Rockwell Medical, Inc.

Good morning and welcome to Rockwell Medical's third quarter 2024 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 Jesse Meary, Rockwell Medical's Senior Vice President of Finance. 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 SEC. 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 or implied by such forward-looking statements are discussed in greater detail in our periodic reports filed with the FCC. Rockwell Medical's quarterly report on Form 10-Q for the third quarter of 2024 provides a full analysis of the company's business strategy, as well as the company's financial and operational results for the three and nine months ended September 2024. The reconciliation of non-GAAP measures we discussed on today's call can also be found in today's press release. Our Form 10-Q and other reports filed with the SBC, along with today's press release, our updated investor presentation, And a replay of today's conference call and webcast can be found on Rockwell Medical's website under the Investors section. Now, I would like to turn the conference call over to Rockwell Medical's president and CEO, Dr. Mark Strovak.

Thank you, Heather. Good morning, and thank you for joining us today for Rockwell Medical's third quarter 2024 earnings conference call and webcast. First, I'm going to review our third quarter results, then provide you with a preview of what we expect in the fourth quarter, and then our outlook on 2025. We are pleased to share with you that for a second consecutive quarter, we achieved profitability on a cash flow and adjusted EBITDA basis. Additionally, for the third quarter 2024, we achieved the highest quarterly concentrates product sales, the highest quarterly gross profit, and the highest quarterly gross margin in Rockwell's history. Revenue for the third quarter was positively impacted by consistent sales from our current customers, as well as our largest customer making a special large order of premium price products during the quarter. Our largest customer is expected to continue to make those purchases into the fourth quarter of 2024. The increase in gross profit was due to higher gross margin on our current business, coupled with the special large order of premium price products from our largest customers. This, in turn, led to an increase in our gross margin for the third quarter and profitability on a cash flow and adjusted EBITDA basis. As a result of the third quarter of 2024 being our second consecutive quarter of positive cash flow, we are now eligible to extend the interest-only period of our loan and security agreement with Innovata from 30 months, which has an amortization date of August 1, 2026, August 1, 2026, the 36th month, which has an amortization date of February 1, 2027. We intend to take advantage of this extension. During the third quarter of 2024, we entered into a multimillion-dollar distribution agreement with NEPRO Medical Corporation. Under the terms of the agreement, we will continue to supply NEPRO with our liquid and dry acid and bicarbonate hemodialysis concentrate for which NEPRO has the right to distribute our products outside of the United States. The two-year agreement has an option to extend for an additional one-year period and includes product purchasing minimums of $5 million for the first year and incremental increases each subsequent year. As we noted in our last earnings call, We expanded our concentrates product portfolio to include a convenience pack that will help Rockwell Medical expand our presence in the at-home market. Subsequently, we announced a product purchase agreement with a leading at-home and acute care dialysis equipment manufacturer in the United States. Under the terms of the agreement, we will supply this customer with our liquid acid and liquid bicarbonate both of which will be packaged in either our four-per-case packaging or larger dialysis settings or two-per-case packaging for smaller acute care and at-home settings. Rockwell Medical also renewed its supply agreement with AquaDialysis. As part of the renewal, we expanded our distribution to all Texas-based AquaDialysis clinics, supplying them with our liquid and dry acid and bicarbonate hemodialysis concentrates and other associated hemodialysis products. Now turning our attention to the fourth quarter of 2024, we project that our revenue will be between $23 million and $25 million. Our gross margin will be in line with previous quarters, and we will be profitable on an adjusted EBITDA basis. As a result, we have increased our 2024 guidance for net sales to between $98 million and $101 million, gross profit to between $15 million and $17 million, gross margin to between 16% and 18%, and adjusted EBITDA to between $4 million and $5 million. These targets represent significant improvements over what we initially guided at the beginning of this year in addition we have significantly both bolstered our cash position more than doubling it from where our cash position was at the end of the first quarter 2024. these accomplishments and revised projections are a direct result of our team's hard work and dedication to deliver against the goals and objectives we Steve, over two years ago, which include focusing on growing Rockwell's revenue-generating business, driving profitability for our overall business, and achieving profitability in 2024. Continually assessing our strategic priorities and capital structure, managing cash, reducing our debt, and placing Rockwell Medical on firmer, stronger, more stable financial footing. Every member of our organization has been instrumental in turning Rockwell Medical around, helping to rebuild shareholder value, and in turn, positively impacting more patients with end-stage kidney disease. 2024 will reflect the best performance this company has had in 25-plus years of its history. As we look towards 2025, we expect to encounter a shift in our customer makeup, as we move away from less profitable business to focus on more profitable growth opportunities. The first of these changes will come from the relationship with our largest customer. During the third quarter, we received confirmation that our largest customer will extend their product purchase agreement with Rockwell through the end of 2025, during which product pricing will be increased. This customer has indicated to us that it expects volume to decline during this extended period as they work to diversify their supplier base. We are actively working with this customer in an effort to focus their volume reduction on products that we believe are least profitable for Rockwell. Currently, we believe that our largest customer's net sales in 2025 will decline between $31 million and $38 million, depending on the final volume forecast for 2025, which we expect to receive on or by December 15th. Although our top line revenue will be negatively impacted in the short term, we believe we will in 2025. And this is before any new customer contracts, product purchase agreements, distribution agreements, new product opportunities, or potential acquisitions are put in place. While this revised forecast downward is certainly disappointing, we have always known that we have a significant portion of our revenue with a single customer which presented a risk to Rockwell. We have been working incredibly hard to mitigate that risk by adding new customers and growing our top line beyond our largest customer. We are working to replace this top line revenue with opportunities that we believe will be more profitable to Rockwell in 2025 and beyond. Let me walk you through some of the activities we are currently pursuing. We are in the process of negotiating a large multi-year supply agreement with the world's largest leading provider, of dialysis products and services and hope to be able to announce the execution of this agreement later this month. We are in the final stages of contract negotiations to add two new complementary hemodialysis products to our portfolio in 2025. We have new customer contracts under review that we expect to announce shortly. Finally, we have several acquisition opportunities we are currently evaluating that would add new capabilities and products to our portfolio. Because of all the changes we have made here at Rockwell over the last two-plus years, the change in our largest customer's forecast, while a short-term setback, doesn't impact the strong foundation that we've built. We have a number of exciting opportunities we are working on that we believe will continue to support a profitable, growing business going forward. Now I will turn the call over to Jesse to go into further detail about our third quarter financial results.

Thank you, Mark, and good morning, everyone. For the three and nine months ended September 30th, 2024, I will present the financials for the comparable periods in 2023 with and without the deferred revenue recognition in Q1 and Q3 of 2023 related to the termination of the Baxter and Wang Bang distribution agreements, respectively. This continues to offer us the opportunity to more accurately present the progress we have made and continue to make specifically within our hemodialysis concentrate segment. Net sales for the third quarter of 2024 were $28.3 million, our highest quarterly concentrate product revenue to date. This represents a 19% increase over net sales of $23.8 million for the same period in 2023. Excluding deferred revenue, net sales for the third quarter 2024 increased 31% over $21.6 million for the third quarter 2023. This increase was driven by a large special order of premium-priced products by our largest customer. Net sales for the nine months ended September 30, 2024 were $76.8 million. Excluding deferred revenue, this represents a 33% increase over the same period in 2023. Gross profit for Q3 2024 was $6.2 million. which represents a 183% increase over gross profit of $2.2 million for the same period in 2023. Excluding the impact of deferred revenue recognition, gross profit for the third quarter increased 464% over $1.1 million for the same period in 2023, driven by a special large order of premium priced products by our largest customer, as well as increased sales and price increases to existing customers. Gross profit for the nine months ended September 30th, 2024 was $13.9 million. Excluding deferred revenue, this represents an increase of 342% over the same period in 2023. Gross margin for the third quarter 2024 was 22%, a significant improvement from 9% or 5% excluding deferred revenue for the same period in 2023. Gross margin for the nine months ended September 30th, 2024 was 18%. Excluding deferred revenue, this represents an increase of 13 percentage points from 5% for the same period in 2023. Net income for the third quarter of 2024 was 1.7 million compared to a net loss of 1.9 million for the same period in 2023. Excluding deferred revenue, net income for the third quarter of 2024 represents a $4.6 million improvement over a net loss of $3 million for the same period in 2023. Net income for the nine months ended September 30, 2024 was $300,000, which represents an improvement of $7.2 million over a net loss of $6.9 million for the same period in 2023. Excluding deferred revenue, net income for the nine months ended September 30, 2024 improved by almost $10 million over a net loss of $9.6 million the same period in 2023. Adjusted EBITDA for the third quarter was a positive $2.8 million compared with a negative adjusted EBITDA of $1.2 million for the same period in 2023. Adjusted EBITDA for the nine months ended September 30, 2024 with a positive 3.8 million compared with a negative adjusted EBITDA of 4.4 million for the same period in 2023. Excluding deferred revenue, adjusted EBITDA for the nine-month ended September 30, 2024 increased by 9.7 million over the same period in 2023. Cash, cash equivalents, and investments available for sale at September 30, 2024 was $18.3 million compared to 11.9 at June 30, 2024. Once again, the combination of increased sales and greater gross margins led to cash flow from operations of $4.3 million for the third quarter. I will now turn the call back over to Mark.

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

At this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. To withdraw your question, press star 1 again. We ask that you please unmute yourself to one question and one follow-up. Our first question will come from the line of Anthony Vendetti with Maxim Group. Please go ahead.

Thank you. Good morning. Mark, I was just wondering if, obviously, with this customer indicating a decrease in orders for 2025, you have plenty of time to prepare for that. At-home dialysis is on an uptick. Can some of that be made up from more orders for at-home dialysis concentrate? And then where else are you looking to diversify within your core customer base Does that open up more opportunity, or are you in the process of identifying new customers to take on this additional, now that you have additional supply capabilities?

Yeah. Thanks, Anthony, for the question. You know, to address your first point, absolutely. I think we continue to see and continue to believe that the at-home dialysis market is expanding. And we are working with all of the providers, essentially, that tap into that emerging sort of treatment path. So I think there's absolutely an opportunity for us to continue to grow within that as that market expands. um you know with our products and the and the you know the convenience pack which you know um we've just recently introduced is um it may seem like a small change to you know our existing portfolio but is incredibly meaningful when you think about you know what a patient at home has to do to not only store the materials to carry out the dialysis process but then what they physically have to manage as far as lifting materials and putting it into the machine. So it may seem like a small change, but it's actually going to be quite meaningful and has been quite meaningful for the at-home market. So I think absolutely that's an area for us to grow. As I said, this change is something that I think for us, we always knew was a possibility. And so we wanted to prepare ourselves You know, for that, you know, the first place obviously is an expansion of the relationship with the largest dialysis provider on the planet in an effort to, you know, to support making up that revenue change. You know, secondly, for us, you know, we have an incredibly stable foundational business. that we're now looking to expand beyond just concentrate. You know, product opportunities, I think, are going to be key for us in 2025 to continually help fill that gap with a higher margin-based opportunity. It doesn't help us to continue to essentially supply product to a very large organization of which we don't make very much money on. And I think the point I was making was that even when you take away that top line, this business stays profitable on an adjusted EBITDA basis, which gives you a sense that it's not really contributing much to the margin that we see here. So for us, it's all about adding more things, developing more of our core business in a much more profitable fashion. And that's where our goals and objectives are going to be through 2025. As I said, you know, we recognize that this is going to have a short-term impact, at least on the top line. But, you know, we're excited and the team is excited about the opportunities that we're pursuing that we hope to be able to announce here in the next couple of weeks.

Okay. And then just as a follow-up to that, in terms of the impact, obviously you've quantified the revenue impact and it'll have less of an impact because of the lower margin component of it on your EBITDA. Have you been able to, or are you still working on what that impact will be to the EBITDA line in terms of either dollars or to the EBITDA margin, any color around that? And then based on the lower revenue footprint, is there any uh cost that you're able to take out temporarily as you look to either add new products or uh new innovation to your your current product mix and then i'll hop back in the queue thank you yeah yeah no thanks anthony um so yeah let me let me address each piece of of that um

Right now, we've taken a very conservative look at the business. And as I said, all of the numbers that we put forward really don't include or incorporate any new items that we're in the process of closing right now. So with that conservative look, you know, we believe gross margin percentage for the business will continue to tick upwards as we go forward into 2025. you know, we're continuing that positive trend, A, through the efficiencies that we're creating here in the organization, and two, obviously, removing, you know, products that are currently a drag on that gross margin. So from gross margin percentage, we expect that to continue to increase. We are working on what the final, you know, sort of impact will be on our EBITDA for next year. But as of right now, All of our modeling is continuing to indicate that the business is going to be profitable. We just don't know yet how profitable. And that may come from some tweaks that we make from a cost perspective, you know, in our underlying infrastructure. We will obviously, you know, as we've done in the past, put out, you know, 2025 guidance, you know, at the beginning of the year. That will very clearly indicate what that is. But I can tell you, you know, from our perspective, we will be a profitable entity on an adjusted EBITDA basis going forward.

Okay, great. Thanks so much. Appreciate all the call. I'll hop back in the queue. Thanks, Anthony.

Our next question comes from the line of Ram Zabaraju with HC Wainwright. Please go ahead.

Hi. This is Jade for RAM. Thank you so much for taking my call, and congrats on the earnings. So could you tell me how the Western expansion is going and when you expect to fully deploy in the territory?

Yes. So on a practical level, we continue to increase the number of customers that we have in the West and are continuing to enhance our presence there. We are in discussions right now with a potential opportunity that could provide us with a permanent position in the West. And we hope to be able to say more about that in the coming weeks.

Great. Thanks. And the follow-up to that more locationally based. So you've mentioned a lot as we move into 2025 that you're, you know, planning that you can't really say anything. But is there anything that you can mention regarding value-driving developments in ex-U.S. territories during 2025?

Yeah, so that too is an area that continues to be a good opportunity for us. As you know from the press release, we signed this quarter an extension and enhancement of our relationship with Nipro Medical, which helps put our product into the international market. In addition, we are also in the final stages of bidding on multiple contracts. um in different international locations and seeking those tenders for product which again we feel like we're in a really good position to do based on our existing international business and so again we hope to have more to say about that here in the coming weeks all right thank you so much thank you and there are no further questions i'll turn the call back over to dr strobeck

Thank you.

Before we close, I'd like to take a moment to thank our team members for all their hard work they do every day to provide dialysis clinics and the patients they serve with the highest quality products supported by the best customer service in the industry. Our team members at every level within our organization are the nucleus of our success. We have developed and continue to build upon a core expertise in manufacturing and delivering hemodialysis concentrates. It's because of this dedication and passion that Rockwell Medical was named a Fortune's Best Workplace in Manufacturing and Production in 2024. We have a reputation for reliability, quality, and excellent customer service. When patient outcomes are critical, customers and in turn patients can depend on Rockwell Medical to deliver. We continue to focus on optimization, automation, and streamlining our operations to drive sustainable profitability and shareholder value. We look forward to sharing more with you on our next earnings call. Thank you for your time today.