Rockwell Medical, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results. Rockwell develops renal drug therapies and manufactures hemodialysis concentrates; substantially all sales were concentrates and related ancillary products.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $14.6 million | $12.8 million | $42.5 million | $39.9 million |
| Gross profit / margin | $1.1 million / 7.3% | $1.6 million / 12.3% | $4.9 million / 11.6% | $4.8 million / 11.9% |
| Operating loss | $5.0 million | $4.8 million | $16.7 million | $14.9 million |
| Net loss | $5.1 million | $4.6 million | $16.9 million | $14.7 million |
| Loss per share, basic and diluted | $0.10 | $0.09 | $0.33 | $0.29 |
- Revenue and margins: Q3 sales increased 14.1%, primarily from domestic concentrate volume growth and higher delivery-cost billings; nine-month sales rose 6.4%. Drug revenue was not significant. Gross margin fell in Q3, in part because of lower concentrate pricing under amended Baxter terms and drug inventory reserves.
- Expenses and investment income: Nine-month SG&A increased $2.3 million to $17.4 million, mainly due to legal and professional costs, partly offset by lower equity compensation. Research and product development was $4.2 million for the nine months, down from $4.6 million. Net interest and investment results were a $0.2 million loss for the nine months, compared with $0.6 million income in 2016.
- Cash flow: Operating activities used $16.3 million in the first nine months, versus $13.0 million in 2016. Investing activities provided $5.2 million; financing activities used $2.2 million, including $2.3 million of withholding taxes paid through share withholding. Cash declined $13.3 million during the period.
- Liquidity and debt: At September 30, cash was $3.9 million and available-for-sale investments were $35.0 million, or approximately $38.9 million combined. Current assets were $61.2 million, working capital was $53.6 million, and current liabilities were $7.6 million. The company reported no long-term debt.
- Balance-sheet items: Total assets were $65.8 million versus $83.2 million at year-end 2016; shareholders’ equity was $40.8 million versus $53.0 million. Inventory was $16.4 million, including $1.5 million of non-current Triferic active pharmaceutical ingredient.
Material developments, outlook and risks
- Rockwell and Baxter settled their arbitration in June 2017 with mutual releases and no settlement payment. Amended pricing is intended to incentivize Baxter to pursue new customers and increase sales; management said the settlement was not expected to materially affect liquidity or results.
- Management said it did not expect significant Triferic revenue until the separate-reimbursement issue was resolved and could not predict CMS’s decision or timing. The company had $4.0 million of Triferic finished goods that could expire within 12 months and recorded a Q3 inventory reserve of approximately $0.7 million. Failure to commercialize sufficiently could require further inventory write-offs.
- The FDA notified the company in October that it needed more time to review Calcitriol data; the notice did not identify a data deficiency. Rockwell expected to begin marketing in Q1 2018, conditional on FDA approval.
- Management considered its resources adequate for planned operations and product development, but reported substantial operating cash use. It expected positive operating cash flow when drug products generate substantial sales; this depends on successful commercialization. The company also anticipated continued development spending and possible modest increases in receivables and inventory.
- Key risks include Triferic adoption, reimbursement and inventory shelf life; regulatory and manufacturing dependencies for drug products; customer concentration and competition in concentrates; possible repayment of part of Baxter fees under certain circumstances; and intellectual-property and litigation exposure. A shareholder-related lawsuit and counterclaims were in discovery, with trial scheduled for July 2018. Management reported disclosure controls were effective and no material quarterly change in internal control.
Important facts for investors to verify
- CMS’s decision and timing on separate reimbursement for Triferic, and resulting sales adoption and inventory utilization.
- Triferic inventory expiration exposure, the basis for the Q3 reserve, and any further impairment risk.
- FDA action on Calcitriol and whether the anticipated Q1 2018 launch remains achievable.
- Concentrate sales, margins and volumes under the amended Baxter agreement, including any potential Baxter fee repayment exposure.
- Operating cash burn and the timing and assumptions behind management’s expectation of adequate liquidity and eventual positive operating cash flow.
- Developments and potential costs or outcomes in the shareholder litigation and other disclosed legal matters.