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| RMTI > SEC Filings for RMTI > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
• We operate in a very competitive market against substantially larger competitors with greater resources.
• Our new drug product requires FDA approval and expensive clinical trials before it can be marketed.
• Even if our new drug product is approved by the FDA it may not be successfully marketed.
• If prices of the key commodities we purchase change significantly, we may not be able to continue improving or sustain our current gross profit margins and our business may remain unprofitable.
• We depend on government funding of healthcare.
• We may not have sufficient cash to fund future growth or SFP development.
• Orders from our international distributors may not result in recurring revenue.
• We depend on key personnel.
• Our business is highly regulated.
• We depend on contract research organizations and consultants to manage and conduct our clinical trials and if they fail to follow our protocol or meet FDA regulatory requirements our clinical trial data and results could be compromised causing us to delay our development plans or have to do more testing than planned.
• Foreign approvals to market our new drug products may be difficult to obtain.
• Health care reform could adversely affect our business.
• We may not have sufficient products liability insurance.
• Our Board of Directors is subject to potential deadlock.
• Shares eligible for future sale may affect the market price of our common shares.
• The market price of our securities may be volatile.
• Voting control and anti-takeover provisions reduce the likelihood that you will receive a takeover premium.
• We do not anticipate paying dividends in the foreseeable future.
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.
Overview and Recent Developments
We currently operate in a single business segment, the manufacture and
distribution of hemodialysis concentrates and ancillary products used in the
kidney dialysis process. We have gained domestic market share each year since
our inception in 1996 and we believe we currently service a significant share of
the dialysis market in the United States. 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 end stage renal disease
market. We are primarily focused on the approval of the use of our lead drug
candidate, Soluble Ferric Pyrophosphate, or SFP, in dialysate but are also
seeking to increase our pipeline of products, including SFP extensions into
other applications as well as other technologies. During the first half of 2009,
in furtherance of this strategy, we added two key leadership positions to our
specialty pharmaceutical development team, a Chief Scientific Officer in the
second quarter of 2009 and a Vice President of Clinical Development and Medical
Affairs in the first quarter of 2009.
We are currently conducting a Phase IIb human clinical trial of SFP.
Obtaining regulatory approval for a drug in the United States is expensive and
can take several years. We expect to spend approximately $2.5-$3.5 million in
the second half of 2009 to complete our Phase IIb clinical trials and other
related development costs. Once we complete the Phase IIb 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.
In the first half of 2009, sales in our commercial business operations
increased 4.9% and our gross profit margins improved significantly following a
decrease in gross profit margins in 2008. While we experienced substantial sales
growth over the last several years, we also experienced unprecedented increases
in the costs for chemicals, packaging materials and fuel. Price increases we
implemented in response did not keep pace with the cost increases. As a result,
our gross profit and gross profit margins decreased significantly in 2008.
We took actions in the last quarter of 2008 that improved our margins in the
first half of 2009, including raising prices, changing vendors, changing our
product mix and reducing operating costs. Softening of commodity prices also
contributed to the improvement of our gross profit margins during that period.
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.
Results of Operations for the Three and Six Months Ended June 30, 2009 and
June 30, 2008
Sales
Sales in the second quarter of 2009 were $13.0 million, an increase of
$0.8 million or 6.8% over the second quarter of 2008. For the second quarter of
2009, our international sales increased by $0.3 million and our domestic sales
increased by $0.5 million compared to the second quarter of 2008. Sales in the
first six months of 2009 increased $1.2 million or 4.9% compared to the first
six months of 2008 with domestic sales increasing $1.1 million and international
sales accounting for the remainder of the increase. Price increases on maturing
contracts accounted for most of the increases with the remainder attributable to
increased unit volumes primarily in our Dri-Sate dry acid concentrate.
Gross Profit
Gross profit in the second quarter of 2009 was $1.9 million compared to
$1.0 million in the second quarter of 2008 and was $3.1 million in the first six
months of 2009 compared to $1.7 million in the first six months of 2008. Gross
profit margins increased to 14.3% from 8.0% in the second quarter of 2008 and to
11.8% in the first six months of 2009 compared to 6.8% in the first six months
in 2008. Substantial changes in product and customer mix in the second quarter
and first six months of 2009 compared to the comparable periods of 2008 were the
primary contributors to improved gross profit margins. Domestic sales migrated
toward our Dri-Sate dry acid concentrate products, which provide a cost
effective alternative to higher cost per treatment liquid products and costs us
less to deliver than liquid products. Our Dri-Sate unit volumes increased by
18.5% and 30% compared to the second quarter and first six months of 2008.
Customers also migrated toward lower cost formulations, which improved margins
while not increasing costs to our customers. The increase in gross profit was
also due to reductions in material costs, fuel costs and operating expenses. 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 as well as management actions to gain efficiencies and reduce operating
costs.
We reclassified certain quality assurance and operations management expenses
totaling $120,000 to cost of sales from selling, general and administrative
expense for the second quarter of 2008 and $260,000 for the first six months of
2008 to maintain comparability of prior year results with the current year
presentation.
Selling, General and Administrative Expense
Selling, general and administrative expense, or "SG&A," during the second
quarter of 2009 was $1.6 million compared to $1.3 million in the second quarter
of 2008, an increase of $0.3 million or 19%. Non-cash charges for equity
compensation were $0.5 million in the second quarter of 2009 compared to
$0.3 million in the second quarter of 2008. Personnel costs increased
approximately $0.1 million as a result of increased headcount in support of our
business growth and routine wage increases.
SG&A during the first half of 2009 was $3.1 million compared to $2.6 million
in the first half of 2008, an increase of $0.5 million or 20%. Non-cash charges
for equity compensation were $1.0 million in the first six months of 2009
compared to $0.7 million in the first six months of 2008. The primary drivers of
these cost increases were
approximately $0.15 million in higher personnel costs and $0.1 million for
additional information technology costs in support of our business growth.
Research and Development
Research and development costs were $2.0 million and $3.3 million in the
second quarter and first six months of 2009, respectively, compared to
$0.8 million and $1.6 million in the comparable periods of 2008, respectively.
While spending in both years was primarily devoted to development and approval
of SFP, the increases in research and development costs in 2009 were primarily
due to significantly increased activity relating to the conduct of the Phase IIb
clinical trial and unanticipated costs needed to accelerate completion of the
trial enrollment process. We anticipate spending approximately $2.5 to
$3.5 million in the second half of 2009 for SFP related development spending.
Interest Income, Net
Our net interest expense was $7,000 in the second quarter of 2009 compared to
net interest income of $20,000 in the second quarter of 2008. Interest expense
in the first six months of 2009 was $16,500 compared to $164,700 in net interest
income in the first six months of 2008. The changes were due to fewer funds
available for investment and our decision to hold funds in the form of cash due
to substantially lower market interest rates compared to 2008.
Liquidity and Capital Resources
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, vitamins and therapeutic products 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.
We expect to spend approximately $2.5 to $3.5 million in the second half of
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, in which we
raised $12.8 million. Our current assets exceeded our current liabilities by
approximately $5.0 million as of June 30, 2009 and included $3.3 million in
cash. In the first six months of 2009, we used $2.2 million in cash, compared to
$1.4 million in the first six months of 2008, and our cash used in operations
increased to $1.7 million in the first six months of 2009 from $0.6 million in
the first six months of 2008. The increase in cash used in operations during
2009 was primarily the result of a $1.7 million increase in research and
development expenditures compared to 2008. Working capital requirements in our
core business operations included a reduction in accounts payable of
$0.2 million attributable to a $0.4 million reduction in raw material inventory,
and a decrease in other liabilities of $0.5 million. Non-cash charges against
operating results were $1.5 million in the first six months 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 our improved operating results and current stability in the
markets for our key commodity materials.
We believe our current cash resources and the cash we expect to generate from
operations will be sufficient to fund the completion of our Phase IIb clinical
trial as well as our ordinary operating cash requirements. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
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.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
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, 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.
Changes in Internal Control over Financial Reporting
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
June 30, 2009 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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