Rockwell Medical Technologies, Inc. — FY 2011 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2011; quarterly results include the fourth quarter of 2011. Rockwell manufactures and distributes hemodialysis concentrates and related supplies. Concentrates represented more than 94% of revenue. The company is also developing soluble ferric pyrophosphate (SFP), an investigational iron therapy, and preparing to market generic calcitriol subject to FDA approval.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Sales | $49.0 million | $59.6 million |
| Gross profit / margin | $5.6 million / 11.5% | $9.9 million / 16.6% |
| Operating loss | $21.7 million | $2.9 million |
| Net loss | $21.4 million | $2.7 million |
| Loss per diluted share | $1.21 | $0.16 |
| Cash used in operating activities | $10.8 million | Cash provided: $2.1 million |
Fourth-quarter 2011 sales were $11.9 million, versus $14.3 million in Q4 2010; gross profit was $1.5 million versus $2.4 million, and net loss was $9.0 million versus $1.7 million. Q4 research and product development expense rose to $7.9 million from $1.7 million.
At year-end, cash and cash equivalents were $5.7 million and available-for-sale investments were $11.8 million, or $17.5 million combined. Working capital was $12.2 million, down from $26.2 million. Total assets were $31.9 million; current liabilities were $13.7 million, including $8.2 million of accrued liabilities, of which $5.9 million related to R&D. Debt was minimal: capital lease obligations totaled $8,750. The company reported no material off-balance-sheet arrangements.
Changes versus prior period
- Sales fell 17.8%, driven mainly by lower sales to one international distributor, with additional domestic declines from customer losses, product mix and lower volumes.
- Gross margin contracted from 16.6% to 11.5%, reflecting lower volume, higher sales incentives, and increased fuel, material and labor costs. Management said the shift toward dry Dri-Sate concentrate supported margins through lower delivery costs, although it reduced sales value.
- R&D expense increased to $17.8 million from $3.4 million, principally as the company began multiple Phase III SFP studies.
- DaVita represented 48% of 2011 sales, versus 42% in 2010. The company renewed its supply agreement with its largest domestic chain customer through the end of 2013.
Outlook, risks and unusual items
- Management expected SFP Phase III studies to be completed in the first half of 2013, with an NDA planned if results were successful. FDA approval and commercial success were uncertain.
- The company expected approval of calcitriol manufacturing changes in late 2012 and planned marketing afterward; timing depended on regulatory testing and the contract manufacturer. A $550,000 payment was due to retain the ANDA, subject to a right to return it by July 13, 2012.
- Management expected significant R&D cash needs over the following two years and operating losses until SFP approval and marketing. It believed available resources could fund 2012 plans and forecast positive operating cash flow in 2012 excluding R&D, assuming stable revenues and fuel and raw-material markets. This was a conditional expectation, not formal earnings guidance.
- After year-end, the company completed a February 2012 stock offering for $17.5 million gross and approximately $16.2 million net proceeds. Management also noted that warrants expiring in 2012 could generate up to $11.2 million if exercised.
- Key risks include dependence on DaVita and a concentrated customer base, competition and pricing pressure, volatile fuel and input costs, Medicare’s bundled reimbursement model, clinical and FDA approval risk, and the need for continued funding. The company had an accumulated deficit of $56.0 million.
- A material weakness in financial reporting controls involved timely recording of clinical-trial liabilities. Related preliminary-statement misstatements were corrected before issuance, and the financial-statement auditor issued an unqualified opinion; however, management and the auditor concluded internal control over financial reporting was ineffective at year-end. Management anticipated remediation in Q1 2012.
- Management did not expect ordinary-course legal proceedings to materially affect the company. The company reported that its short-term bond-fund investments had unrealized losses of $152,079, but did not consider them other-than-temporarily impaired.
Most important facts for investors to verify
- DaVita’s continued purchases and the status and terms of the supply agreement through 2013.
- Progress, safety and efficacy results, remaining costs, and funding needs for SFP Phase III trials and any subsequent FDA submission.
- FDA approval timing and commercial prospects for calcitriol, including the ANDA payment and contract-manufacturer readiness.
- Whether 2012 operating cash generation excluding R&D met management’s assumptions, and the impact of the February 2012 offering and any warrant exercises on cash and dilution.
- Whether the clinical-trial accrual control weakness was remediated as planned and whether subsequent filings report further control issues.
- Whether sales volumes, customer mix, pricing, and fuel and material costs stabilize enough to improve gross margins.