Rockwell Medical, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results include Rockwell Medical and its wholly owned subsidiary. The company develops renal drugs and manufactures hemodialysis concentrates. The October 2014 Baxter transactions described below occurred after quarter-end.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $13.74 million | $13.09 million | $39.74 million | $38.41 million |
| Gross profit | $2.27 million | $1.63 million | $5.97 million | $4.60 million |
| Gross margin | 16.5% | 12.5% | 15.0% | 12.0% |
| Operating loss | $3.13 million | $12.36 million | $12.54 million | $39.53 million |
| Net loss | $3.97 million | $13.21 million | $14.94 million | $40.45 million |
| Loss per share, basic and diluted | $0.10 | $0.34 | $0.37 | $1.32 |
- Revenue rose 5.0% in Q3 and 3.5% year to date. Management attributed improved gross profit and margins primarily to greater sales of higher-margin CitraPure and dry products. CitraPure represented 65% of acid-concentrate gallons sold in Q3 versus 39.7% a year earlier.
- Research and product development expense fell to $1.3 million in Q3 from $10.6 million, and to $6.1 million for nine months from $33.6 million, largely because Triferic Phase 3 trials were completed in 2013. SG&A increased to $4.1 million in Q3 and $12.4 million year to date, with higher personnel, marketing and intellectual-property costs related to anticipated drug launches.
- Net interest expense was approximately $0.8 million in Q3 and $2.4 million for nine months, reflecting the secured loan. Nine-month cash interest paid was $1.9 million, versus $0.5 million in 2013.
- Operating cash use was $13.3 million for nine months, compared with $42.5 million in 2013. Investing activities provided $2.4 million, while financing activities provided $2.1 million. Cash declined by $8.9 million to $3.0 million.
- At September 30, cash and cash equivalents were $3.0 million and available-for-sale investments were $9.0 million. Current assets were $19.9 million versus current liabilities of $17.3 million. Total assets were $23.9 million, and shareholders’ equity was a deficit of $5.5 million.
- Balance-sheet current and long-term debt totaled approximately $20.0 million. The loan note reports $19.4 million of principal outstanding, a 14.5% effective interest rate, and an additional $1.1 million end-of-term fee, of which $0.6 million had accrued.
Material developments, outlook and risks
- Baxter agreement: On October 2, 2014, Baxter became the exclusive commercialization agent for Rockwell’s hemodialysis concentrate and ancillary products in the U.S. and certain foreign markets for an initial 10-year term. Rockwell retains rights in certain existing international markets and continues manufacturing. Baxter’s exclusivity is subject to minimum annual purchase requirements; the agreement also allows termination in specified circumstances.
- In connection with the agreement, Baxter paid a $20 million upfront fee, which Rockwell expects to recognize as revenue over the agreement term. Baxter also invested $15 million in Rockwell common shares at $11.39 per share. Separately, Baxter agreed to provide a $10 million facility fee toward a new Western U.S. manufacturing facility; the fee is payable in installments and may be reduced if the facility is not operational within 12 months after construction begins.
- Rockwell received $8 million in October from exercise of 838,071 warrants. Together with the $20 million upfront fee and $15 million share investment, the company reported receiving $43 million in post-quarter cash. Including the $12 million of cash and investments at September 30, management said it believed resources were sufficient for cash requirements.
- The Baxter agreement requires repayment of secured debt within 180 days. Management estimated approximately $20.5 million would be required and stated repayment was due by March 31, 2015. Management expected lower operating costs and improved operating income from the arrangement, but anticipated an initial slight negative effect on concentrate-business cash flow; improvement was expected over time as volumes and geographic reach expand.
- Triferic’s NDA was under FDA review, with a PDUFA date of January 24, 2015. The FDA advisory committee had recommended that Phase 3 results support a positive benefit-risk profile. FDA approval and successful commercialization were not assured. Rockwell estimated a Calcitriol launch could occur in the first half of 2015, subject to manufacturing, inventory and regulatory requirements.
- Management expected Triferic R&D spending to remain significantly below 2013 levels and 2015 R&D spending to be at or below 2014 levels. No specific revenue or earnings guidance was provided.
- Potential risks include FDA approval or launch delays, drug commercialization and reimbursement uncertainty, supplier and manufacturing constraints, dependence on a few concentrate customers, competition and raw-material inflation. Baxter termination, loss of exclusivity, or specified refund-trigger events could reduce cash or require repayment of part of the upfront and facility fees. The agreement also restricts certain asset-secured borrowing without Baxter’s consent.
- Management reported disclosure controls were effective at September 30, 2014, and no material change in internal control over financial reporting occurred during the quarter.
Key facts for investors to verify
- FDA’s decision and timing for Triferic, and Rockwell’s ability to launch Calcitriol as planned.
- Execution of the Baxter transition, purchase volumes against minimums, termination and refund provisions, and the timing and conditions for the $10 million facility fee.
- Debt repayment by the required deadline, including the full payoff amount and the effect on liquidity after the reported $43 million of post-quarter receipts.
- Whether improved product mix, Baxter-driven volume growth and lower costs translate into sustainable operating profit and cash generation.
- Future customer concentration, competitive and raw-material pressures, and any financing constraints under the Baxter agreement.