Rockwell Medical - 10-Q quarterly report FY

 

 

(Mark One)

(Exact name of registrant as specified in its charter)

(248) 960-9009(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

 

(Unaudited)

(Unaudited)

Supplemental Cash Flow disclosure

     We manufacture, sell and distribute hemodialysis concentrates and other ancillary medical products and supplies used in the treatment of patients with End Stage Renal Disease, or “ESRD”. We supply our products to medical service providers who treat patients with kidney disease. Our products are used to cleanse patients’ blood and replace nutrients lost during the kidney dialysis process. We primarily sell our products in the United States. References in these Notes to “the Company,” “we,” “our” and “us” are references to Rockwell Medical Technologies, Inc. and its subsidiaries.

     We are regulated by the Federal Food and Drug Administration, or “FDA,” under the Federal Drug and Cosmetics Act, as well as by other federal, state and local agencies. We have received 510(k) approval from the FDA to market hemodialysis solutions and powders and to sell our Dri-Sate Dry Acid Concentrate product line and our Dri-Sate Mixer. We have also obtained global licenses for certain dialysis related drugs which we are developing and for which we are seeking FDA approval to market. We plan to devote substantial resources to the development, clinical testing and FDA approval of our lead drug candidate.

     Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiary, Rockwell Transportation, Inc. All intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America, or “GAAP,” and with the instructions to Form 10-Q and Securities and Exchange Commission Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

     In the opinion of our management, all adjustments have been included which are necessary to make the financial statements not misleading. All of these adjustments that are material are of a normal and recurring nature. Our operating results for the three month period ended March 31, 2009 is not necessarily indicative of the results to be expected for the year ending December 31, 2009. You should read our unaudited interim financial statements together with the financial statements and related footnotes for the year ended December 31, 2008 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 includes a description of our significant accounting policies.

     We recognize revenue at the time we transfer title to our products to our customers consistent with GAAP. Generally, we recognize revenue when our products are delivered to our customer’s location consistent with our terms of sale. We recognize revenue for international shipments when title has transferred consistent with standard terms of sale.

     We require certain customers, mostly international customers, to pay for product prior to the transfer of title to the customer. Deposits received from customers and payments in advance for orders are recorded as liabilities under Customer Deposits until such time as orders are filled and title transfers to the customer consistent with

our terms of sale. At March 31, 2009 and December 31, 2008, we had customer deposits of $208,751 and $245,186, respectively.

     We recognize research and product development costs as expenses are incurred. We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, including iron supplemented dialysate (“SFP”), aggregating approximately $1.3 million and $0.8 million in the first three months of 2009 and 2008, respectively. We are conducting human clinical trials on SFP and we recognize the costs of these clinical trials as the costs are incurred and services are performed over the duration of the trials.

     We computed our basic earnings (loss) per share using weighted average shares outstanding for each respective period. Diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially dilutive securities, consisting of stock options and common share purchase warrants, unless inclusion would have had an anti-dilutive effect. Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were:

The Company has reclassified certain expenses from Selling, General and Administrative Expense to Cost of Sales in the 2008 consolidated income statement to conform with the current year presentation. The impact of the change was not material.

     Components of inventory as of March 31, 2009 and December 31, 2008 are as follows:

     The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. References in this report to “we,” “our” and “us” are references to Rockwell Medical Technologies, Inc. and its subsidiaries.

     We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission, or SEC. We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of our operations. When we use words such as “may,” might,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “predict,” “forecast,” “projected,” “intend,” or similar expressions, or make statements regarding our intent, belief, or current expectations, we are making forward-looking statements. Our forward looking statements also include, without limitation, statements about our competitors, statements regarding the timing and costs of obtaining FDA approval of our new SFP product and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.

     We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed below and elsewhere in this report, and from time to time in our other reports filed with the Securities and Exchange Commission, including, without limitation, in “Item 1A — Risk Factors” in our Form 10-K for the year ended December 31, 2008.

     Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. We do not undertake, and expressly disclaim, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

     We operate in a single business segment, the manufacture and distribution of hemodialysis concentrates, dialysis kits and ancillary products used in the kidney dialysis process. We have gained domestic market share each year since our inception in 1996. Our sales grew approximately 80% over the two years ending December 31, 2008. Our domestic sales in the first quarter of 2009 increased approximately 5.5% compared to the first quarter of last year. Our strategy is to continue to develop and expand our dialysis products business while at the same time developing new products, including pharmaceutical products for the renal market.

     As we experienced substantial sales growth over the last two years, we also experienced unprecedented increases in the costs for chemicals, packaging materials and fuel. Although we raised our prices over this period, the price increases did not keep pace with the cost increases. As a result, our gross profit and gross profit margins decreased significantly.

     We took actions in the last quarter of 2008 that improved our margins in the first quarter of 2009, including raising prices, changing vendors, changing our product mix and reducing operating costs. Softening of commodity prices also contributed to the recovery of our losses in gross profit margin over the last two years.

     We plan to continue to increase prices to improve our gross profit. However, it may be difficult to raise prices adequately due to price competition. We typically enter into supply contracts that have a term similar to our contracts with customers to mitigate our exposure to raw material and other cost increases.

     While the majority of our business is with domestic clinics who order routinely, certain major distributors of our products internationally have not ordered consistently, resulting in variation in our sales from period to period. We anticipate that we will realize substantial orders from time to time from our largest international distributors but we expect the size and frequency of these orders to fluctuate from period to period. These orders may increase in future periods or may not recur at all.

     We are continuing the FDA approval process for our iron supplemented dialysate product, SFP. We believe our SFP product, which has a unique method of action and other substantive benefits compared to current treatment options, has the potential to compete successfully in the iron maintenance therapy market. However, the cost to obtain regulatory approval for a drug in the United States is expensive and can take several years. We currently expect to spend approximately $4 million in 2009 to complete our Phase IIb clinical trials and other related development costs. Once we complete the Phase II clinical study, we will seek FDA approval to commence a Phase III clinical trial. We anticipate that costs to complete clinical trials and to obtain FDA approval to market SFP from 2010 until such approval may total approximately $15 million depending on the duration and size of the studies required.

     Sales in the first quarter of 2009 were $12.8 million, an increase of $0.4 million or 3.1% over the first quarter of 2008. Our domestic sales increased 5.5% while our international sales decreased by 16.1%. With respect to our domestic business, our overall treatment volume remained consistent with the first quarter of 2008 although our product mix shifted significantly toward our Dri-Sate dry acid concentrate product lines as customers sought cost effective alternatives to higher pricing on liquid products.

     International sales, which represented 9% of our total sales in the first quarter of 2009, decreased due to a reduction of $0.75 million in orders from distributors for one market compared to the first quarter of 2008 while all other international sales in the first quarter of 2009 increased by $0.5 million compared to the first quarter of 2008.

     Gross profit in the first quarter of 2009 was $1.2 million compared to $0.7 million in the first quarter of 2008. Gross profit margins increased to 9.3% from 5.8% in the first quarter of 2008. The increase in gross profit was due to reductions in material costs, fuel costs and operating expenses coupled with price increases. In early 2009, we entered into new supply contracts and made certain vendor changes, and also benefitted from reductions in costs for certain chemicals and fuel, which were the primary reasons for the improvement in gross profit margins in the first quarter of 2009. We reclassified certain quality assurance and operations management expenses totaling $140,000 to cost of sales from selling, general and administrative expense for the first quarter of 2008 to maintain comparability of prior year results with the current year presentation.

     Selling, general and administrative expense, or “SG&A,” during the first quarter of 2009 was $1.6 million compared to $1.3 million in the first quarter of 2008, an increase of $0.3 million or 21.0%. Non-cash charges for equity compensation were $0.5 million in the first quarter of 2009 compared to $0.3 million in the first quarter of 2008. Other cost increases included additional information technology costs and personnel expenses in support of our business growth over the last two years.

     Research and development costs were $1.3 million in the first quarter of 2009 compared to $0.8 million in the first quarter of 2008. Spending in both periods was primarily devoted to development and approval of SFP, our proprietary anemia drug used to treat iron deficiency in dialysis patients. We are conducting a Phase IIb clinical trial and we anticipate spending approximately $4 million in 2009 for SFP related development spending.

     Our net interest expense was $9,000 in the first quarter of 2009 compared to net interest income of $145,000 in the first quarter of 2008. The decrease in interest income was due to less funds available for investment and substantially lower market interest rates compared to the first quarter of 2008. Due to financial market turmoil in late 2008, the Company’s financial institution terminated its short term investment program for its corporate customers and did not offer a suitable replacement. The Company was not able to identify a short term investment program with an acceptable risk to return profile and elected not to expose its cash resources to investment risk during the first quarter of 2009.

     We have two major areas of strategic focus in our business: development of our dialysis products business and expansion of our product offering to include drugs and vitamins administered to dialysis patients. We expect to expend substantial amounts in support of our clinical development plan and regulatory approval of SFP and its extensions. Each of these initiatives will require investments of substantial amounts of capital.

     In November 2007, we raised approximately $12.8 million in equity capital (net of related expenses) primarily for the purpose of funding the clinical development and FDA approval of SFP. We expect to spend approximately $4 million on SFP development and testing in 2009.

     Upon completion of our Phase IIb clinical trial we will seek FDA approval to conduct Phase III clinical trials for SFP. We anticipate that the cost to fund our Phase III clinical trials and to obtain FDA approval to market SFP will cost as much as $15 million from 2010 until approval. We will evaluate various alternative sources of funding in order to raise additional capital or enter into development arrangements with an international development partner in order to fully execute our strategic plan. In our efforts to obtain additional capital resources, we will evaluate both debt and equity financing as potential sources of funds. We will also evaluate alternative sources of business development funding, licensing agreements with international marketing partners, sub-licensing of certain products for certain markets as well as other potential funding sources.

     Our cash resources include cash generated from our business operations and the remaining proceeds from our November 2007 equity offering. Our current assets exceed our current liabilities by over $6.1 million as of March 31, 2009 and included $3.4 million in cash. In the first quarter of 2009, we used $2.2 million in cash, including $2.0 million in operating activities and $0.2 million for capital expenditures. Our cash used in operations was primarily used to fund our research and development expenditures of $1.3 million, and the remainder was used to fund working capital requirements in our core business operations, including a reduction in accounts payable of $1.4 million partly attributable to a $0.4 million reduction in raw material inventory. Non-cash charges against operating results were $0.8 million in the first quarter of 2009.

     We expect to generate positive cash flow from operations during the remainder of 2009, excluding our research and development expenses. We based our cash flow projections on the expected effects of the reductions in material costs that commenced in January 2009 from our new supply contracts, reduced diesel fuel expenses and other actions we have taken to reduce certain other operating expenses, as well as the price increases we have implemented.

     We believe our current cash resources are sufficient to fund the completion of our Phase IIb clinical trial and prepare for our Phase III clinical trial as well as fund our ordinary course operating cash requirements in 2009. However, if we use more cash than anticipated for SFP development or to fund business operations, or if the assumptions underlying our cash flow projections for 2009 prove to be incorrect, we would need to obtain additional cash such as through equity financing, debt financing of capital expenditures or a line of credit to supplement our working capital requirements in 2009 or 2010. Should we not be able to obtain additional financing or enter into development or licensing arrangements, we may be forced to alter our strategy, delay spending on development initiatives or take other actions to conserve cash resources.

     Our international business is conducted in U.S. dollars. It has not been our practice to hedge the risk of appreciation of the U.S. dollar against the predominant currencies of our trading partners. We have no significant foreign currency exposure to foreign supplied materials, and an immediate 10% strengthening or weakening of the U.S. dollar would not have a material impact on our shareholders’ equity or net income.

     Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, as amended, that are designed to ensure that material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, including their evaluation of the status of the material weakness remediation noted below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.

     No changes were made to our internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the fiscal quarter ended March 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

     As discussed in the Company’s Annual Report on Form-10-K for the year ended December 31, 2008, there were two material weaknesses in internal control over financial reporting identified by management relating to (i) inadequate segregation of duties pertaining to access to information technology applications used in our business operations and (ii) inventory valuation and reporting procedures. These internal control deficiencies did not result in any material adjustments to the 2008 annual or interim consolidated financial statements.

     Beginning in the fourth quarter of 2008 and continuing in the first quarter of 2009, management implemented a number of changes to the access controls for information technology applications, including new access restrictions and improved monitoring of user access. Management also implemented additional inventory control, valuation and monitoring procedures. These changes included a complete review and update of all standard costs, monthly transaction sample testing for completeness and accuracy, ongoing inventory cycle counting procedures, and a periodic status review of all open jobs. As a result of these changes and review by management, management has concluded that the previously reported material weaknesses no longer exist as of March 31, 2009.

     For information regarding risk factors affecting us, see “Risk Factors” in Item 1A of Part I of our 2008 Annual Report on Form 10-K. There have been no material changes to the risk factors described in such Form 10-K.

     See Exhibit Index following signature page, which is incorporated herein by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.