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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 SEPTEMBER 30, 2006
[ ] 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
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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
incorporation or organization) Identification No.)
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 [ ]
Indicate by check mark whether the issuer is a shell company (as defined by
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: 11,475,749 Common Shares
outstanding as of October 31, 2006.
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 SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(Whole Dollars)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
ASSETS
Cash and Cash Equivalents................................. $ 4,034,516 $ 299,031
Accounts Receivable, net of a reserve of $92,000 in 2006
and $70,000 in 2005.................................... 2,748,827 2,836,072
Inventory................................................. 2,547,135 2,051,819
Other Current Assets...................................... 257,776 193,158
------------ ------------
TOTAL CURRENT ASSETS................................... 9,588,254 5,380,080
Property and Equipment, net............................... 2,486,943 2,430,222
Intangible Assets......................................... 467,957 394,819
Goodwill.................................................. 920,745 920,745
Other Non-current Assets.................................. 129,584 134,794
------------ ------------
TOTAL ASSETS........................................... $ 13,593,483 $ 9,260,660
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short Term Borrowings..................................... $ -- $ 1,800,000
Notes Payable & Capitalized Lease Obligations............. 444,634 522,439
Accounts Payable.......................................... 2,425,081 1,795,393
Accrued Liabilities....................................... 488,741 530,749
Customer Deposits......................................... 386,682 33,558
------------ ------------
TOTAL CURRENT LIABILITIES.............................. 3,745,138 4,682,139
Long Term Notes Payable & Capitalized Lease Obligations... 414,632 733,723
Shareholders' Equity:
Common Shares, no par value, 11,475,749 and 8,886,948
shares issued and outstanding.......................... 23,052,274 12,628,539
Common Share Purchase Warrants, -0- and 3,591,385 shares
issued and outstanding................................. -- 1,414,876
Accumulated Deficit....................................... (13,618,561) (10,198,617)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................. 9,433,713 3,844,798
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 13,593,483 $ 9,260,660
============ ============
2
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
(WHOLE DOLLARS)
(Unaudited)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 2006 SEPT. 30, 2005 SEPT. 30, 2006 SEPT. 30, 2005
------------------ ------------------ ----------------- -----------------
SALES ................................. $ 7,379,201 $7,828,262 $ 19,410,357 $21,238,803
Cost of Sales ......................... 6,785,796 6,868,274 17,568,497 18,798,954
------------ ---------- ------------ -----------
GROSS PROFIT ....................... 593,405 959,988 1,841,860 2,439,849
Selling, General and Administrative ... 592,767 684,809 1,912,544 1,935,114
Research and Product Development ..... 1,621,821 74,010 3,381,643 159,831
------------ ---------- ------------ -----------
OPERATING INCOME (LOSS) ............ (1,621,183) 201,169 (3,452,327) 344,904
Other Income .......................... -- -- -- 137,468
Interest Income (Expense), net ........ (486) (44,992) 32,383 (131,524)
------------ ---------- ------------ -----------
NET INCOME (LOSS) .................. ($1,621,669) $ 156,177 ($3,419,944) $ 350,848
============ ========== ============ ===========
BASIC EARNINGS (LOSS) PER SHARE ....... ($.14) $ .02 ($.31) $ .04
DILUTED EARNINGS (LOSS) PER SHARE ..... ($.14) $ .02 ($.31) $ .04
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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
(WHOLE DOLLARS)
(Unaudited)
2006 2005
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ............................................... ($3,419,944) $ 350,848
Adjustments To Reconcile Net Income(Loss)To Net Cash Used For
Operating Activities:
Depreciation and Amortization ................................ 542,480 516,217
Loss on Disposal of Equipment ................................ 653 --
Changes in Assets and Liabilities:
Decrease (Increase) in Accounts Receivable ................ 87,245 (400,088)
(Increase) in Inventory ................................... (495,316) (410,066)
(Increase) in Other Assets ................................ (59,408) (565,535)
Increase (Decrease) in Accounts Payable ................... 629,688 (621,575)
Increase in Customer Deposits ............................. 353,124 1,067,340
(Decrease) in Other Liabilities ........................... (42,008) (81,173)
------------ -----------
Changes in Assets and Liabilities ...................... 473,325 (1,011,097)
------------ -----------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES ........ (2,403,486) (144,032)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment ..................................... (522,937) (445,813)
Purchase of Intangible Assets ............................. (104,115) (56,478)
------------ -----------
CASH (USED IN) INVESTING ACTIVITIES ................. (627,052) (502,291)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowing on Line of Credit ................. -- 5,537,395
Payments on Line of Credit ................................ (1,800,000) (4,590,077)
Payments on Notes Payable and Capital Lease Obligations ... (442,836) (257,030)
Issuance of Common Shares ................................. 9,008,859 241,165
------------ -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ..... 6,766,023 931,453
INCREASE IN CASH ................................................... 3,735,485 285,130
CASH AT BEGINNING OF PERIOD ........................................ 299,031 166,195
------------ -----------
CASH AT END OF PERIOD .............................................. $ 4,034,516 $ 451,325
============ ===========
Supplemental Cash Flow Disclosure:
Interest Paid .......................................... $ 102,304 $ 131,621
============ ===========
Non-Cash Investing and Financing Activity -
Equipment Acquired Under Capital Lease Obligations ..... $ 45,940 $ 64,409
============ ===========
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
End Stage Renal Disease "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.
We are regulated by the Federal Food and Drug Administration 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 Dry
Acid Concentrate product line and our Dri-Sate Mixer.
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 and nine month periods ended September 30, 2006
are not necessarily indicative of the results to be expected for the year ending
December 31, 2006. You should read our unaudited interim financial statements
together with the financial statements and related footnotes for the year ended
December 31, 2005 included in our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005. Our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005 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 most 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 September 30, 2006, we had
customer deposits of $386,682.
For the quarter ended March 31, 2006, we reached a settlement with a
customer related to its breach of several purchase contracts. The settlement
provided for payment of a total amount of $755,000 in exchange for release of
the customer's future obligations under these contracts. All of this settlement
has been recognized as a component of revenue in the quarter ended March 31,
2006 and the settlement amount has been fully realized.
5
RESEARCH AND PRODUCT DEVELOPMENT
We recognize research and product development costs as expenses as
incurred. We have reclassified research and product development costs incurred
in 2005 to this statement line from selling, general and administrative expense
in 2005 to conform with the current year presentation for research and product
development expense.
We have entered into a number of research and development related contracts
for safety, pharmacology and toxicology testing of our iron dialysate drug
product under which we made commitments to spend $3.5 million. Services under
the contracts will be performed over periods ranging from 3 to 12 months. We are
recognizing the costs of these contracts as research and development expense
over the periods in which the testing is being performed and on a basis
reflective of the level of activity under those contracts in each period. We
recognized approximately $950,000 and $2,125,000 of expense under these
contracts during the three and nine months ended September 30, 2006,
respectively. As of September 30, 2006, we had made payments in advance of
services performed under these contracts which have been recorded as prepaid
expenses totaling $130,973 and approximately $1.25 million will be funded in
future periods.
In addition, we have incurred other consulting and laboratory costs
pertaining to this testing throughout 2006. We have also incurred other research
and development costs for the planning and preparation for human clinical trials
for our iron dialysate drug product.
STOCK OPTIONS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R ("SFAS 123R"), a revision to Statement No. 123, "Accounting
for Stock-Based Compensation." This standard requires us to measure the cost of
employee services received in exchange for equity awards, including stock
options, based on the grant date fair value of the awards. The cost will be
recognized as compensation expense over the vesting period of the awards. The
Company has adopted SFAS 123R as of January 1, 2006. The standard provides for a
modified prospective application. Under this method, the Company will begin
recognizing compensation cost for equity based compensation for all new or
modified grants after the date of adoption. In addition, the standard requires
the Company to recognize compensation cost for the remaining unvested portion of
prior option grants over the remaining service period. All of the Company's
options granted in 2005 and prior years were fully vested as of December 31,
2005, and therefore, the Company has not recorded any expense for options
granted prior to 2006 upon adoption of SFAS 123R. The Company did not grant any
stock options in the first nine months of 2006.
Our reported and pro forma information for the three and nine months ended
September 30:
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, 2006 Sept. 30, 2005 Sept. 30, 2006 Sept. 30, 2005
-------------- -------------- -------------- --------------
As reported net income (loss) available
to common shareholders ($1,621,669) $ 156,177 ($3,419,944) $ 350,848
Less: Stock based compensation expense determined
under the fair market value method, net of tax -- (606,814) -- (1,820,442)
----------- ---------- ----------- ------------
Pro forma net income (loss) ($1,621,669) ($521,358) ($3,419,944) ($1,469,594)
=========== ========== =========== ============
As reported basic earnings (loss) per share ($0.14) $ 0.02 ($0.31) $ 0.04
As reported diluted earnings (loss) per share ($0.14) $ 0.02 ($0.31) $ 0.04
Pro forma earnings (loss) per share and
diluted earnings (loss) per share ($0.14) ($0.06) ($0.31) ($0.17)
6
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 anti-dilutive effect. Actual
weighted average shares outstanding used in calculating basic and diluted
earnings per share were:
Three months ended Nine months ended
Sept. 30, Sept. 30,
---------------------- ----------------------
2006 2005 2006 2005
---------- --------- ---------- ---------
Basic Weighted Average Shares Outstanding 11,463,210 8,633,866 11,090,338 8,680,952
Effect of Dilutive Securities -- 681,160 -- 714,845
---------- --------- ---------- ---------
Diluted Weighted Average Shares Outstanding 11,463,210 9,315,026 11,090,338 9,395,797
========== ========= ========== =========
3. LINE OF CREDIT
On March 29, 2006, we renewed our 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 our eligible accounts
receivable and up to 40% of our 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 April 1, 2007. As of September 30, 2006, we had no outstanding
borrowings under this line of credit.
4. WARRANT EXERCISE & STOCK PURCHASE
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 with an exercise price of $3.90 ("New
Warrants") for each of the 3,625,000 then outstanding common share purchase
warrants expiring January 26, 2006 with an exercise price of $4.50 ("Old
Warrants"). The SEC declared the Registration Statement effective on October 20,
2005. Old Warrant holders were required to tender their Old Warrants by November
28, 2005 to participate in the exchange. Both Old and New Warrants expired
January 26, 2006.
We raised gross proceeds of $9,363,982 upon exercise of New Warrants issued
in the exchange prior to their expiration on January 26, 2006. We issued
2,401,021 Common Shares resulting from New Warrant exercises of which 58,615
were issued in 2005 and the remainder in January 2006. All unexercised publicly
traded warrants expired on January 26, 2006. Gross proceeds of the warrant
exercises were offset by costs of the offering of approximately $941,000. Net
proceeds received during the quarter ended March 31, 2006 were $8,194,036.
On June 22, 2006 we issued 111,895 common shares with respect to a private
placement of our common shares. The gross proceeds of the offering were
$500,000. We realized net proceeds after legal and other offering expenses of
approximately $400,000.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, our Registration Statement on Forms SB-2
and S-4(file no. 333-127048), effective October 20, 2005, 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, sale and
distribution of hemodialysis concentrates, dialysis kits and ancillary products
used in the dialysis process. We have gained market share each year since our
inception in 1996. We increased our sales by 54% in 2005 over 2004 and have a
five year compound annual growth rate of sales of 30%. Sales in our core
concentrate business grew 38% in 2005 and continue to show increases of 17%
domestically in the first nine months of 2006. Our plan is to grow and develop
our dialysis products business including the development and introduction of new
dialysis drugs, nutrients and solutions.
The dialysis supply market is very competitive and is characterized by
having a few dialysis providers treating the majority of chronic hemodialysis
patients in the United States. Until 2006, two of the three largest dialysis
chains manufactured their own dialysis solutions and competed against us for
independent business. One of those chains, Gambro, sold their clinic business to
DaVita, Inc., our largest customer, and subsequently has stated its intention to
exit the dialysis concentrate market at the end of 2006. As a result of Gambro's
pending exit from the concentrate market, we anticipate that we will increase
our business in certain markets and regions. As a result of this opportunity, we
may add facilities and equipment and incur additional costs that are greater
than the additional revenue generated from these initiatives until sufficient
volume growth is realized to offset the additional operating expenses.
We are seeking to gain FDA approval for our iron supplemented dialysate
product, Soluble Ferric Pyrophosphate (SFP). We believe SFP has the potential to
compete in the iron maintenance therapy market. The cost to obtain regulatory
approval for a drug in the United States is expensive and can take a long time.
Over the next two years, we expect to spend at least $7-9 million to complete
testing and file for regulatory approval in the United States. We completed an
equity financing transaction in the first quarter of 2006 which we believe
raised sufficient cash resources to fund the majority of these expected costs
over the next year.
We expect to incur substantial costs to conduct required clinical trials
and to obtain marketing approval which we expect will offset some or all of any
profits generated from sales of our existing products during the approval
process. We anticipate that we may report losses for the duration of the
approval process. We expect this process to take several years and we might not
be successful.
8
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
SALES
Our sales in the third quarter of 2006 were $7,379,201, a decrease of
$449,061 or 5.7% from the third quarter of 2005. Third quarter 2006 sales
increased from the second quarter of 2006 by $1.5 million or 25.7% with a
significant portion of the increase due to increased sales to our major
international distributors. While our sales increased sequentially in the third
quarter, sales to these major international distributors were approximately $1.5
million less than in the third quarter of 2005 which was the primary reason for
decreased sales compared to the third quarter of last year. Excluding sales to
these major international distributors, our other sales increased by over $1
million or 20% compared to the third quarter last year.
We anticipate that we will continue to realize sales growth with other
existing and new customers this year, both in the United States and abroad.
While we expect our business to grow substantially in the future, we also
anticipate that our sales results may be impacted by volatility or inconsistency
in order patterns and other changes to our customers and product mix going
forward.
Our sales in the first nine months of 2006 were $19,410,357 and were
$1,828,447 or 8.6% lower than our sales in the first nine months of 2005.
Similarly, sales to our major international distributors decreased by $4.5
million in the first nine months of 2006 compared to the first nine months of
2005. Excluding these sales to major international distributors our domestic
sales increased by $2.7 million or 17%.
In the first nine months of 2006, we experienced a reduction in sales to
our major international distributors of $4.5 million. In 2005, one of these
international distributors placed a large purchase order with us aggregating
$6.5 million in the first quarter of 2005 which was fulfilled throughout 2005.
This distributor subsequently placed a $13 million purchase order but only
requested minimal deliveries under this purchase order until the third quarter
of 2006. During the third quarter, our international distributors increased
their order requirements. We anticipate that we will continue to realize
substantial orders from our major international distributors in the fourth
quarter of 2006 and that our sales will increase sequentially over the third
quarter as a result.
The domestic hemodialysis service provider market has experienced
substantial consolidation with the four largest dialysis service provider chains
consolidating into two during the last year. DaVita, Inc., our largest customer,
completed its acquisition of Gambro's clinic division, the third largest
dialysis provider, in November of 2005. At the end of March of 2006, Fresenius
Medical Care completed its acquisition of Renal Care Group, Inc., the fourth
largest dialysis provider in the United States. Together, DaVita and Fresenius
are estimated to provide treatments to over 60% of the chronic hemodialysis
patient population in the United States.
We compete against both Fresenius and Gambro, which remained in the
dialysis products business following the sale of its clinic business to DaVita.
Gambro plans to exit the dialysis solutions business at the end of 2006. Renal
Care Group, Inc., was a customer of ours until it was acquired by Fresenius and
with whom we had several supply contracts which were breached by the customer.
We entered into a settlement with Renal Care Group, Inc. for these prematurely
terminated contracts. In the first quarter of 2006, approximately 12% of our
revenue was related to this settlement. Future revenue from the former RCG
clinics is anticipated to be immaterial. Our other sales growth in the first
nine months of 2006 compared to the first nine of 2005 was 23% after eliminating
Renal Care Group, Inc. revenue and excluding the impact of orders to major
international distributors.
In the first nine months of 2006, 53% of our sales were to customers other
than the two major dialysis chains and the major international distributors
discussed above. This segment of our business consists of other national and
regional chains along with other independent accounts and grew by 35.8% over the
first nine months of 2005.
9
All of the decrease in our product sales of $1.8 million in the first nine
months of 2006 was due to a $4.5 million reduction in dialysis kit sales sold
internationally through a major international distributor. Sales of our dialysis
concentrate product lines, which represented over 93% of our sales in the first
nine months of 2006, increased over 13.1% in the first nine months of 2006
compared to the first nine months of 2005.
GROSS PROFIT
Gross profit increased by 27.6% sequentially from the second quarter of
2006 on a sales increase of 25.7% in the third quarter of 2006. Our average
actual selling prices on our concentrate products increased approximately 1.5%
compared to the second quarter of 2006 on our concentrate products. However,
gross profit in the third quarter of 2006 was $593,405 and was $366,583 less
than the third quarter of 2005. Gross profit margins were 4.2% lower than the
third quarter of 2005. Gross profit margins were impacted by higher operating
costs, net of price increases of approximately 2.3% of sales and due to
inventory write-offs of 1.9% of sales in the third quarter.
We incurred lower gross profit margins due to a combination of factors
including unfavorable changes to product mix, lower sales volumes of higher
margin products, higher operating costs and higher costs for deliveries.
Delivery costs were 1.6 percentage points of the decrease in margins with 1
percentage point due to recent addition of fleet resources to support our
current and anticipated domestic growth and .6 percentage points due to higher
fuel costs than last year. We have also incurred higher operating costs for
materials, packaging and facility operating costs during 2006.
Gross profit in the first nine months of 2006 was $1,841,860 and was
$598,000 below the first nine months of 2005. Gross profit margins in the first
nine months of 2006 were 9.5% compared to 11.5% in the first nine months of last
year. Gross profit margins decreased by 2.0 percentage points compared to the
first nine months of 2005. The decrease in gross profit margins was primarily
caused by lower sales volume of dialysis kit products and higher operating
costs. Increased inflationary pressures from higher fuel, material and operating
costs have had a more significant impact on margins during 2006. In addition, we
have recently added fleet resources to support our current and anticipated
growth which reduced year to date gross profit margins approximately .4
percentage points from expected operating levels. Approximately .8 percentage
points of the decrease in gross profit margins was due to inventory write-offs.
We anticipate that we will experience changes in our customer and product
mix in future quarters that may also impact our gross profit. We anticipate that
as our business grows our margins should benefit from increased plant
utilization. We may also add manufacturing and distribution resources to support
our business growth and these resources may reduce our gross profit margins
until sufficient new volume is realized. Since we sell a wide range of products
with varying profit margins and to customers with varying order patterns, we
expect that the gross profit we generate and our gross profit margins may vary
from period to period.
SELLING, GENERAL & ADMINISTRATIVE
Selling, general and administrative expenses decreased to 8.0% of sales in
the third quarter of 2006 compared to 8.7% of sales in the third quarter of
2005. Selling, general and administrative expense in the third quarter of 2006
was $592,767 and decreased 13.4% over the third quarter of 2005. Similarly,
selling, general and administrative expenses in the first nine months of 2006
were $1,912,544 and decreased $22,570 or 1.2% compared to the first nine months
of 2005. We realized reduced operating expenses through efforts to control
discretionary spending.
RESEARCH & PRODUCT DEVELOPMENT
Research and product development expense was $1,621,821 in the third
quarter of 2006 and increased by $1,547,811 over the third quarter of 2005.
Research and product development spending during the first nine months of 2006
was $3,381,643 and increased $3,221,812 over the first nine months of 2005. We
increased spending for product development and regulatory approval for Soluble
Ferric Pyrophosphate (SFP) our proprietary dialysate iron product used in the
treatment of anemia.
10
OTHER INCOME & EXPENSE
In the first quarter of 2006, we raised approximately $8.3 million of
equity capital after expenses. We repaid all of our borrowings under our line of
credit totaling $1,800,000 and invested the balance of the proceeds in short
term investments. In the third quarter of 2006, we generated interest income of
$25,066 from these short term investments. Overall, our net interest income and
expense was an expense of $486 in the third quarter of 2006, and represented an
earnings improvement of $44,506 from our net interest expense reported for the
third quarter of 2005. Similarly, year to date interest income was $134,687 and
our net interest income, net of interest expense, of $32,383, represented an
earnings improvement of $163,907 compared to the first nine months of last year.
In the first quarter of 2005, we recognized income from proceeds of a
litigation settlement aggregating $137,468.
NET INCOME (LOSS)
Our net (loss) in the third quarter of 2006 was ($1,621,669) or ($.14) per
share as compared to net income of $156,177, or $.02 per share in the third
quarter of 2005. The decrease in net earnings per share of $.16 from the third
quarter of 2005 was largely attributable to increased spending on research and
product development for SFP of $.14 per share and the remainder attributable to
reduced international orders partially offset by domestic sales growth.
Our net (loss) for the first nine months of 2006 was ($3,419,944) as
compared to a profit of $350,848 in the first nine months of last year. Net
(loss) per share of ($.31) was primarily attributable to research and product
development expenses of $.31 per share. Higher research and product development
spending in the first nine months of 2006 of $3.2 million was the primary reason
for the overall decrease in net income of approximately $3.7 million compared to
the first nine months of 2005 with the remainder attributable to reduced
international orders partially offset by domestic sales growth.
LIQUIDITY AND CAPITAL RESOURCES
We have two major areas of strategic focus in our business. First, we plan
to develop our dialysis concentrate solutions and ancillary supply business.
Second, we plan to expand our product offering to include drugs and vitamins
administered to dialysis patients. We are seeking FDA approval for SFP, our iron
supplemented dialysate product. We plan to develop and offer new and innovative
products to the dialysis market.
We believe that we will continue to grow and expand our business. We
anticipate that our sales growth in 2007 may be substantial based on the
changing dynamics in our market and that we will require additional working
capital and capital expenditures to fund this growth. In order to fund facility
expansions, a larger distribution fleet and certain capital expenditures, we
intend to enter into lease financing arrangements. We anticipate that our
working capital line of $2.75 million is sufficient to meet our requirements for
working capital expansion in the year ahead. No borrowings under this line are
anticipated in 2006.
A second major area of focus is to expand our product offering to include
drugs and vitamins administered to dialysis patients using our dialysis
concentrate solutions as the delivery method. We are seeking FDA approval for
our dialysate iron drug product, SFP. The development and approval of drugs can
be expensive and take a long time. Drug development and approval costs will
offset some or all of any earnings during the approval process and we expect to
incur losses in the future. We estimate the cash requirements for SFP
development in the next four quarters to be approximately $5,000,000. We plan to
conduct clinical trials during 2007 and we will fund several studies in 2007 and
into 2008.
As of September 30, 2006, our liquidity position included $4,034,516 in
cash and $2.75 million in unused borrowing capacity under our line of credit. We
anticipate that these cash resources coupled with cash flow generated from our
operations will be sufficient to fund our cash requirements for the year ahead.
However, there is no guarantee that we will
11
not require additional funds to execute our strategy or pursue other business
development opportunities. If we raise additional funds in the future, we will
evaluate both debt and equity financing as potential sources of funds.
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 September 30, 2006. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective as of September 30, 2006 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 September 30, 2006 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
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: November 10, 2006 /s/ ROBERT L. CHIOINI
----------------------------------------
Robert L. Chioini
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: November 10, 2006 /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
------------ -----------
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.
15