filing text. Cash declined $6.7 million during the first half. Investing activities provided $3.2 million, primarily from net sales of investments; there were no cash financing activities.
Management stated existing liquidity was insufficient for operations and anticipated capital expenditures over the next 12 months. Recurring losses, operating cash deficits and the accumulated deficit of $258.0 million raise substantial doubt about the company’s ability to continue as a going concern. Additional financing was planned, but no financing commitments were in place.
Material changes and outlook
- Triferic’s near-term prospects for separate CMS reimbursement weakened after CMMI feedback in June. The company began planning a commercial launch with reimbursement within the existing dialysis payment bundle, while continuing to pursue separate reimbursement. Management did not expect Triferic sales to materially affect 2018 revenue.
- Triferic inventory reserves materially affected results. Management cited $7.6 million of reserve impact for the first half and $5.4 million in Q2; it also reported $7.5 million of finished goods potentially expiring within 12 months, against which $7.3 million was reserved. The inventory note reports different gross and reserve totals; investors should reconcile the disclosures.
- The company planned to file an NDA for intravenous Triferic before year-end 2018, subject to liquidity and capital availability; the filing fee was estimated at $1.2 million, with additional development costs. A pediatric study was intended to begin by early 2019, also subject to resources. European studies were not planned without a development partner or additional capital.
- FDA approval for Calcitriol manufacturing was received July 11, 2018, enabling U.S. marketing; management did not expect material 2018 revenue from it. The company expected materially higher second-half SG&A for commercialization and litigation, and expected trucking-related costs to continue rising.
- After quarter-end, the company agreed to a settlement with former executives and directors: $1.5 million plus $30,000 to a director, option-vesting provisions and other terms. The company had accrued $1.53 million and recorded a $0.5 million insurance receivable, for net settlement expense of approximately $1.03 million.
Risks, contingencies and controls
- The former CEO and CFO litigation was settled in August 2018; the federal court had not yet entered the dismissal order as of the report. A purported securities class action was filed in July; no class had been certified and the company reported it had not been served.
- The SEC issued a subpoena seeking information about Triferic reimbursement and the former CEO’s termination. The company said it was cooperating. An independent investigation into a whistleblower complaint and related shareholder demand was ongoing.
- The company restated its Q1 2018 financial statements because of inventory-reserve errors. It disclosed multiple material weaknesses, including inadequate segregation of duties, IT-control evaluation, compensation controls and inventory-reserve controls. Disclosure controls and procedures were deemed ineffective as of June 30.
- Management turnover continued: a new CEO was announced in August with an expected September start, while the company was still seeking a CFO. The filing also highlights risks from potential dilution, limited access to secured borrowing under the Baxter agreement, Triferic commercialization and inventory expiration, regulatory approvals, customer concentration and litigation costs.
Important facts for investors to verify
- Whether the company obtained financing sufficient to fund operations beyond the stated 12-month liquidity gap, and on what terms.
- Triferic’s commercialization progress, CMS reimbursement status, sales uptake and any further inventory write-downs; reconcile the differing inventory reserve figures in the filing.
- Progress on the intravenous Triferic NDA, pediatric study and Calcitriol commercialization, including funding and regulatory milestones.
- Resolution and financial impact of the SEC inquiry, independent investigation, shareholder litigation and settlement obligations.
- Remediation of the disclosed material weaknesses and reliability of subsequent financial reporting after the Q1 restatement.