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RMTI > SEC Filings for RMTI > Form 10-Q on 7-Aug-2012All Recent SEC Filings

Show all filings for ROCKWELL MEDICAL, INC.

Form 10-Q for ROCKWELL MEDICAL, INC.


7-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Forward-Looking Statements

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

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed below and elsewhere in this report, and from time to time in our other reports filed with the Securities and Exchange Commission, including, without limitation, in "Item 1A - Risk Factors" in our Form 10-K for the year ended December 31, 2011 and our Form 10-Q for the quarter ended March 31, 2012.

The dialysis provider market is highly concentrated in national and regional dialysis chains that account for the majority of our domestic revenue. Our business is substantially dependent on a few customers that account for a substantial portion of our sales. The loss of any of these customers would have a material adverse effect on our results of operations and cash flow.

We operate in a very competitive market against a substantially larger competitor with greater resources.

Our lead drug candidate requires FDA approval and expensive clinical trials before it can be marketed.


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Even if we receive FDA approval to manufacture and market our new drug products, we may not be able to market them successfully.

We may not be successful in maintaining our gross profit margins.

We have incurred net losses in each of the last several years and we may not achieve or sustain profitability.

We may require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.

We depend on government funding of healthcare.

Health care reform could adversely affect our business.

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 independent clinicians 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 delaying our development plans or causing us to do more testing than planned.

Foreign approvals to market our new drug products may be difficult to obtain.

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.

We could have a material weakness in our internal control over financial reporting, which, until remedied, could result in errors in our financial statements requiring restatement of our financial statements. As a result, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

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 flow 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.


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Overview and Recent Developments

Rockwell Medical operates in a single business segment as a specialty pharmaceutical company offering innovative products targeting hemodialysis chronic kidney disease. As an established manufacturer delivering high-quality hemodialysis concentrates to dialysis providers and distributors in the U.S. and abroad, we provide products used to maintain human life, remove toxins and replace critical nutrients in the dialysis patient's bloodstream.

We are currently developing unique, proprietary renal drug therapies. These novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience and outcome.

Our strategy is to develop high potential drug candidates while also expanding our dialysis products business, which had sales of $24.2 million in the first half of 2012. Our dialysis products business is cash flow positive excluding research and development expenses, and provides an in-place sales and distribution infrastructure and conduit with established business relationships to sell our drug products into the dialysis market.

Our product development costs were primarily related to SFP, our lead drug candidate. We believe our SFP product has unique and substantive benefits compared to current treatment options and has the potential to compete in the iron delivery therapy market. Obtaining regulatory approval for a drug in the United States is expensive and can take several years. We expect to incur substantial costs relating to product testing and development over the next several years and expect to incur losses from operations until SFP is approved and marketed. In addition to our SFP testing and approval process, we plan to spend additional amounts on drug development of extensions of SFP technology as well as on other opportunities.

In 2011, we acquired the right to manufacture Calcitriol, a generic vitamin D analogue, indicated in the treatment of secondary hyperparathyroidism, which is common in ESRD patients. We are in the process of obtaining FDA approval to make a change in manufacturing locations and expect to begin marketing Calcitriol in early 2013.

As of June 30, 2012 we had $20.4 million in cash and investments.

Results of Operations for the Three and Six Months Ended June 30, 2012 and June 30, 2011

Sales

Sales in the second quarter of 2012 were $12.1 million compared to $11.8 million in the second quarter of 2011. Sales increased $0.3 million or 2.7% due to increased domestic sales of $0.2 million and increased international sales of $0.1 million compared to the second quarter of 2011.

Sales in the first six months of 2012 were $24.2 million compared to $25.1 million in the first six months of 2011. The $0.9 million decrease in sales was attributable to lower sales to a single international distributor totaling $1.4 million in the first half of 2011. Other international sales increased 32% or $650,000 while other domestic sales decreased $0.2 million. Domestic sales were $0.2 million lower primarily due to continuing changes in product mix from liquid to dry acid concentrate as well as due to the loss of some smaller chain accounts that were acquired by other customers for whom we do not supply products. Over the last year, many customers have converted to our dry acid concentrate product line, which lowers providers' cost per treatment and reduces our sales, but improves our gross profit margins by reducing shipping costs.


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Gross Profit

Gross profit margins in the second quarter of 2012 were 14.2% compared to 9.1% in the second quarter of 2011, an increase of 5.1 percentage points. Gross profit dollars in the second quarter were $1.7 million an increase of $0.6 million or 61% compared to the second quarter of last year. These increases were due to improving product mix, increased sales of Dri-sate, reduced operating expenses and other new business compared to the second quarter of 2011.

For the six months ended June 30, 2012, gross profit was $3.3 million compared to $2.7 million in the first six months of 2011. Gross profit margins were 13.9% compared to 10.8% in the first six months of 2011. Gross profit increased by $0.6 million primarily due to an improving product and customer mix as well as lower operating costs. We realized lower operating costs due to lower personnel and insurance costs.

Selling, General and Administrative Expense

Selling, general and administrative expense during the second quarter of 2012 was $2.8 million, an increase of $0.5 million or 19.0% compared to the second quarter of 2011. The increase was largely due to non-cash equity compensation which was $0.4 million greater than the second quarter of 2011.

Selling, general and administrative expense for the first six months of 2012 was $5.7 million compared to $4.6 million in the first six months of 2011. The $1.1 million increase was largely due to non-cash equity compensation which was $0.8 million greater than the first six months of 2011.

Research and Development

Research and development costs were $10.9 million and $3.3 million in the second quarter of 2012 and 2011, respectively. Research and development costs for the first six months of 2012 were $20.3 million and were $5.7 million for the first six months of 2011. Spending in both years was primarily for clinical testing and development of SFP with the increase in 2012 due to the increased testing associated with the SFP Phase III clinical program.

Interest and Investment Income, Net

Our net interest and investment income in the second quarter of 2012 was essentially unchanged compared to net interest and investment income in the second quarter of 2011. Our net interest and investment income for the first six months of 2012 was $187,000 compared to $162,000 in the first half of 2011. The increase in net interest and investment income in the first six months of 2012 was the result of slightly higher yields on our investments.

Liquidity and Capital Resources

Our strategy is centered on obtaining regulatory approval to market SFP and developing other high potential drug candidates, while also expanding our dialysis products business. We expect to expend substantial amounts in support of our clinical development plan and regulatory approval of SFP and its extensions and other product development opportunities. These initiatives will require the expenditure of substantial cash resources. We expect our cash needs for research and development spending to be significant over the next two years as we execute our clinical development program for SFP and other development initiatives. We made the final cash payment of $550,000 in the third quarter of 2012 in connection with our acquisition of the right to market Calcitriol and funding will be necessary to obtain FDA approval for our contract manufacturer to manufacture the product for us. However, these expenditures relating to Calcitriol are not expected to have a material effect on our liquidity or financial position.


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Our cash resources include cash generated from our business operations and from proceeds of equity offerings. As of June 30, 2012, we had $20.4 million in cash and investments. In February 2012, we completed a common stock offering realizing $17.5 million in gross proceeds and approximately $16.2 million in net proceeds. We also realized approximately $1.6 million in proceeds from the exercise of warrants during the first half of 2012. We expect to generate additional cash from our business operations and from other sources, which may include the exercise of outstanding warrants, the possible out-licensing of SFP outside the United States, out-licensing of certain SFP uses outside the dialysis market, and other capital raising alternatives as needed.

Our current assets exceeded our current liabilities by $12.0 million as of June 30, 2012. During the first half of 2012, we used $14.8 million in cash for our operations. Our research and development expenses were $20.3 million in the first half of 2012.

We believe our current and prospective sources of cash resources are sufficient to fund our anticipated research and development activities as well as our ordinary course operating cash requirements in 2012. We expect to generate positive cash flow from operations in 2012, excluding the effect of our research and development expenses, assuming relative stability in the markets for fuel and our key raw materials and relatively stable revenues. In addition, we may realize substantial cash proceeds from in-the-money warrants that expire in 2012 aggregating approximately $8.0 million. However, if we use more cash than anticipated for SFP development, if we are required to do more testing than expected, if the assumptions underlying our cash flow projections prove to be incorrect, or if we pursue opportunities to expand our business, we may 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. We explore opportunities from time to time to increase our cash resources, to reduce our liquidity risk and to have resources available to permit us to pursue expansion opportunities. Alternatively, we may seek to enter into product development arrangements with an international partner in order to fully execute our strategic plan. We may also evaluate alternative sources of business development funding, licensing agreements with international marketing partners, sub-licensing of certain products for certain markets and other potential funding sources.

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