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RMTI > SEC Filings for RMTI > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for ROCKWELL MEDICAL, INC.

Form 10-K for ROCKWELL MEDICAL, INC.


7-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview and Recent Developments

Rockwell is a fully-integrated pharmaceutical company targeting end-stage renal disease and chronic kidney disease with innovative products and services for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis. We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the U.S. and abroad.

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 drugs while expanding our dialysis products business. In 2013, our sales increased 5.1% to $52.4 million. The increase in sales was primarily a result of increased business with current customers. We signed a multi-year contract extension through 2018 with our largest customer, which increased the number of committed clinics purchasing from us, but we do not expect a material increase in gross profit to result from the increase. Most of our total sales are to domestic clinics that order routinely. From time to time, we have experienced volatility in international sales.

Our product development costs were primarily related to completing the Phase 3 clinical trials for Triferic®, our lead drug candidate. We believe our Triferic® product has unique and substantive benefits compared to current treatment options and has the potential to compete in the iron maintenance therapy market. We successfully completed the Phase 3 clinical trial program for Triferic® in early 2014 and we are preparing to file our NDA for Triferic® in the first quarter of 2014.

In 2011, we acquired the right to manufacture the generic version of Calcitriol, a 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 we expect to receive such approval during the first half of 2014. We anticipate that our gross profit margins and operating cash flows will improve once we begin marketing Calcitriol.

In March and May 2013, we completed common stock offerings for a total of approximately $50.4 million in net proceeds. In June 2013, we entered into a secured loan agreement and borrowed $20.0 million.

As of December 31, 2013, we had $23.9 million in cash, cash equivalents and short term investments. We have completed the major spending on Triferic® development and future spending on Triferic® R&D and commercial launch is not expected to require additional cash resources to complete. We believe we have adequate cash resources to fund our business development and drug launch efforts for Triferic® and Calcitriol.

Results of Operations

For the year ended December 31, 2013 compared to the year ended December 31, 2012

Sales

In 2013, our sales were $52.4 million compared to $49.9 million in 2012. Sales increased $2.5 million or 5.1% in 2013 compared to 2012. Domestic sales increased $1.8 million or 4.0% to $46.0 million while international sales increased by $0.8 million or 14% to $6.4 million.


Domestic sales increased due to new business additions, including the renewal and expansion of the supply agreement with our largest customer, as well as conversions to our CitraPure and dry acid concentrate product lines.

Dry acid concentrate lowers providers' cost per treatment and reduces our sales, but improves our gross profit margins due to a reduction in shipping costs.

International sales and domestic sales shipped internationally increased due to increased demand in international markets for dialysis products.

Gross Profit

Our gross profit was $6.7 million in both 2013 and 2012. Gross profit margins were 12.7% in 2013 compared to 13.4% in 2012. Favorable product mix changes from CitraPure growth were offset by higher costs for material, shipping and operating costs, as well as growth in lower margin sales and higher regulatory compliance costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $14.3 million in 2013 compared to $12.7 million in 2012. The increase of $1.6 million was primarily due to an increase of $1.3 million in compensation expense, an increase of $0.6 million in non-cash charges relating to extending the expiration date of outstanding warrants and an increase in other expense of $0.8 million attributable to the medical device excise tax imposed on us beginning in 2013. These increases were partially offset by a reduction in non-cash equity compensation for services of $1.1 million.

The increase in compensation costs included an increase in non-cash charges for equity compensation of $0.9 million while cash compensation and benefit costs increased $0.4 million.

Research and Development

We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic®, aggregating approximately $39.4 million and $48.3 million in 2013 and 2012, respectively. Costs incurred in 2013 and 2012 were primarily for conducting human clinical trials of Triferic® and other Triferic® testing and development activities. We have now completed the clinical testing for Triferic® and incurred the majority of Triferic® development expenses by the end of 2013.

Interest Expense, Net

Our net interest expense was $1,724,000 in 2013 compared to net interest and investment income of $242,000 in 2012. The increase in net interest expense was due to the loan agreement entered into in June 2013 coupled with reduced net interest and investment income due to lower funds available for investment in 2013 compared to 2012.

Income Tax Expense

We have substantial tax loss carryforwards from our earlier losses. We have not recorded a federal income tax benefit from either our prior losses or our current year losses because we might not realize the carryforward benefit of the remaining losses.


For the year ended December 31, 2012 compared to the year ended December 31, 2011

Sales

In 2012, our sales were $49.9 million compared to $49.0 million in 2011. Sales increased $0.9 million or 1.8% in 2012 compared to 2011. Domestic sales increased $1.7 million or 3.9% to $44.2 million while international sales decreased by $0.8 million or 12.1% to $5.6 million. International sales to a single international distributor decreased $1.4 million while all other international sales increased $0.6 million.

Domestic sales increased due to new business additions as well as changes in product mix to higher margin products including our CitraPure product lines and due to higher volume of our dry acid concentrate product lines.

Gross Profit

Our gross profit in 2012 was $6.7 million an increase of $1.1 million or 18.6% compared to 2011. Gross profit margins were 13.4% in 2012 compared to 11.5% in 2011. The increase in gross profit margins was due to increased sales of higher margin products and product lines including our CitraPure product lines along with conversions to dry acid concentrates. Margins also benefited from efforts to control operating costs in the face of inflationary cost increases for material, transportation operating costs and diesel fuel.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $12.7 million in 2012 compared to $9.5 million in 2011. The increase of $3.2 million was primarily due to an increase in non-cash charges for equity compensation of $2.9 million. Employee non-cash equity compensation aggregated $5.0 million in 2012 compared to $4.1 million in 2011. In addition, share based compensation for services increased $2.0 million to $2.3 million in 2012.

Research and Development

We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic®, aggregating approximately $48.3 million and $17.8 million in 2012 and 2011, respectively. Costs incurred in both 2012 and 2011 were primarily for conducting human clinical trials of Triferic® and other Triferic® testing and development activities. Our spending increased considerably in 2012 for our Phase 3 clinical program as enrollment efforts and related testing activities increased dramatically and were in effect for the full year.

Interest and Investment Income, Net

Net interest and investment income in 2012 was $242,000 compared to $244,000 in 2011. We earned higher rates of return on investable funds in 2012 compared to 2011 while overall investable funds were reduced throughout 2012 to fund our clinical development program.

Income Tax Expense

We have substantial tax loss carryforwards from our earlier losses. We have not recorded a federal income tax benefit from either our prior losses or our current year losses because we might not realize the carryforward benefit of the remaining losses.


Critical Accounting Estimates and Judgments

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results will generally differ from these estimates. Changes in estimates are reflected in our financial statements in the period of change based upon on-going actual experience, trends, or subsequent realization depending on the nature and predictability of the estimates and contingencies.

Interim changes in estimates are generally applied prospectively within annual periods. Certain accounting estimates, including those concerning revenue recognition, allowance for doubtful accounts, impairments of long-lived assets, and accounting for income taxes, are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgments and estimates. These are described below. For further information on our accounting policies, see Note 2 to our Consolidated Financial Statements.

Revenue recognition

We recognize revenue at the time we transfer title to our products to our customers consistent with generally accepted accounting principles. Our products are generally sold domestically on a delivered basis and as a result we do not recognize revenue until delivered to the customer with title transferring upon completion of the delivery. For our international sales, we recognize revenue upon the transfer of title as defined by standard shipping terms and conventions uniformly recognized in international trade.

Allowance for doubtful accounts

Accounts receivable are stated at invoice amounts. The carrying amount of trade accounts receivable is reduced by an allowance for doubtful accounts that reflects our best estimate of accounts that may not be collected. We review outstanding trade account receivable balances and based on our assessment of expected collections, we estimate the portion, if any, of the balance that may not be collected as well as a general valuation allowance for other accounts receivable based primarily on historical experience. All accounts or portions thereof deemed to be uncollectible are written off to the allowance for doubtful accounts. If we underestimate the allowance, we would incur a current period expense which could have a material adverse effect on earnings.

Impairments of long-lived assets

We account for impairment of long-lived assets, which include property and equipment, amortizable and non-amortizable intangible assets and goodwill, in accordance with authoritative accounting pronouncements. An impairment review is performed annually or whenever a change in condition occurs which indicates that the carrying amounts of assets may not be recoverable. Such changes may include changes in our business strategies and plans, changes to our customer contracts, changes to our product lines and changes in our operating practices. We use a variety of factors to assess the realizable value of long-lived assets depending on their nature and use.

Goodwill is not amortized; however, it must be tested for impairment at least annually. The goodwill impairment analysis is based on the fair market value of our common shares. Amortization continues to be recorded for other intangible assets with definite lives over the estimated useful lives. Intangible assets subject to amortization are reviewed for potential impairment whenever events or


circumstances indicate that carrying amounts may not be recoverable based on future cash flows. If we determine that goodwill has been impaired, the change in value will be accounted for as a current period expense and could have a material adverse effect on earnings.

Accounting for income taxes

We estimate our income tax provision to recognize our tax expense and our deferred tax liabilities and assets for future tax consequences of events that have been recognized in our financial statements using current enacted tax laws. Deferred tax assets must be assessed based upon the likelihood of recoverability from future taxable income and to the extent that recovery is not likely, a valuation allowance is established. The allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgment about whether the related deferred tax asset may be realized. These calculations and assessments involve complex estimates and judgments because the ultimate tax outcome can be uncertain and future events unpredictable. If we determine that the deferred tax asset will be realized in the future, it may result in a material beneficial effect on earnings.

New Accounting Pronouncements

No new accounting pronouncements that were issued or became effective during the year have had or are expected to have a material impact on our Consolidated Financial Statements.

Liquidity and Capital Resources

Our strategy is centered on obtaining regulatory approval to market Triferic® and developing other high potential drug candidates, while also expanding our dialysis products business. We have completed the clinical trials required for the submission of our NDA for Triferic®. Our future spending on research and development for Triferic® is not expected to be material in future periods. We believe we have adequate cash resources to launch Triferic® once approved by the FDA and to fund other business development opportunities we may elect to pursue.

Our cash resources include cash generated from our business operations, the $50.4 million in net proceeds generated from equity offerings during 2013 and the $20.0 million borrowed under the secured loan agreement executed in June 2013. The repayment and other terms of the loan are described in Note 10 to our Consolidated Financial Statements. We were in compliance with the terms of the loan agreement and there was no event of default as of December 31, 2013. As of December 31, 2013, our cash and investments were $23.9 million and our current assets exceeded our current liabilities by $14.1 million.

We expect to generate positive cash flow from operations in 2014, excluding research and development related expenditures. The Company intends to expand its customer relationships and to introduce Calcitriol in 2014 which we anticipate will result in increased cash availability and higher future cash flows if successful. We believe that cash flow from operations will increase substantially when sales of Calcitriol commence.

The Company is in discussion with potential business development partners to license rights to its products outside the United States and to partner its dialysis business with interested parties including joint ventures, partnerships and other arrangements. We do not expect to require additional cash resources to execute our business plan.


Contractual Obligations

    The following table details our contractual obligations as of December 31,
2013:

                                                 Payments due by period
                                          Less than                                  More than
Contractual Obligations      Total         1 year      1 - 3 years    3 - 5 years     5 years
Long term debt            $ 21,100,000   $ 2,308,145   $ 18,791,855              -            -
Capital leases                       -             -              -              -            -
Operating leases             5,501,726     1,500,697      1,929,332      1,472,137      599,560
Purchase obligations                 -             -              -              -            -
All other long term
liabilities                          -             -              -              -            -


Total                     $ 26,601,726   $ 3,808,842   $ 20,721,187    $ 1,472,137    $ 599.560

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition.

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