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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO ____________
COMMISSION FILE NUMBER: 000-23-661
----------
ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38 -3317208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30142 WIXOM ROAD
WIXOM, MICHIGAN 48393
(Address of principal executive offices)
(248) 960-9009
(Issuer's telephone number)
___________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: 8,677,952 Common Shares
outstanding as of August 8, 2005.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of June 30, 2005 and December 31, 2004
(Whole Dollars)
(Unaudited)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
Cash and Cash Equivalents ................................ $ 1,275,910 $ 166,195
Restricted Cash Equivalents ............................... 8,662 8,662
Accounts Receivable, net of a reserve of $44,500 in 2005
and $44,500 in 2004 .................................... 2,383,340 2,302,093
Inventory ................................................. 2,379,666 1,652,457
Other Current Assets ...................................... 238,759 111,630
----------- -----------
Total Current Assets ................................... 6,286,337 4,241,037
Property and Equipment, net ............................... 2,028,495 2,048,665
Intangible Assets ......................................... 403,817 369,508
Goodwill .................................................. 920,745 920,745
Other Non-current Assets .................................. 116,680 120,597
----------- -----------
Total Assets ........................................... $ 9,756,074 $ 7,700,552
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short Term Borrowings ..................................... $ 991,884 $ 452,682
Notes Payable & Capitalized Lease Obligations ............. 467,820 389,602
Accounts Payable .......................................... 1,865,435 2,124,679
Customer Deposits ......................................... 1,504,273 11,005
Accrued Liabilities ....................................... 440,995 481,587
----------- -----------
Total Current Liabilities .............................. 5,270,407 3,459,555
Long Term Notes Payable & Capitalized Lease Obligations ... 643,654 818,678
Shareholders' Equity:
Common Share, no par value, 8,674,619 and 8,556,531 shares
issued and outstanding ................................. 12,095,931 11,870,909
Common Share Purchase Warrants, 3,710,832 and 3,761,071
shares issued and outstanding .......................... 320,150 320,150
Accumulated Deficit ....................................... (8,574,068) (8,768,740)
----------- -----------
Total Shareholders' Equity ............................. 3,842,013 3,422,319
----------- -----------
Total Liabilities And Shareholders' Equity ............. $ 9,756,074 $ 7,700,552
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
2
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
(WHOLE DOLLARS)
(Unaudited)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
SALES ................................ $7,791,033 $4,382,924 $13,410,541 $8,690,768
Cost of Sales ........................ 6,980,588 3,700,686 11,930,680 7,313,570
---------- ---------- ----------- ----------
GROSS PROFIT ...................... 810,445 682,238 1,479,861 1,377,198
Selling, General and Administrative .. 688,467 582,977 1,336,126 1,153,388
---------- ---------- ----------- ----------
OPERATING INCOME .................. 121,978 99,261 143,735 223,810
Other Income ......................... -- -- 137,468 --
Interest Expense, net ................ 36,522 44,636 86,531 88,968
---------- ---------- ----------- ----------
NET INCOME ........................ $ 85,456 $ 54,625 $ 194,672 $ 134,842
========== ========== =========== ==========
BASIC EARNINGS PER SHARE ............. $ 0.01 $ 0.01 $ 0.02 $ 0.02
DILUTED EARNINGS PER SHARE ......... $ 0.01 $ 0.01 $ 0.02 $ 0.01
The accompanying notes are an integral part of the
consolidated financial statements.
3
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
(WHOLE DOLLARS)
(Unaudited)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ...................................................... $ 194,672 $ 134,842
Adjustments To Reconcile Net Income To Net Cash Used For
Operating Activities:
Depreciation and Amortization ................................ 335,288 297,765
Changes in Assets and Liabilities:
(Increase) in Accounts Receivable ......................... (81,247) (56,631)
(Increase) in Inventory ................................... (727,209) (83,067)
(Increase) in Other Assets ................................ (123,212) (25,392)
(Decrease) Increase in Accounts Payable ................... (259,244) 369,954
Increase in Customer Deposits ............................. 1,493,268 -0-
(Decrease) Increase in Other Liabilities .................. (40,592) 22,061
----------- -----------
Changes in Assets and Liabilities ...................... 261,764 226,925
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES ............... 791,724 659,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment ..................................... (282,418) (187,243)
Purchase of Intangible Assets ............................. (50,000) -0-
----------- -----------
CASH (USED IN) INVESTING ACTIVITIES ................. (332,418) (187,243)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowing on Line of Credit ................. 5,129,279 8,108,522
Payments on Line of Credit ................................ (4,590,077) (8,251,945)
Payments on Notes Payable and Capital Lease Obligations ... (113,815) (162,349)
Issuance of Common Shares ................................. 225,022 32,876
----------- -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..... 650,409 (272,896)
INCREASE IN CASH ................................................... 1,109,715 199,393
CASH AT BEGINNING OF PERIOD ........................................ 166,195 106,639
----------- -----------
CASH AT END OF PERIOD .............................................. $ 1,275,910 $ 306,032
=========== ===========
Supplemental Cash Flow Disclosure:
Interest Paid .......................................... $ 86,579 $ 89,052
=========== ===========
Non-Cash Investing and Financing Activity -
Equipment Acquired Under Capital Lease Obligations ..... $ 17,009 $ 185,648
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
4
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
We manufacture, sell and distribute hemodialysis concentrates and other
ancillary medical products and supplies used in the treatment of patients with
kidneys that do not function properly. 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 during the kidney dialysis
process. We primarily sell our products in the United States.
We are regulated by the United States Food and Drug Administration (the
"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. We also have 510(k) approval to sell
our Dri-Sate(R) Dry Acid Concentrate product line and Dri-Sate(R) Dry Acid
Mixing System.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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.
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 June 30, 2005 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2005. You should read our unaudited interim financial statements
together with the financial statements and related footnotes for the year ended
December 31, 2004 included in our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004. Our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004 includes a description of our significant
accounting policies.
Revenue Recognition
We recognize revenue at the time we transfer title to our products to our
customers consistent with generally accepted accounting principles. Generally,
we recognize revenue when our products are delivered to our customer's location
consistent with our terms of sale. In most instances title for goods shipped
internationally transfers to the buyer once it leaves our facility and
therefore, we recognize revenue upon shipment to foreign customers.
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 June 30, 2005, we had
customer deposits of $1,504,273.
EARNINGS PER SHARE
We computed our basic earnings 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
5
antidilutive effect. Actual weighted average shares outstanding used in
calculating basic and diluted earnings per share were:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Basic Weighted Average Shares Outstanding 8,639,321 8,544,296 8,610,029 8,539,889
Effect of Dilutive Securities 638,368 735,060 675,029 772,230
--------- --------- --------- ---------
Diluted Weighted Average Shares Outstanding 9,277,689 9,279,356 9,285,058 9,312,119
========= ========= ========= =========
Our reported and pro forma information for the three and six months ended
June 30:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
As reported net income (loss) available
to common shareholders $ 85,456 $ 54,625 $ 194,672 $134,842
Less: Stock based compensation expense determined
under the fair market value method, net of tax 162,254 104,385 324,510 208,769
--------- --------- --------- --------
Pro forma (loss) ($76,798) ($49,760) ($129,838) ($73,927)
========= ========= ========= ========
As reported basic earnings per share $ .01 $ .01 $ .02 $ .02
As reported diluted earnings per share $ .01 $ .01 $ .02 $ .01
Pro forma earnings (loss) per share and
diluted earnings (loss) per share ($.01) ($.01) ($.02) ($.01)
3. LINE OF CREDIT
On March 29, 2005, we entered into a new line of credit with a
financial institution. The loan agreement provides for revolving borrowings by
us of up to $2,750,000. We are permitted to borrow up to 80% of eligible
accounts receivable and 40% of eligible inventory up to $600,000. Borrowings
under the loan agreement are secured by accounts receivable, inventory and
certain other assets. The annual interest rate payable on revolving borrowings
under the loan agreement is the lender's prime rate plus 75 basis points. The
lender's commitment to make revolving borrowings under the loan agreement
expires on March 31, 2006. As of June 30, 2005, we had borrowed $991,884 under
this line of credit.
4. OTHER INCOME
We were the plaintiff in certain litigation that was settled in the
first quarter of 2005. Since we have realized the full proceeds of the
settlement, which totaled approximately $241,000, we have recognized $137,468 of
other income from this settlement in the first quarter of 2005. A portion of the
cash received was from the exercise of stock options by the defendant during the
first quarter of 2005 which totaled $103,750.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
6
Some of the statements in this report are forward-looking statements.
These forward-looking statements include statements relating to our performance
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we may make forward-looking statements in future
filings with the Securities and Exchange Commission and in written material,
press releases and oral statements. Forward-looking statements include
statements regarding the intent, belief or current expectations of us or our
officers, including statements preceded by, followed by or including
forward-looking terminology such as "may," "might," "will," "should," "believe,"
"expect," "anticipate," "estimate," "continue," "predict," "forecast,"
"projected," or similar expressions, with respect to various matters.
Our actual results might differ materially from those projected in the
forward-looking statements depending on various important factors. These
important factors include the cost of obtaining FDA approval to market our new
iron supplemented dialysate product, the challenges associated with developing
new products, the uncertainty of acceptance of our products by the hemodialysis
community, competition in our market, and the other factors discussed under the
caption "Risk Factors" in our Registration Statement on Form SB-2 (file no.
333-31991) effective January 26, 1998 and elsewhere in our public filings and in
this report, all of which constitute cautionary statements identifying important
factors with respect to the forward-looking statements, including risks and
uncertainties, that could cause actual results to differ materially from those
in the forward-looking statements.
All forward-looking statements in this report are based on information
available to us on the date of this report. We do not undertake to update any
forward-looking statements that may be made by us or on our behalf in this
report or otherwise.
OVERVIEW
We operate in a single business segment: the manufacture and distribution
of hemodialysis concentrates, dialysis kits and ancillary products used in the
dialysis process. Our business has gained market share each year and our sales
have grown each year since our inception in 1996. In 2004, our revenue grew 20%
to $17.9 million and we earned $211,000. We increased our sales by over 54% for
the first six months of 2005 compared to first six months of last year. Our net
earnings were $194,672 in the first six months of 2005 or $.02 per share.
We believe that our core concentrate and supply business can continue to be
profitable; however, the dialysis supply market is very competitive and we
compete against companies with substantially greater resources than us. We
expect to continue growing our business while executing our strategic plan to
expand our product lines, expand our geographic reach and to develop our
proprietary technology. We expanded our operations in the Southeastern United
States by adding a third manufacturing facility in March of 2005. We have
increased our plant capacity in order to position ourselves to take advantage of
accelerated growth potential in our market. In the short run, we expect that
these additional costs will reduce our gross profit margins until we
successfully increase facility production volumes.
The dialysis industry is highly concentrated with several large clinic
chains representing the majority of the industry. We expect that the
consolidation of large and regional dialysis service providers will continue in
the future. Our largest customer, DaVita, Inc., the second largest dialysis
treatment provider in the United States, has announced its pending acquisition
of the dialysis clinic business of Gambro, the third largest dialysis treatment
provider in the United States. How this acquisition by DaVita may impact our
market or our results is not clear at this time; however, we believe these
events may prove beneficial in our business development efforts.
We are seeking to gain FDA approval for our iron supplemented dialysate
product (which we also refer to as dialysate iron). We believe our iron
supplemented dialysate product has the potential to compete in the iron
maintenance therapy market. If we are successful in introducing our dialysate
iron product, we believe it is possible that we may also increase our market
share for the other products we sell. The cost to obtain regulatory approval for
a drug in the United States is substantial and we expect that the development
costs of our iron supplemented dialysate product will require us to raise
additional funds or collaborate with a strategic partner. These substantial
costs include those expected to be incurred in order to conduct required
clinical trials and to obtain marketing approval which costs may offset some or
all of any profits generated from sales of our existing products during the
approval process, and we may incur losses. We expect the approval process to
take between two and three years and there is no assurance we will be
successful.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005
7
Our sales in the second quarter of 2005 were $7,791,033 and increased
by $3.4 million, or 77.8%, over the second quarter of 2004. Sales of our
dialysis concentrates represented 70% of our sales in the second quarter of 2005
and increased 50.6% over the second quarter of 2004. Sales of our ancillary
products increased by a net $1.5 million largely as a result of an increase in
dialysis kit sales primarily due to the purchase order described below, which
were partially offset by a reduction of blood tubing sales.
We have continued to realize sales growth with national and regional
dialysis chains throughout the eastern half of the United States over the last
year. In February of 2005, we announced that we had signed multiple supply
agreements with several dialysis chains and regional units of national chains in
the Southeastern United States. The aggregate annual revenue from these dialysis
chains is anticipated to be approximately $2,500,000. We began to fulfill these
supply agreements beginning in March of 2005, and we realized the full quarterly
revenue impact during the second quarter of 2005. We also opened a third
manufacturing facility in March 2005 to support the business under these supply
agreements in addition to our existing portfolio of business in the Southeastern
United States.
We achieved accelerated growth in the Southeastern United States
through the sale of our liquid acid concentrate product lines over the last nine
months. Overall, we experienced substantial unit growth in our liquid products
with the aggregate gallons of liquid acid sold increasing by 124% from the
second quarter of 2004. We achieved a faster and more profitable operational
start-up by gaining a critical mass of customers in a short time frame by
penetrating this region with liquid products. Going forward, we intend to
continue to attempt to convert our liquid concentrate customers to our Dri-Sate
Dry Acid Concentrate products, which generally would result in a lower cost per
treatment for the provider than liquid products.
We received a significant purchase order from a single distributor for
dialysis products totaling $6,500,000 and fulfilled approximately $625,000 of
this purchase order in the first quarter and $2.5 million in the second quarter
which is included in our sales results. We anticipate filling the remainder of
this purchase order, $3,375,000, during the third quarter of 2005. We anticipate
that similar purchase orders may recur in the future. However, it is possible
that they may not recur in the future or repeat in each succeeding period.
Gross profit was $810,445 in the second quarter of 2005 which
represented an increase of 18.8%, or $128,000, from the second quarter of 2004.
Our overall gross profit margins in the second quarter of 2005 were 10.4% as
compared to 15.6% in the second quarter of 2004. There were several factors,
both recurring and non-recurring, contributing to the reduction in gross profit
margins including the expansion of our production operations, transition costs
as we moved order fulfillment operations between regions, higher product
delivery costs due to fuel increases and higher costs for equipment maintenance
caused by increased production volumes.
We made an investment in the geographic expansion of our business in
order to position the Company to take advantage of new business opportunities in
our market. We added a third manufacturing facility in the Southeastern United
States that increased our costs of operation. We moved certain production,
related to business in that region, to the new plant from our other facilities
which added flexibility at our other facilities to absorb additional volume
growth. As a result, we added additional operating costs which have not been
completely offset by higher production volumes. We anticipate that having a
facility in the Southeastern United States will enable us to realize
improvements in distribution efficiencies and will mitigate the negative impact
from supplying the Southeastern United States from our other facilities.
Overall, our recurring operating costs have increased and have reduced
our gross profit margins by three percentage points compared to the second
quarter of 2004. Cost increases included higher fuel costs for delivery, which
we estimate to have decreased gross profit margins by 1.2 percentage points.
Other increases in cost include additional production resources that will
provide us with additional speed and flexibility in handling new business in the
future.
We also incurred substantial expenses that we anticipate will be of a
non-recurring nature equivalent to approximately two percentage points of the
decrease in gross profit margins. These expenses included transition costs
related to distribution and for production labor for Southeast based customers
as they were transitioned to being serviced from our new facility. In addition,
we also incurred substantial expenses for equipment maintenance and repairs as a
result of the 50% increase in year to date sales volumes. We anticipate some
improvement in distribution costs in the
8
third quarter following completion of repositioning some of our fleet resources.
We expect that we will continue to incur substantial maintenance costs in the
third quarter but expect those to mitigate in the fourth quarter.
Selling, general and administrative expense as a percent of sales in
the second quarter of 2005 decreased to 8.8% of sales from 13.3% of sales in the
second quarter of 2004 or an improvement of 4.5% of sales. Our selling, general
and administrative expenses increased $105,490, or 18.1%, compared to the second
quarter of 2004. The majority of the cost increase was due to additional
personnel resources and internal information technology infrastructure costs
added to handle increased transaction activity associated with our 54% sales
increase in the first half of 2005. Our second quarter 2005 spending on the
dialysate iron project of $28,000 was an increase of $6,000 over the second
quarter of last year.
Operating income in the second quarter of 2005 was $121,978, which was
an improvement in profitability of $22,717 compared to the second quarter of
2004. Operating income to sales of 1.6% decreased by .7 percentage points.
Net interest expense for the second quarter of 2005 was $36,522 and
decreased $8,114 compared to the second quarter of last year largely as a result
of lower average borrowings and lower effective interest rates under our new
line of credit.
Earnings after tax for the second quarter of 2005 was $85,456, or 1.1%
of sales, which was $30,831, or 56%, higher than the second quarter of 2004.
Basic earnings per share of $.01 was the same as the second quarter of 2004.
Diluted earnings per share were $.01 in the second quarter of both 2005 and
2004.
Our sales for the first six months of 2005 were $13,410,541 and were
$4,719,773 or 54.3% higher than the first six months of 2004. In the first half
of 2005, 76.5% of our sales consisted of dialysis concentrate sales, and sales
of our concentrates increased by over 43% in the first six months of 2005
compared to the first six months of 2004. We have been successful at developing
new business over the last year with our growth attributable to unit volume
increases across the breadth of our product lines. Our growth has been
attributable to both new dialysis centers purchasing products from our core
concentrate product lines and to a substantial purchase order from a single
distributor for which we recorded revenue of $3.1 million in the first half of
2005. Sales of our ancillary products grew by $1.5 million; primarily as a
result of increases in sales of specialty kits from this distributor's purchase
order.
Our overall gross profit for the first half of 2005 increased by
$102,663, or 7.5%, while our gross profit margins decreased by 4.8 percentage
points to sales. There were both recurring and non-recurring factors that
impacted gross profit margins including the expansion of our production
operations, transition costs as we moved order fulfillment operations between
regions, higher product delivery costs due to fuel increases and higher costs
for equipment maintenance caused by increased production volumes.
We made an investment in the geographic expansion of our business in
order to position the Company to take advantage of new business opportunities in
our market. In March of 2005, we added a third manufacturing facility in the
Southeastern United States that increased our costs of operation. We moved
certain production, related to business in that region, to the new plant from
our other facilities adding flexibility to our other facilities to absorb
additional volume growth. As a result, we added additional operating costs which
have not been completely offset by higher production volumes. We anticipate that
having a facility in the Southeastern United States will enable us to realize
improvements in distribution efficiencies and will mitigate the negative impact
from supplying the Southeastern United States from our other facilities.
We anticipate that our business volumes will grow in the future and
that the additional manufacturing capacity and personnel that have been added
will be more effectively utilized resulting in restoring gross profit margins to
levels experienced prior to the addition of the new facility.
Our strategy was to expeditiously penetrate the Southeastern region of
the U.S. and install a self sustaining operation in the region in a short period
of time. We successfully added over $5,000,000 in new annualized revenue over
the last nine months in that market. We have added a facility but have incurred
start-up costs for transition, above normal
9
distribution expense to ensure continuity in product supply and additional
operating costs for the new operation. We estimate that the transition costs
including above normal operating costs were equivalent to approximately two
gross profit margin percentage points in the first half of 2005. The remainder
of the cost increases are a result of additional production personnel and
resources. We anticipate improvement in our overall gross profit margins as we
increase our respective plant volumes in the future.
Selling, general and administrative expense decreased as a percentage
of sales by 3.3% in the first half of 2005 as compared to the first half of
2004, with the first half cost to sales of 10.0% as compared to 13.3% in the
first half of 2004. Overall, selling, general and administrative expense
increased by $182,738, or 15.8%. Approximately $120,000 of the increase was for
sales and administrative personnel to handle increased transaction activity. We
also incurred higher operating expenses for computer infrastructure costs and
other operating expenses related to our substantial sales growth. In addition,
we increased spending on development of our dialysate iron product by over
$22,000 from the first six months of last year. We have recognized $85,000 of
expenses related to the dialysate iron project in the first half of 2005.
Interest expense decreased by $2,437 in the first six months of 2005
compared to the prior period, primarily due to a lower effective interest rate
under our new line of credit.
We were the plaintiff in certain litigation that was settled in the
first quarter of 2005. We have recognized $137,468 of other income from this
settlement in the first half of 2005. A portion of the cash received was from
the exercise of stock options by the defendant during the first quarter of 2005
which totaled $103,750.
Net income in the first half of 2005 was $194,671, an improvement of
$59,830 over the first half results in 2004. Net income to sales was 1.5% in the
first half of 2005 as compared to net income to sales of 1.6% in the first half
of 2004. Basic earnings per share for the first half of 2005 aggregated $.02
which was equivalent to basic earnings per share for the first half of 2004.
Diluted earnings per share in the first half of 2005 were $.02 as compared to
$.01 for the first half of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our strategy is to expand our operations to serve dialysis providers
throughout the United States. We anticipate that, as a result of our existing
supply agreements, our customer relationships and our changing market dynamics,
we have the opportunity to capture substantial market share that will lead to
sustaining and increasing our profitable operations. We expect that we will
continue to realize substantial growth during the second half of 2005 and that
we will require additional working capital and capital expenditures to fund this
growth. In addition, over the next several years, we expect to make substantial
investments in our dialysate iron product in order to gain FDA approval to
market dialysate iron.
In 2004, we generated cash from our business operations and reinvested
those funds into the development and expansion of our business. Cash flow
generated from our business operations aggregated $840,000 in 2004 after
adjusting our earnings for non-cash charges against earnings for depreciation
and amortization. We realized substantial revenue growth of over 54% in the
first half of 2005. Based on current and prospective developments that we
anticipate in our business in the second half of 2005 and into 2006, we will
require additional working capital and capital expenditures to support our
development plans. Our current credit line coupled with positive cash flow from
operations is expected to provide the majority of the funding that we anticipate
that we may need to support future growth in our core concentrate and dialysis
supply business.
In addition to funding provided by operations, we intend to raise
additional capital. We continue to engage in discussions with various potential
financing sources including potential lenders, strategic partners and investors.
In addressing our need for additional working capital, we obtained a new
line of credit with a financial institution, at the end of the first quarter of
2005, which expands our borrowing capacity. This credit line has a $2.75 million
credit
10
limit. We are permitted to borrow up to 80% of our eligible accounts receivable
and 40% of eligible inventory up to $600,000. As of June 30, 2005, we had
borrowed $991,884 under this line of credit.
We are seeking FDA approval for our dialysate iron drug product. The
development and approval of drugs can be expensive and take a long time. The
development and approval costs may offset some or all of our earnings during the
approval process. We estimate the cash required to fund approval of our new iron
supplemented dialysate product will be between $5,000,000 - $7,000,000 over the
next several years. We may raise these funds ourselves or if we do not raise the
capital to fund this project ourselves, we may decide to seek a partner with
greater technical and financial resources to facilitate approval of this
product.
We plan to raise the capital required to expand our operations and fund our
new product development strategy through a combination of cash flow from
operations, debt or equity financing arrangements and/or licensing arrangements;
however, we may not be successful.
On July 29, 2005, we filed with the Securities and Exchange Commission (the
"SEC") a registration statement on Forms S-4 and SB-2 (the "Registration
Statement") with respect to an offer to exchange new common share purchase
warrants expiring January 26, 2006 for each of the 3,625,000 currently
outstanding common share purchase warrants expiring January 26, 2006 with an
exercise price of $4.50. The exercise price for the new common share purchase
warrants has not yet been determined. As the registration statement currently
is under review by the SEC, and we also may decide not to complete the exchange
offer, it is uncertain whether the Registration Statement will ever become
effective. We would not receive any proceeds from the completion of the
exchange offer, although we would receive proceeds upon the exercise of the new
common share purchase warrants. The net proceeds to the Company from the sale
of the 3,625,000 common shares underlying the new common share purchase warrants
will not be determinable until the exercise price has been set. We currently
contemplate using any net proceeds from the exercise of new common share
purchase warrants to add additional manufacturing facilities, for research and
product development and for clinical trials related to our efforts to obtain FDA
approval of our iron dialysate product and the financing of marketing and sales
activities.
If we are not successful in raising additional funds, we may be required to
alter our growth strategy, defer spending on business development, curtail
production expansion plans or take other measures to conserve our cash
resources.
In addition, the dialysis provider market that we serve is becoming
increasingly concentrated. As a result, our business is predominantly with
national and regional dialysis chains. If we were to lose a significant portion
of our business with major national and regional dialysis chains, it could have
a substantial negative impact on our cash flow and operating results. If we were
to lose a substantial portion of our business, it may have a detrimental impact
on our ability to continue our operations in their current form or to continue
to execute our business strategy. If we lost a substantial portion of our
business, we would be required to take actions to conserve our cash resources
and to mitigate the impact of any such losses on our business operations.
ITEM 3. CONTROLS AND PROCEDURES
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 our disclosure controls and
procedures as of June 30, 2005. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective as of June 30, 2005 in ensuring that information
required to be disclosed by us under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified under the Exchange Act
rules and forms. There was no change in our internal control over financial
reporting identified in connection with such evaluation that occurred during our
fiscal quarter ended June 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the 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. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were the plaintiff in certain litigation that was settled in the
first quarter of 2005. We received gross proceeds from this settlement of
approximately $241,000. We received cash of $130,000 during the first quarter of
2005 and $111,000 in the second quarter of 2005. A portion of the cash received
was from the exercise of stock options by the defendant during the first quarter
of 2005 which totaled $103,750. The balance of the settlement was paid May 4,
2005. As we have realized the full proceeds of the settlement, the Company has
recognized $137,468 of income from this settlement in the first quarter of 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During 2005, we issued 43,089 common shares upon exercise of warrants
which were issued to investors in a private placement. The offer and sale of the
above common shares upon exercise of the warrants were exempt from the
registration requirements of the Act under Section 4(2) of the Act. We realized
proceeds of $77,994, or $1.81 per share on average. Investors exercising these
private placement warrants received a legended certificate representing the
shares purchased.
We recently discovered that supplemental or new registration
statements were not filed with the SEC with respect to the sale of certain
shares pursuant to options granted under our stock option plan. Consequently,
certain shares were sold without registration under the Securities Act of 1933,
which may give rise to certain claims under Section 12(a)(1) of the Securities
Act. We do not believe that it is likely any such claims would be brought, we
would vigorously defend against any such claims and we believe that the
aggregate impact of such claims, if successful, would be immaterial. We also
believe it would be extremely difficult to determine which exact options or
shares were affected. On July 15, 2005, we have filed a new Form S-8
Registration Statement for the Rockwell Medical Technologies, Inc. 1997 Stock
Option Plan. During 2005, we had issued 54,999 unregistered common shares as a
result of the exercise of stock options by employees and realized proceeds of
$87,038.61, or $1.58 per share on average. During 2004, we issued 30,950
unregistered common shares as a result of the exercise of stock options by
employees and realized proceeds of $33,186.63, or $1.07 per share on average.
During 2003, we issued 12,066 unregistered common shares as a result of the
exercise of stock options by employees and realized proceeds of $15,330.30, or
$1.27 per share on average. During 2002, the Company issued 310,313 unregistered
common shares to employees and non-employees. The Company issued 4,000 common
shares to employees upon the exercise of stock options and realized proceeds of
$64,000, or $0.83, per share on average. The Company also issued 246,313 common
shares to consultants and other service providers upon exercise of options
issued in exchange for services. Such options had an aggregate fair market value
of $241,050 on the dates of the option grants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of its shareholders held May 26, 2005,
the shareholders re-elected Mr. Kenneth L. Holt to the board of directors as a
Class II director for a three year term expiring in 2008. Votes cast in favor
were 7,904,024 while no votes were cast against. Mr. Ronald D. Boyd continues to
serve as a Class I director with a term expiring in 2007 and Mr. Robert L.
Chioini continues to serve as a Class III director with a term expiring in 2006.
In addition, the shareholders approved a proposal to increase the
number of Common Shares with respect to which stock options may be granted under
the Company's 1997 Stock Option Plan from 3,900,000 Common Shares to 4,500,000
Common Shares in the aggregate. Votes cast in favor were 2,011,859 while votes
cast against were 540,402. Total abstentions were 11,000 and total non-votes
were 5,893,337.
No other matters were submitted to a vote of the shareholders at the annual
meeting.
12
ITEM 6. EXHIBITS
10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan, incorporated
by reference to the Proxy Statement for the Annual Meeting of
Shareholders filed on April 21, 2005.
31.1 Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of the Chief Financial Officer Pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of the Chief Executive Officer and Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Registrant)
Date: August 12, 2005 /s/ ROBERT L. CHIOINI
----------------------------------------
Robert L. Chioini
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 12, 2005 /s/ THOMAS E. KLEMA
----------------------------------------
Thomas E. Klema
Vice President of Finance,
Chief Financial Officer, Treasurer and
Secretary (Principal Financial Officer
and Principal Accounting Officer)
14
10-QSB EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
------------ -----------
EX-10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan,
incorporated by reference to the Proxy Statement for the Annual
Meeting of Shareholders filed on April 21, 2005.
EX-31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
EX-31.2 Certification of the Chief Financial Officer Pursuant to Rule
13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
EX-32.1 Certifications of the Chief Executive Officer and Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.