Rockwell Medical Technologies, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. The company manufactures and distributes hemodialysis concentrates and supplies, and is developing renal drug therapies, principally Soluble Ferric Pyrophosphate (SFP).
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Sales | $12.0 million | $13.3 million |
| Gross profit / margin | $1.6 million / 13.5% | $1.7 million / 12.4% |
| SG&A | $2.9 million | $2.2 million |
| Research and product development | $9.4 million | $2.4 million |
| Operating loss | $10.7 million | $3.0 million |
| Net loss; loss per share | $10.6 million; $0.54 | $2.9 million; $0.17 |
| Cash used in operations | $8.3 million | $4.6 million |
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $13.6 million and available-for-sale investments were $11.9 million, totaling approximately $25.6 million in cash and investments. Current assets were $33.8 million versus current liabilities of $13.8 million.
- Total assets were $39.4 million; shareholders’ equity was $25.6 million. Capitalized lease obligations were approximately $5,700 in total; the filing reports no material conventional debt balance.
- Cash increased $7.9 million during the quarter, mainly because of $16.3 million in net financing cash flow, including a February common-stock offering that generated $17.5 million gross and approximately $16.2 million net proceeds.
Material changes and management commentary
- Sales declined 9.5%, primarily due to a $1.4 million decrease in purchases by one international distributor. Higher sales to other international customers partly offset the decline; domestic sales were also lower.
- Gross margin improved 1.1 percentage points despite lower sales. Management attributed this to product mix, pricing and cost changes; adoption of dry acid concentrate reduced customers’ cost per treatment and shipping costs, but also lowered sales dollars per unit.
- R&D spending rose sharply with increased testing in the SFP Phase III clinical program. Management expects substantial development spending and operating losses until SFP is approved and marketed.
- The company expects Calcitriol manufacturing-location approval in late 2012 and intends to market it after approval. It also expects to make a further $550,000 acquisition-related payment and fund the approval process.
Outlook, risks and controls
- Management believes available and prospective resources can fund anticipated R&D and ordinary operating needs in 2012, and expects positive operating cash flow excluding R&D, assuming relatively stable revenue, fuel and key raw-material markets. It cautions that higher-than-expected development costs, additional trials or business expansion could require further financing.
- Potential additional resources include warrant exercises (approximately $9.5 million of potential proceeds from in-the-money warrants expiring in 2012, per management), licensing arrangements and equity or debt financing. These are not assured sources.
- Key risks include dependence on a small number of major dialysis customers, competition, maintaining margins, clinical-trial and FDA approval uncertainty, commercialization and market-acceptance challenges, reimbursement changes, and the possibility of further financing needs.
- Management reported that disclosure controls were effective and that the previously identified material weakness concerning timely recognition of clinical-trial R&D expenses had been remediated as of March 31, 2012. Management noted that the small accounting staff could pose future control risks.
- The available-for-sale bond funds are exposed to interest-rate-driven market-value changes, although management did not expect a 100-basis-point rate change to have a material portfolio impact. International business is conducted in U.S. dollars; management reported no significant foreign-currency exposure.
Important facts for investors to verify
- Progress, costs, timing and regulatory requirements for SFP Phase III trials and any eventual FDA approval.
- Whether Calcitriol manufacturing approval arrives as expected and whether commercial launch follows.
- Customer concentration, distributor order recurrence, sales trends and sustainability of gross-margin improvement.
- Cash use relative to the company’s 2012 liquidity assumptions, warrant exercise proceeds, and any need for additional capital.
- Continued effectiveness of controls over accruals and recording of clinical-trial expenses.