Rockwell Medical, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Rockwell sells hemodialysis concentrates and related supplies and develops renal drug therapies, including Triferic. Concentrates and ancillary products made up substantially all sales; the company said it supplied approximately 25% of the U.S. dialysis-concentrate market.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $13.2 million | $13.5 million | $27.8 million | $27.1 million |
| Gross profit / margin | $1.5 million / 11.3% | $1.5 million / 11.1% | $3.9 million / 13.9% | $3.2 million / 11.8% |
| SG&A | $6.5 million | $5.0 million | $12.6 million | $10.0 million |
| Research and product development | $1.7 million | $2.1 million | $2.9 million | $3.4 million |
| Operating loss | ($6.7 million) | ($5.6 million) | ($11.7 million) | ($10.2 million) |
| Net loss | ($7.1 million) | ($5.4 million) | ($11.8 million) | ($10.2 million) |
| Loss per share, basic and diluted | ($0.14) | ($0.11) | ($0.23) | ($0.20) |
Second-quarter sales fell 1.6% year over year, mainly on lower volumes. First-half sales rose 2.8%, primarily from one-time additional Baxter orders; international sales were flat. Drug revenue was not significant in either first-half period. First-half gross profit improved partly due to higher concentrate sales, lower costs, and recognition of $0.3 million related to the Wanbang licensing payment.
SG&A increases reflected legal and professional costs, including litigation and the 2017 annual meeting. The second-quarter net investment result was a loss of $0.4 million, versus income of $0.2 million a year earlier; management attributed the loss to repositioning short-term bond holdings in response to market changes. No income tax expense was recorded in 2017.
Financial position and cash flow
- At June 30, cash and cash equivalents were $8.3 million and available-for-sale investments were $34.9 million, totaling approximately $43.2 million. Current assets were $63.8 million; working capital was $56.1 million.
- Total assets were $69.5 million, down from $83.2 million at December 31, 2016. Current liabilities were $7.7 million. The company reported no long-term debt.
- Operating cash use was $12.3 million in the first half, versus $6.3 million in 2016. Inventory growth used $2.5 million of cash. Investing activities provided $5.7 million, mainly reflecting net investment sales; financing activities used $2.3 million for taxes withheld on restricted-stock vesting.
- Inventory was $16.5 million, including $2.7 million classified as non-current. The company disclosed approximately $12.9 million invested in Triferic inventory, with shelf lives of one to three years.
Developments, outlook, and risks
- Baxter: The parties settled their arbitration on June 23, 2017, mutually releasing known claims; neither paid the other. Amendments to their agreements included modified pricing intended to encourage new customers and future sales. Management did not expect a material impact on liquidity or results. The amended terms and the continuing distribution relationship remain important to monitor.
- Triferic: FDA-approved for adult hemodialysis patients, but Rockwell said it did not expect significant sales until transitional add-on reimbursement is resolved. The company was seeking that reimbursement and had built inventory in anticipation. Failure to commercialize sufficient volume within the inventory’s shelf life could require a write-down.
- Other products: Rockwell expected Calcitriol to be available for marketing later in 2017, subject to timely FDA approval. It was pursuing international licensing and other partnerships; it terminated its Middle East licensee’s rights during Q2 for material default, which management said had no material effect on results or liquidity.
- Cash outlook: Management said liquidity was adequate for planned operations and development spending, and expected positive operating cash flow when drug products generate substantial sales. This was conditional, not a quantified earnings or cash-flow forecast.
- Key risks: Triferic reimbursement, adoption and inventory obsolescence; dependence on Baxter and customer concentration; pricing and competition in concentrates; regulatory and manufacturing dependencies; and healthcare reimbursement changes. A separate shareholder-related lawsuit remained pending after the court denied defendants’ motion to dismiss; the filing did not quantify potential exposure.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Triferic receives transitional add-on reimbursement and achieves adoption and sales before inventory expires.
- Updated cash burn, inventory levels and any required Triferic inventory reserves.
- Sales performance under the amended Baxter agreement, including customer volumes and pricing; the filing does not disclose the full confidential terms.
- FDA approval timing and launch progress for Calcitriol, and progress on international licensing.
- Developments and potential costs in the pending shareholder litigation and other legal proceedings.