Rockwell Medical, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Rockwell develops renal-care drugs and manufactures hemodialysis concentrates and dialysates. Its lead candidate, Triferic, was under FDA review; FDA approved manufacture of generic Calcitriol during Q2, with launch targeted for late 2014.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $13.03 million | $12.98 million | $26.00 million | $25.32 million |
| Gross profit | $2.02 million | $1.69 million | $3.70 million | $2.97 million |
| Gross margin | 15.5% | 13.0% | 14.2% | 11.7% |
| Operating loss | $2.38 million | $11.78 million | $9.41 million | $27.17 million |
| Net loss | $3.17 million | $11.86 million | $10.98 million | $27.24 million |
| Basic and diluted loss per share | $0.08 | $0.38 | $0.28 | $1.04 |
Q2 sales rose 0.4% year over year; first-half sales rose 2.7%. Management attributed improved gross profit and margins mainly to greater CitraPure product sales and lower operating and distribution costs. CitraPure represented 63% of acid concentrate gallons sold in the first half, versus 15% a year earlier. SG&A was $4.21 million in Q2 and $8.30 million in the first half, up from $3.24 million and $7.15 million, respectively; increases included equity compensation, personnel, and marketing costs.
Cash, liquidity, and debt
- At June 30, cash and equivalents were $2.86 million and available-for-sale investments were $9.08 million, totaling approximately $11.93 million. The company also reported a $2.17 million receivable for its FDA filing-fee refund; the refund was received in July.
- First-half operating cash use was $13.61 million, compared with $32.83 million in the prior-year period. Investing activities provided $2.55 million and financing activities provided $2.04 million. Cash declined by $9.02 million during the half.
- Current assets were $21.70 million and current liabilities were $15.31 million. Shareholders’ equity was a deficit of $3.91 million, compared with positive equity of $0.60 million at year-end 2013.
- The Hercules secured loan had $20.00 million of principal outstanding; balance-sheet current and long-term debt lines total approximately $20.45 million. Interest is subject to a 12.5% minimum, with a stated effective rate of 14.5%. Principal-and-interest installments were scheduled to begin September 1, 2014; the loan matures March 1, 2017. The company reported covenant compliance and no default at June 30.
Changes, outlook, and key risks
- R&D expense fell sharply to $0.19 million in Q2 from $10.22 million, and to $4.80 million for the first half from $22.98 million. This reflects completion of much of the Triferic clinical program and the Q2 reversal of a $2.17 million NDA fee expense after the company won a small-business waiver appeal. The fee refund was received after quarter-end; Q2 R&D therefore includes the benefit of that reversal.
- Interest expense rose substantially following the $20 million 2013 loan. Net interest and investment expense was approximately $0.79 million in Q2 and $1.57 million in the first half, versus approximately $0.09 million in each comparable 2013 period.
- Management expected materially lower R&D spending in the second half of 2014, planned to build Calcitriol inventory for a launch before year-end, and believed available cash and investments plus the subsequent refund were adequate for projected operating and launch needs. It expected positive operating cash flow excluding R&D spending, but did not provide quantified earnings or revenue guidance. Potential partnerships or additional financing were possible, not committed.
- Risks include FDA review and commercialization of Triferic, Calcitriol launch readiness and competition, reliance on a few dialysis customers, pricing and margin pressure, third-party supply/manufacturing availability, and substantial debt and interest obligations. Management noted that international orders can be volatile. It reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Triferic FDA review status, timing, and costs, and whether approval would translate into successful commercialization.
- Calcitriol testing and stability requirements, launch timing, market uptake, and competitive pricing.
- Cash burn, the impact of the July NDA-fee refund, and funding needs as loan principal payments begin.
- Loan interest, scheduled repayments, and continued compliance with secured-loan covenants.
- Customer concentration, product mix, and whether CitraPure-related margin improvement is sustainable.