Rockwell Medical, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Rockwell develops renal drugs and manufactures hemodialysis products. Its lead candidate, SFP, was in Phase 3 clinical development; its established dialysis-products business generated sales.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $13.0 million | $12.1 million | $25.3 million | $24.2 million |
| Gross profit | $1.7 million | $1.7 million | $3.0 million | $3.3 million |
| Gross margin | 13.0% | 14.2% | 11.7% | 13.9% |
| Operating loss | $11.8 million | $12.0 million | $27.2 million | $22.7 million |
| Net loss | $11.9 million | $11.9 million | $27.2 million | $22.5 million |
| Basic and diluted loss per share | $0.38 | $0.58 | $1.04 | $1.12 |
- Q2 sales rose about 7%; first-half sales rose 4.8%, driven mainly by CitraPure growth and, to a lesser extent, the renewed supply agreement with the largest customer. Gross margins declined, reflecting higher raw-material costs; first-half operating costs also rose with inflation and regulatory costs.
- First-half selling, general and administrative expense increased to $7.2 million from $5.7 million. Research and product development increased to $23.0 million from $20.3 million, principally for SFP Phase 3 testing.
- Cash used in operations was $32.8 million for the first half, versus $14.8 million a year earlier. Working-capital outflows included reductions in accounts payable and other liabilities.
- Cash and equivalents were $41.0 million at June 30, versus $4.7 million at year-end. Current assets were $49.3 million and current liabilities $16.8 million; shareholders’ equity was $17.2 million, compared with a $10.0 million deficit at year-end.
- Financing activities provided $69.4 million in the first half, including $50.5 million from share and warrant issuance and a $20.0 million loan, partly offset by debt issuance costs. Shares outstanding increased from 21.5 million at year-end to 39.9 million at June 30.
Material developments, outlook and risks
- In June, Rockwell borrowed $20.0 million from Hercules. The loan has a 14.5% effective interest rate, interest-only payments through August 2014 if specified SFP trial conditions are met, and scheduled principal-and-interest payments thereafter; it matures in March 2017 subject to adjustment. It is secured by substantially all assets, has restrictive covenants, and includes a $1.1 million fee payable at prepayment or maturity. The company reported compliance and no default at June 30.
- Management said available resources were adequate to complete SFP regulatory approval and support commercialization, while also evaluating business-development and partnering options. It expected operating losses in 2013 and substantial SFP clinical and regulatory spending into 2014. These are expectations, not guarantees.
- After quarter-end, Cruise-1 reported that it met its primary efficacy endpoint, key secondary endpoints and showed a favorable safety profile. Cruise-2 results were expected in Q3 2013 and anticipated to confirm Cruise-1. FDA approval remains necessary before SFP can be marketed.
- Rockwell expected FDA manufacturing approval for Calcitriol later in 2013 and planned launch after approval; timing and commercial success are uncertain. Management expected Calcitriol to benefit gross margins once approved.
- The company completed a multi-year extension of its largest-customer supply agreement and anticipated volume and revenue growth from an increased minimum number of committed clinics, but not a material change in gross margins. Customer concentration, competition, product mix and international order volatility remain risks.
- The filing says the prior going-concern risk was no longer considered material after approximately $70 million of first-half equity and debt financing. However, the company continued to report recurring losses and warned that future financing may be needed, may dilute shareholders or impose restrictive debt terms, and may not be available.
- Other notable items: first-half SG&A included a $0.9 million non-cash charge related to extending certain warrants and a $0.5 million medical-device-tax increase. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether Cruise-2 confirmed Cruise-1 and the subsequent SFP FDA filing, review and approval timeline.
- Cash burn and remaining funding needs relative to SFP development, regulatory and commercialization costs.
- Loan payment timing, interest burden, covenants and any impact of SFP trial outcomes on the interest-only period.
- Progress on Calcitriol manufacturing approval and whether the largest-customer agreement translates into expected volume growth.
- Margin trends, raw-material and regulatory cost pressures, and dependence on a small number of dialysis customers.
- The extent of dilution from the financing and equity compensation; review the full risk disclosures, including clinical, regulatory, intellectual-property and financing risks.