ADMA Biologics, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014; comparison periods are the corresponding periods of 2013. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context
ADMA is a late-stage biopharmaceutical company developing plasma-based biologics for immunocompromised patients. Its lead candidate, RI-002, is intended to treat primary immune deficiency disease. Revenue is currently generated primarily by the company’s FDA-licensed plasma collection operation and related plasma sales; the company has not generated revenue from its therapeutics development business.
ADMA completed enrollment and scheduled dosing in its pivotal Phase III RI-002 trial. Management expected to announce primary endpoint data by year-end 2014 and, if results were positive, submit a Biologics License Application in the first half of 2015. The filing also states that NASDAQ approved the company’s listing on November 5, 2014, with trading expected to begin November 10, 2014.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $1.37 million, versus $1.11 million | $4.43 million, versus $2.64 million |
| Gross profit | $0.50 million, versus $0.38 million | $1.64 million, versus $0.90 million |
| Gross margin | 36.5%, versus 34.4% | 37.1%, versus 34.1% |
| Operating loss | $(3.04) million, versus $(2.53) million | $(12.31) million, versus $(10.52) million |
| Net loss | $(3.38) million, versus $(2.69) million | $(13.25) million, versus $(10.83) million |
| Net loss per share | $(0.36), versus $(0.46) | $(1.43), versus $(1.84) |
Operating expenses were $4.40 million for the quarter and $16.74 million for the nine-month period. Nine-month research and development expense increased to $7.60 million from $6.35 million, primarily because of Phase III manufacturing and clinical development costs. Plasma center expenses increased to $2.64 million from $1.71 million, while general and administrative expense increased to $3.71 million from $3.37 million.
At September 30, 2014, cash and cash equivalents were $13.95 million, short-term investments were $6.32 million, accounts receivable were $0.56 million, and working capital was approximately $18.5 million. Total assets were $25.29 million, compared with $31.98 million at December 31, 2013. Stockholders’ equity declined to $9.24 million from $21.57 million, primarily due to the nine-month net loss.
Net cash used in operating activities was $11.80 million, compared with $7.93 million in the prior-year period. Investing cash outflow was $5.15 million, including $3.38 million invested in short-term investments and $1.77 million for equipment and facility expansion. Financing activities provided $4.76 million, principally from Hercules debt proceeds. Cash and cash equivalents declined by $12.20 million to $13.95 million.
Debt and Liquidity
Notes payable, net of debt discount, were $9.86 million at September 30, 2014, compared with $4.87 million at December 31, 2013. In February 2014, the Hercules loan facility was amended to permit total borrowings of up to $15.0 million. The company borrowed $10.0 million at closing, including $5.0 million used to refinance existing Hercules debt; an additional $5.0 million may become available if specified Phase III clinical objectives are met.
The Hercules loan bears interest at a minimum stated rate of 8.75%, includes payment-in-kind interest of 1.95% per annum, and requires principal repayment beginning no later than April 1, 2015, subject to specified extension criteria. It matures no later than January 1, 2018 and is secured by company assets other than intellectual property. The company also had a $0.13 million end-of-term liability and a $0.26 million warrant liability.
Management believes available cash, short-term investments, projected revenue, and potentially available credit will fund operations into the first half of 2016. This estimate depends on revenue and expense assumptions, clinical and regulatory progress, and availability of the credit facility. Management states that additional capital may be required sooner if assumptions prove inaccurate.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 67%, driven primarily by higher plasma collections, donor recruitment, expanded equipment, and plasma sales to Biotest.
- Nine-month gross margin improved to 37.1% from 34.1%, although operating and net losses increased because expense growth exceeded revenue growth.
- Nine-month R&D expense increased 20%, reflecting Phase III manufacturing, clinical study costs, and regulatory preparation.
- Plasma center operating expense increased 54%, including staffing, advertising, supplies, and preparation of a second collection center.
- Interest expense increased to $0.90 million from $0.45 million as debt outstanding increased.
- Cash used in operations increased by $3.88 million, while property and equipment increased to $2.38 million from $0.77 million because of plasma-center expansion.
- Stock-based compensation expense increased to $0.92 million from $0.67 million for the nine-month period; 221,932 stock options were granted during 2014.
Outlook, Risks, and Unusual Items
- RI-002 regulatory and commercial milestones remain conditional on successful Phase III results, FDA review, and BLA approval. Management projected potential first commercial sales as early as the first half of 2016, if approved.
- The company has incurred cumulative losses of approximately $65.9 million since inception and expects continuing losses and negative operating cash flow.
- Additional equity, debt, licensing, collaboration, or other financing may be necessary. Such financing may be unavailable or may dilute existing stockholders and increase fixed obligations.
- Clinical enrollment, safety or efficacy results, manufacturing, regulatory review, competition, and commercialization timing could materially affect liquidity and prospects.
- Revenue is substantially dependent on one customer, and the filing states that plasma sales comprise substantially all current revenue.
- The Hercules warrants are remeasured at fair value each reporting period, creating potential earnings volatility. The company recorded a $44,196 increase in warrant liability during the nine months.
- The company expects general and administrative expense to increase through 2014 and into 2015 for commercialization planning, market research, and additional staffing. It also expected plasma-center costs to rise as collections expand.
- Minimum rent commitments for Georgia plasma-center leases totaled approximately $3.3 million through 2023 and 2024, depending on the lease.
- No pending legal proceedings were reported that would have a material adverse effect, and management concluded that disclosure controls were effective as of September 30, 2014.
Investor Verification Items
- Verify the final Phase III RI-002 primary endpoint results, subsequent FDA interactions, and whether the anticipated BLA timetable was achieved.
- Assess whether cash, short-term investments, operating receipts, and Hercules availability were sufficient beyond the first half of 2016 without additional financing.
- Review the timing and terms of Hercules principal repayments beginning in 2015, including covenants, collateral, and default provisions.
- Evaluate customer concentration and the durability of Biotest-related plasma and license revenue.
- Monitor plasma-center expansion costs, capacity utilization, donor collections, and margins.
- Reconcile warrant liability remeasurement, stock-based compensation, and other non-cash charges when assessing underlying cash burn.