Rockwell Medical, Inc.

Good morning and welcome to Rockwell Medical's third quarter 2022 results conference call and webcast. Please note this event is being recorded. At this time, I would like to turn the conference call over to Heather Hunter, Senior Vice President, Chief Corporate Affairs Officer at Rockwell Medical. Heather, please go ahead.

Good morning and thank you for joining us for this update on Rockwell Medical. Joining me on today's conference call are Dr. Mark Strobeck, Rockwell Medical's President and Chief Executive Officer, and Paul McGarry, Rockwell Medical's Senior Vice President, Finance, and Chief Accounting Officer. During today's call, Mark will discuss changes we are making to Rockwell Medical's corporate strategy along with the recent company updates, and then review highlights from the third quarter. Then, Paul will go through Rockwell's financial results After that, we will open the lines to take your questions. Before we begin, I would like to remind you that this conference call will contain forward-looking statements about Rockwell Medical within the meaning of the federal securities laws, including but not limited to the types of statements identified as forward-looking in our annual report on Form 10-K and our subsequent periodic reports filed with the FCC, which are all available on our website under the Investors section. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions and expectations only as of today. Except as required by law, we specifically disclaim any obligation to update or revise these forward-looking statements in light of new information or future events. Factors that could cause actual results or outcomes to differ materially from those expressed in or implied by Such forward-looking statements are discussed in greater detail in our periodic reports filed with the SEC. Rockwell Medical's quarterly report on Form 10-Q for the quarterly period ended September 30th, 2022 will provide a full analysis of the company's business strategy as well as the company's third quarter 2022 results. The Form 10-Q for the third quarter of 2022 will be filed at the conclusion of this call. Additionally, a recording of this conference call will be available on Rockwell Medical's website under the Investor section. At this time, I would like to turn the conference call over to Rockwell Medical's President and CEO, Dr. Mark Strobeck.

Thank you, Heather. Good morning, everyone, and thank you for joining us today for Rockwell Medical's third quarter 2022 results conference call and webcast. Before we discuss our third quarter results, I'd like to begin by walking you through the important changes here at Rockwell and our rationale for those changes. After I joined the company in July of this year, I, together with Rockwell's management team and board of directors, underwent an extensive evaluation and assessment of our business, our value proposition and differentiation, our addressable market opportunities, and the ever-changing macroeconomic environment, including rising interest rates, inflation, and the constricting capital markets. We employed this approach in an effort to identify the right path forward for Rockwell, which leverages what has been built over the company's 25-year history and maximizes value going forward for Rockwell stockholders. After evaluating and reassessing our business, we are taking a different approach and are restructuring the business in a way that we believe can reduce the use of cash, create a profitable business, drive near and long-term value, and position us to pursue longer-term opportunities once profitable. We've determined that the optimal path forward is to focus our commercial and operational efforts primarily on Rockwell's hemodialysis concentrates business, which has been a consistent revenue generator for Rockwell and is well positioned for growth. When we look closer at this business fundamentals, we see that the concentrates market in the United States alone is currently valued at approximately $380 million and is projected to grow to approximately $500 million by 2026. This is a large market, and its growth is a byproduct of the increasing number of patients who are suffering from end-stage kidney disease. Today, Rockwell is the second largest supplier of life-sustaining hemodialysis concentrate products to dialysis clinics in the United States and is one of only two suppliers that has the manufacturing scalability and transportation infrastructure to service the over 7,500 dialysis clinics in the United States along with select international markets. This positions Rockwell as an indispensable player in this large and expanding market, which was further confirmed this past year as the largest supplier of concentrates struggled to meet the demands of its customers and came to Rockwell to purchase our products, and we supplied and supported them. Additionally, as I've been out meeting with and getting to know our customers over the past several months, our invaluable position in the market was further amplified by one of our largest customers who said to me, quote, we need you, unquote. Unfortunately, Rockwell's market share and profitability to date have been limited by constraints associated with previous agreements, our inability to add new products to our portfolio that successfully adapt to the fastest growing segments of the market, and our limited ability to control our own destiny. We are making significant progress to address each of these. The first step we took to improve our concentrates business occurred earlier this year through a contract amendment with and a $15 million equity investment from DaVita, one of the largest dialysis companies in the world. One of the key takeaways from this renegotiated agreement is that we are now able to more appropriately price our products in a way that takes into account inflationary increases related to our manufacturing and distribution expenses. We have already begun to see the benefits of this transaction. The second step we took, which we announced last week, was the reacquisition of distribution rights to our hemodialysis concentrates products from Baxter and termination of the exclusive distribution agreement that Rockwell originally entered into eight years ago. This transaction marks a critical inflection point for our Concentrates business. First, let me say our decision to reacquire these rights and take back control of our business had nothing to do with Baxter as a partner. They were a good partner for us and worked alongside our team at Rockwell to support the patients we both served. The issue here was the agreement itself and the severe limitations it imposed on Rockwell. So let me walk you through those limitations and why it made sense for Rockwell now to complete this transaction and not wait. First, reacquiring these rights allows Rockwell to directly assume the business of more than 700 customers, including hospitals, medical centers, dialysis centers, and health systems, and importantly allows Rockwell to capture more of the economics associated with these customers and removes the cap on our potential gross profit. Second, this transaction allows us to begin selling directly to new customers across the United States and abroad. By selling directly to these customers, we were able to establish preferred terms and conditions and long-term supply arrangements, all of which we were previously unable to do. Third, terminating this exclusive distribution agreement now enables us to explore a westward expansion to access a portion of the hemodialysis concentrates market in the United States that was previously unavailable to us. Fourth, it removes the non-compete which prevented us from being able to develop, in-license, or acquire new products to develop a broader kidney care products portfolio. Fifth, it removes disincentives around making our manufacturing process more efficient. Now we can explore automating our manufacturing processes and benefit from the reduced expenses and greater profitability that will come from those changes. Sixth, it removes a number of expensive, restrictive covenants that place an unnecessary stress on our cash position. Seventh, it removes any restrictions or limitations on future strategic investments in Rockwell or potential merger and acquisition activity. Finally, the terms of this acquisition were attractive and the purchase price will have a minimal impact on our cash position. As you can see, this was the right deal for us to do at this time. We are excited to have completed this transaction and believe this is another significant step forward for our hemodialysis concentrates business. Our commercial team is actively working with Baxter to help customers seamlessly transition their hemodialysis concentrates business to Rockwell to ensure our life-sustaining products continue to get to clinics and the hemodialysis patients they serve. Since many of these customers already have a relationship with Rockwell, we believe that this transition will be straightforward and we will retain 100% of this business and we'll be able to drive improved profitability. Following last week's announcements, we plan to grow and enhance profitability in our hemodialysis concentrates business. Our commercial team is already actively marketing our products to new customers in the United States and abroad, and we believe that we will be in a position to announce new Rockwell customers in the coming quarters. To date, Rockwell's hemodialysis concentrates business has been focused on supplying clinics throughout the Northeast, South, and Midwest. For us to access the full concentrates market opportunity in the United States, Rockwell needs to expand west. Currently, we are looking at a number of ways to do this and plan to have more to say about this in the future. In addition, we are looking at ways to grow our hemodialysis products portfolio. We have identified new product candidates, some of which we can develop in-house, that take advantage of our robust manufacturing capabilities and have the potential to address the new and fastest growing segments of the hemodialysis concentrates market. We hope to have more to say about these opportunities in the future. On the topic of profitability, we have undertaken a number of initiatives to enhance Rockwell's profitability. Today, Rockwell's manufacturing process is ripe for improvement and is ripe for automation. We have already begun to invest in new equipment at our three manufacturing facilities in Texas, Michigan, and South Carolina that improves our output and lowers our production costs. We will continue to invest in our facilities in order to improve performance and reduce overall expenses. With all the improvements we have made to our concentrates business and with the additional growth initiatives we outlined, we believe that our hemodialysis concentrates business could achieve annual revenue of $100 million in the coming years and rock-well achieve profitability in 2024. Now let me turn to Triferic. When we examined our Triferic business, we saw an approved commercial product that struggled to gain market adoption. Triferic was launched into a very competitive marketplace with well-entrenched products, generated limited revenue for Rockwell, and cost Rockwell a significant amount of capital to maintain. Taking into account PDUFA fees, required services to maintain registered pharmaceutical products in the United States, manufacturing supply requirements, and other services, Rockwell was losing approximately $2 to $3 million annually in support of Triferic. About a year ago, the Rockwell team initiated business development activities to find a partner more suited to commercialize this product in the United States. Despite a significant effort through which we spoke to every major player in this therapeutic area, both big and small, we were unable to identify a partner willing to license or acquire this product. It is with this information that we have made the difficult decision to discontinue Triferic in the United States and eliminate the expense, ultimately saving money for Rockwell going forward. Rockwell has six international partnerships with companies looking to develop and commercialize Triferic in their respective countries. The regulatory and commercial landscapes outside the U.S. are different than here in the United States and offer the opportunity for Triferic to find a place in the physician's toolbox to treat patients who are suffering from iron deficiency anemia. These international partnerships require very little capital and operational resource expenditure from Rockwell and have the potential to generate near and long-term revenue for the company. In fact, Geo Pharmaceutical launched Triferic in South Korea during the third quarter of 2022, and we are actively keeping track of their progress. and Triferic's market adoption and have already begun to see the impact of revenue associated with yields, license, and supply agreements. In addition, Wang Bang Biopharmaceuticals is still carrying out its phase three study in China, and we expect to hear the results from this study in early 2023. Overall, we believe this approach with Triferic maximizes our revenue potential with little resource expenditure from Rockwell and allows us to further reduce the unnecessary loss associated with this product in the united states more importantly revenue generated from these partnerships drops directly to our bottom line on our development programs let me first address fpc for home infusion during the third quarter 2022 rockwell conducted a microbiology and short-term stability study for fpc for home infusion in accordance with the guidance from the fda to support the company's investigational new drug applications Preliminary results from this microbiology and short-term stability study indicated that the program would likely not meet the FDA's requirement to support the IAD application and would require significant capital expenditure and resources to support additional reformulation work and a phase two study. Despite there being a potentially attractive commercial opportunity for this program, now with the additional expense, and delayed timeline associated with completing further development work and that Rockwell would not realize value from this program for many years to come, we have decided to put development work associated with FPC for home infusion on hold until we are in a better position to support this work through Rockwell's own cash resources. As for FPC for acute heart failure, Rockwell will conduct a pre-IND meeting with the FDA before the end of this year to discuss our development plan for this program. And once completed, Rockwell will determine the appropriate path forward as we work towards profitability. Hopefully this clarifies the rationale for the changes we have initiated. We believe that if we focus our efforts going forward on growing our hemodialysis concentrates business within its large addressable market and focus on our international pharmaceutical partnerships We can drive Rockwell to profitability in 2024, reduce our downside risk while maintaining our upside potential, reduce our overall business risk, all of which will allow us to grow our cash base and reduce our reliance on the capital markets. Once we achieve profitability, we can then make investments with our cash to grow our business with longer term, higher value opportunities. There is no doubt in our minds that this is the right path forward for Rockwell, and we believe this type of business will be valued more appropriately in the public market. Finally, given Rockwell Medical's improved financial outlook, we have decided to take an additional step to strengthen our finances by entering into an amendment of our loan agreement, accelerating the pay down of our debt. Subsequent to the third quarter, we prepaid $5 million of our existing loan leaving Rockwell Medical with $10 million of long-term debt. This offers Rockwell the opportunity to reduce its interest expense over the next year and moves the company closer to its goal of profitability. Rockwell's cash and cash equivalents at the end of the third quarter 2022 was $27.6 million. Taking into account this debt prepayment, the company's cash and cash equivalents as of September 30th, 2022 would have been $22.6 million. This is compared to the first quarter of 2022 in which Rockwell had $19.5 million of debt and $9.9 million in cash and cash equivalents. With $10 million in debt and approximately $22.6 million in cash and cash equivalents, we now find ourselves in a much stronger financial position. We will continue to look for ways to pay off this obligation and remove this financial overhang on our business. Now let's turn to our third quarter financial results. Rockwell's third quarter revenue was $18.7 million, which was slightly ahead of our second quarter 2022 revenue and our highest revenue quarter to date. Rockwell saw consistent volume orders across the quarter as we continued to supply our approximately 1,700 clinics and hospitals. In addition, In a region in which we have a number of customers, we navigated an unprecedented natural disaster in the form of Hurricane Ian, a devastating storm that impacted Florida and other areas along the East Coast. I am very proud to say that Rockwell made all of its deliveries to clinics in and around those areas impacted by the storm. At times, our drivers navigated very dangerous conditions and delivered in areas that took on significant water damage. This determination highlights the commitment Rockwell has to patients who rely on our products. With our revenue performance over the year and including our forecasted demand for the remainder of 2022, we believe Rockwell can anticipate revenue of $65 to $70 million for 2022, which represents up to a 13% increase over revenue in 2021. Our cash used for operating expenses for the quarter was $1.1 million, which represents a significant reduction from the first and second quarters of this year. This is a result of our restructuring and cost-cutting efforts, which we will selectively continue for the remainder of the year. Overall, we are pleased with our performance in and subsequent to the third quarter. The Rockwell team is motivated now more than ever in an effort to continue our efforts to grow our business and place us on a more financially stable foundation. Before I turn the call over to Paul, I'd like to address that Rockwell's Chief Financial Officer, Russell Skibsted, was separated from the company as part of a workforce reduction. Going forward, Rockwell's financial reporting, accounting, and related internal controls will be led by Paul McGarry, Senior Vice President, Finance, and Chief Accounting Officer. Now I will turn the call over to Paul. Paul?

Thank you, Mark. Our cash-to-cash equivalents as of September 30, 2022, was 27.6 million. This compares to 30.8 million at June 30, 2022. Subsequent to the third quarter, we reduced our long-term debt to 10 million, following a prepayment of 5 million, which allows us to reduce our interest expense over the next year by agreeing to a 10-month interest-only period starting December 1, 2022. With this 5 million debt prepayment, Rockwell's cash position would have been approximately 22.6 million as of September 30, 2022. This is compared to March 31, 2022, when Rockwell's outstanding debt was $19.5 million and the cash balance was $9.9 million. Revenue for the three months ended September 30, 2022 was $18.7 million. While slightly ahead when compared to the second quarter of 2022, this represents a 16.9% increase year over year compared to $16 million for the same quarter in 2021. Revenue for the nine months ended September 30, 2022 was $53.5 million, which represented a 14.8% increase year over year compared to $46.6 million for the nine months ended September 30, 2021. Cash use and operating activities for the three months ended September 30, 2022 was $1.1 million compared with $5.8 million for the three months ended June 30, 2022, representing an 81% decrease quarter over quarter. We remain focused on managing our cash to position us for future growth, de-risk the business, and support our goal to be profitable in 2024. I will now turn the call back over to Mark.

Thank you, Paul. Operator, please open the phone lines for any questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. And your first question comes from the line of Brandon Foulkes from Kantor Fitzgerald. Your line is open.

Hi, thanks for taking my questions and congratulations on the progress. So on the 2024 profitability target, can you just help us think about how much of that is driven by revenue growth versus sort of cost cutting and maybe just gross margin improvement and then maybe along the same lines, how much additional investment is required to expand the business, you know, whether it be west or just sort of in other regions now that you have got past the BAFTA agreement?

Yeah, thanks, Brandon. So you've asked a number of pieces, so let me try to address those. So for us to achieve profitability in 2024, it will come from both a combination of growing our business as I mentioned, and that will occur through a couple of different ways. One of which is continuing to expand our customer base both in the US and abroad. Secondly, will be to find a way to access the western portion of the United States which is a market today that is now going to be accessible to us. And then third to that is going to be to add additional products to our portfolio. The second piece to our ability to achieve profitability in 2024 will come from continual improvements to our overall manufacturing and distribution processes. As I mentioned, we recognize that both in all three of our manufacturing facilities we need to continue to automate our ability to manufacture our products. Those facilities and our processes are right for that. So we will continue to do that, which will obviously reduce our expenses and enhance our profitability, which will obviously lead to enhanced gross margin and overall profitability for the business. As far as the remainder of the organization, we will need to add some additional small number of folks in support of taking over this Baxter business, but that won't significantly increase our expenses. And, you know, the combination of which will allow us to get to profitability in 2024. Thanks.

And sorry, just one follow-up. The 65 to 70 million, was that full total revenue for 2022? Apologies if I didn't get that correct.

Yes, that would be total revenue for 2022. Okay.

And then maybe, do you mind if I just, one more on the pipeline? The microbiology and short-term stability results on FPC, how should we think about maybe similar challenges around that acute heart failure product? It's a stage, obviously, you know, home infusions, It's very different for a number of reasons. So, just any comments as to how you're thinking about this meeting with the FDA?

Yep. So, I think, you know, where we've landed on the formulation development is that we need to move to, you know, an aesthetically prepared formulation for this product which, you know, we think, you know, will, you know, move us around any potential issues that way you know we may uh find in other presentations related to you know microbiological growth um and so that will that aesthetically prepared formulation will need to be developed for both the home infusion and the acute heart failure program great thank you very much and congratulations on all the steps during the quarter thanks brandon

And your next question comes from the line of Ram Savaru from HC Wainwright. Your line is open.

Thanks very much for taking my questions. Firstly, Mark, I was wondering if you could give us a bit of a flavor of the differences between the U.S. environment and the ex-U.S. territories to which you were alluding previously. as those pertain to the economic outlook for a product like Triceric? And in particular, if you could maybe highlight the differences between, say, the Chinese market and the U.S. market.

Yeah. So, you know, the different, I mean, obviously there are different, you know, regulatory and development requirements to get a product approved in each of those different territories. And then additionally, you know, sort of commercially, it's a different competitive landscape. And so it's really a combination of those that I think provides each of our different partners an opportunity to develop and successfully commercialize these products in a different environment than we found here in the United States.

And then with respect to the longer-term financial outlook, can you clarify just two items here? Firstly, if you expect to be cash flow breakeven are profitable on a full year basis in 2024, or if you expect to reach cash flow breakeven before the end of 2024, and also if you could clarify what you expect the total annualized revenue to look like in 2024, if you can provide a range that would, in and of itself, be very helpful.

Yeah. So we intend to be... you know, we intend to achieve a cash flow break even within 2024. So as of right now, our model is showing that we're able to do that. And, you know, we are going to continue to work aggressively to move that forward. But as of right now, based on our forecasting and our estimates, and as I mentioned, the growth initiatives that we've outlined, we anticipate that we will cross that line within 2024. We're not prepared at the moment to provide guidance for 2024, but as you've seen in this announcement, we are now moving to a format where we will provide annual guidance for the company going forward.

And then lastly, just some clarifications on restructuring. Can you just indicate whether you expect any further workforce reductions over the course of the next couple of quarters, and if so, what their magnitude might be? And secondly, if you have already seen the bulk of the restructuring-related expenses, let's say addressed as of the end of the current quarter, or if you expect there to be a few more to be recognized in the early part of 2023?

Yeah, so we expect that the majority of the restructuring expense will be taken within the third and the fourth quarter. So we don't anticipate there being much beyond that. And as far as additional reductions in force, we don't see any significant reductions in force going forward. Right now, for us, it's about improving our processes, making what we do more efficiently, and making sure that we do it within a very disciplined cost framework.

Thank you. Thanks, Ron.

And there are no further questions. I will now turn the call back over to Dr. Strobeck.

Thank you, operator, and thank you, everyone, for joining us on today's call. It was a pleasure to provide you with an overview of the restructuring of our business and the rationale for the decisions we've made, our third quarter achievements, the progress we've made since then, and the opportunities that lie ahead for Rockwell. Our singular focus is to drive our overall business to profitability, improve our financial position, maximize revenue, and unlock the value of our manufacturing and distribution capabilities. We are putting Rockwell Medical in a better position to drive growth and further improve its performance so we can serve more patients, clinics, and major medical centers around the world. We are in the business to make products that impact patients' lives. This is our passion and we take this responsibility very seriously. We are inspired by the challenges and opportunities that lie ahead and look forward to sharing our progress on future calls.

this concludes today's conference call you may now disconnect