Rockwell Medical, Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to Rockwell Medical's Second Quarter 2025 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 Neri, Rockwell Medical's Chief Financial Officer. 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 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 3 months ended June 30, 2025, was filed prior to this call and provides a full analysis of the company's business strategy as well as the company's second quarter 2025 results. The reconciliation of non-GAAP measures we discuss on today's call can also be found in today's press release. Our Form 10-Q and other reports filed with the SEC along with today's press release, 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 Strobeck.

Thank you, Heather. Good morning, and thank you for joining us today for Rockwell Medical's Second Quarter 2025 Earnings Conference Call and Webcast. We are past the midpoint of what we recognize as a transition year for Rockwell Medical. Our core objectives for 2025 have been to secure our base business with long-term contracts, adjust our organization while meeting customer demands, and address the revenue gap following our largest customer moving to another supplier. We believe that we are successfully managing through this transition. For the second quarter, we improved our cash position. Our gross margin was consistent with the first quarter and in line with our guidance. We were slightly negative on an adjusted EBITDA basis but cash flow positive from operations. We continue to explore significant opportunities with new and existing customers that could be transformative for Rockwell. As we enter the second half of the year, we are stable and well-positioned for ongoing growth. Our established reputation for high-quality products, reliable supply chains, and a customer-focused approach differentiates us in the hemodialysis concentrates market. We are a leading supplier with the capacity to manufacture and deliver to more than 12,000 individual purchasing facilities, including outpatient dialysis clinics and hospitals in the U.S. and select international markets. Moreover, we continue to be the leading manufacturer and supplier of liquid bicarbonate products in the U.S., which remains strategically important for us. Year-to-date, we have signed several contracts with new customers and renewed contracts with existing ones. Currently, more than 80% of our customers are under long-term contracts, a significant improvement from just a few years ago. This level of commitment is crucial for Rockwell as it shows stability and predictability in our business and provides strong growth opportunities in the years to come. During the second quarter, we established a new product purchase agreement with Innovative Renal Care, one of the largest dialysis service providers in the U.S. Under this agreement, we are supplying IRC with liquid and dry acid and bicarbonate hemodialysis concentrates, as well as our dry acid concentrate mix system, which is 510(k) approved solely for use with our dry acid concentrate powders. This agreement represents a multimillion-dollar purchase commitment and will remain effective for three years with an option to extend for an additional year. Other customer successes include a product purchase agreement with the largest rural health system in the U.S., which has a two-year agreement with minimums and the option for two additional 12-month renewals. We have also contracted with the largest provider of inpatient dialysis in South Florida and a provider of specialized home care services for ill, disabled, and vulnerable individuals. Both agreements are long-term, multi-year contracts with purchase minimums and renewal options. Regarding our largest customer, we continue to supply them well beyond their June 30 transition date and are collaborating with them to explore additional support for their business moving forward. We are still in active discussions about the terms for a new contract. To remain cautious, we are reiterating our guidance for 2025, projecting net sales between $65 million and $70 million, gross margin between 16% and 18%, and adjusted EBITDA between negative $500,000 and positive $500,000. I will now turn the call over to Jesse to review our second quarter 2025 financial results in further detail. Jesse?

Thank you, Mark. Good morning, everyone. I will now review our second quarter 2025 financial results in greater detail. Net sales for the second quarter were $16.1 million, representing a 38% decrease over net sales of $25.8 million for the same period in 2024. The decrease in net sales was driven by our largest customer transitioning to another supplier. Net sales for the 6 months ended June 30, 2025, were $35 million, which represents a 28% decrease over net sales of $48.5 million for the same period in 2024. Gross profit for the second quarter was $2.5 million, which represents a 45% decrease over $4.6 million for the same period in 2024. Gross profit for the 6 months ended June 30 was $5.5 million, which represents a 27% decrease over $7.6 million for the same period in 2024. Gross margin for the second quarter of 2025 was 16%, which was consistent with the first quarter of 2025 and represents a slight decrease from 18% for the same period in 2024. Gross margin for the 6 months ended June 30, 2025, was 16%, which is also consistent with the same period in 2024. Net loss for the second quarter of 2025 was $1.5 million which was consistent with the first quarter of 2025 and represents a decrease from net income of $300,000 from the same period in 2024. Net loss for the 6 months ended June 30, 2025, was $3 million compared to a net loss of $1.4 million for the same period in 2024. Adjusted EBITDA for Q2 2025 was a negative $200,000, which represents an improvement over adjusted EBITDA of negative $400,000 in Q1 of 2025 and compared to a positive adjusted EBITDA of $1.4 million for Q2 2024. Adjusted EBITDA for the 6 months ended June 30, 2025, was a negative $700,000 compared with a positive adjusted EBITDA of $900,000 for the same period in 2024. Cash, cash equivalents, and investments available for sale at June 30, 2025, was $18.4 million, an increase from $17.3 million at the end of Q1. The increase in cash was driven by $1.8 million in cash flow from operations. Now I'll turn the call back over to Mark.

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

Our first question comes from Ram Selvaraju from H.C. Wainwright.

I just wanted to ask about your expansion plans in the Western United States. And if you can provide us with any additional granularity regarding how those initiatives are proceeding and when we might see additional customer acquisition in those territories?

Yes. Thanks, Ram, for the question. So we continue to believe that West is a significant opportunity for Rockwell as there is only 1 provider of concentrates within that marketplace, and we believe represents an approximate $100 million opportunity. Our focus right now has been not only in sort of working through this transition period, but also lining up larger customers for that expansion. I think we'll be able to give greater visibility towards that as we get later into the year and some of the discussions that we have ongoing now with DaVita, Fresenius, and others begins to play out. But it is still our intent, and it's still our belief that, that does represent a large opportunity for us, and we should be able to give more clarity at that point.

The second question I wanted to ask pertains to the negotiations you continue to have with your largest customer. I was wondering if you could give us some sense of what the open questions or key parameters are around potentially reaching a new deal with this customer, if this might ultimately take the form of a long-term agreement like the ones you have in place with the majority of your other customers now. And if by the time we get to the end of those negotiations, such an agreement might be reached in time to have a meaningful upside impact on your 2025 revenue guidance.

Our discussions with DaVita are ongoing. As everyone is aware, DaVita informed us at the start of the year about their intention to transition away from Rockwell by mid-year. However, DaVita continues to purchase products from us beyond this timeframe, and we expect this to last for the rest of the year. We are currently collaborating with DaVita to establish a long-term supply arrangement. Rockwell focuses on long-term supply agreements rather than just providing small projects to fill gaps or support other suppliers. This has been clearly communicated, and we are optimistic about reaching a long-term supply agreement. This agreement should positively influence our financials towards the end of the year and moving forward. Additionally, we are engaging with two other significant suppliers, including the largest dialysis provider globally, on a supply arrangement that could substantially affect our financials in the fourth quarter. We have several promising opportunities arising from Rockwell's reputation as a reliable, consistent supplier of safe, high-quality products, which the marketplace recognizes.

Can you provide insights on how you're prioritizing capital allocation, specifically regarding the balance between debt repayment and investing in new customer acquisition? Additionally, how might your focus on establishing long-term relationships and agreements with key customers lead to more predictable revenue in 2026?

Yes. Currently, our main focus for capital allocation is investing in equipment that automates our manufacturing processes and lowers production costs. This is where our resources are concentrated, aiming to improve product efficiency. We have planned for the next five years and believe we have sufficient resources to meet our debt obligations, a perspective shared by our lender. Right now, our capital allocation is mainly directed towards equipment and acquiring new customers. Regarding your second question, our top priority is to build a reliable and reproducible business that consistently generates positive cash flow and profitability. We have established arrangements with our customers, marking a shift from a couple of years ago, to create a dependable revenue source and consistent business performance. Had it not been for the changes with our largest customer, we were on track to achieve this. Historically, over the past two and a half to three years, we have maintained a steadily growing revenue base. Despite the recent changes affecting that growth, we have gone through the necessary transition, stabilized our base, and are now ready for further growth towards achieving a steady and consistent level of revenue with a reliable and reproducible stream.

Our next question comes from Jeremy Pearlman from Maxim Group.

Just first question related to gross margins. You're able to keep them relatively flat quarter-over-quarter, even though revenue declines. Maybe just talk a little bit about what the actions you're taking, what's going behind that to keep these gross margins at stability?

Thanks, Jeremy. We have adjusted our organization at the end of Q1 and the start of Q2. This included some staff reductions in operations to align with our new revenue base. We have also invested in new equipment that has improved our efficiency, and we anticipate seeing better results from this in the future.

Yes. And I might also add to Jesse's comments, as we've said previously, the gross margin and profit we were making on our largest customer was not a significant piece driving our overall business, right? That has proven itself out by the fact that revenue has been reduced as a result of them moving away, and it hasn't ultimately significantly affected our gross margin. So I think that's consistent with what Jesse has said; this is another factor here. I think looking forward, I think we are in an incredibly good position and we've already begun to see even this month a tick up in our gross margin and our gross profit. And I think that's as a result of the changes that Jesse just outlined that we are making. So I think we're well positioned as we go through the second half of the year to be able to maximize that even further.

Okay, understood. And I know that before your largest customer was fully integrated, there was a significant risk due to customer concentration. How much of that risk has been reduced now that that contract ended midway through this year? Is there still some concentration risk? Do major customers still account for a large portion of the revenue, or has that risk diminished?

It has really been spread out. This time last year, DaVita accounted for about 40% or 45% of our revenue base. Now, they make up only 10%. We have two other large customers, and each of them represents around 10% to 12% of our revenue. This means that the concentration risk has significantly decreased.

Yes. When we began this journey about three years ago, we recognized that one of the significant risks for our business was the heavy reliance on a single customer. We have consistently worked to mitigate that risk by diversifying our customer base, completing the acquisition of Medivators, and undertaking various initiatives to lessen that dependency. The progress we've made allows us to navigate the transition of losing our largest customer while still maintaining a substantial business. If this had happened three years ago, I don't believe we would be in this position. Everything we've done has been aimed at addressing that concern. The fact that we continue to operate and grow this business meaningfully is a testament to our efforts. However, as Jesse mentioned, we will not find ourselves in that situation again moving forward.

Okay, great. And then just a final question. In early April, one of your competitors had a voluntary recall of contaminated product. Have you been able to take advantage of that in your negotiations with customers since then? It has been 4 months now.

Yes, it's a great question. Yes, unfortunately, the organization that our largest customer shifted towards did have a significant issue in the manufacturing of their liquid products. As you pointed out, there was a significant recall of all of their liquid products. Unfortunately, there was contamination associated with the products that led to not only serious health consequences to patients, but apparently, according to what we learned in the Federal Register, actually resulted in the death of a patient. So we are obviously working quite closely with them to supplement their supply as well as working with our largest customer to make sure that there is continuous supply of liquid, both acid and bicarbonate products in an effort to maintain patient care and the ability of patients to continue to access dialysis treatments.

There are no further questions. I'll turn the call back over to Dr. Strobeck.

Thank you for joining us today for an update on Rockwell Medical. We look forward to providing you with more updates next quarter.

This concludes today's call. You may now disconnect.