10KSB 1 k61245e10ksb.txt FORM 10-KSB 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-23-661
------------------------ ROCKWELL MEDICAL TECHNOLOGIES, INC. (Name of Small Business Issuer in Its Charter) MICHIGAN 38-3317208 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 28025 OAKLAND OAKS DRIVE WIXOM, MICHIGAN 48393 (Address of Principal (Zip Code) Executive offices)
(248) 449-3353 ------------------------ (Issuer's Telephone Number, including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: NONE Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON SHARES, NO PAR VALUE (TITLE OF CLASS) COMMON SHARE PURCHASE WARRANTS (TITLE OF CLASS) ------------------------ Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $7,457,001 State the aggregate market value of the voting and non voting common equity held by non-affiliates: $3,779,153 as of March 20, 2001. Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 5,256,948 Common Shares outstanding and 3,625,000 Common Share Purchase Warrants outstanding as of March 20, 2001. Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement pertaining to the 2000 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are herein incorporated by reference. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Rockwell Medical Technologies, Inc. (the "Company") is a Michigan corporation, incorporated on October 25, 1996. From October 25, 1996 through February 18, 1997 the Company had no operations and incurred only legal and consulting expenses. On February 19, 1997, the Company acquired substantially all of the assets of Rockwell Medical Supplies, L.L.C. and of Rockwell Transportation, L.L.C. (collectively, the "Predecessor Company") used in connection with the business of manufacturing hemodialysis concentrates and dialysis kits and distributing and delivering these and other products to hemodialysis clinics. The Predecessor Company began operations in January 1996. Rockwell Medical Technologies, Inc. manufactures hemodialysis concentrates and dialysis kits, and sells, distributes and delivers such concentrates and dialysis kits, as well as other ancillary hemodialysis products, to hemodialysis providers in the United States. Hemodialysis is a process which is able to duplicate kidney function in patients whose kidneys have failed to function properly. Without properly functioning kidneys, the patient's body cannot rid itself of excess water and waste nor regulate the amount of electrolytes in the patient's blood. Long-term dialysis treatments are essential for these patients' survival. INDUSTRY BACKGROUND The Company provides products used in the treatment of patients with end-stage renal disease ("ESRD"). In 2001 there are an estimated 360,000 ESRD patients in the United States, whose permanent kidney failure requires long-term dialysis for survival. According to the United States Department of Health and Human Services ("DHHS"), the ESRD patient population has increased, on average, 7.9% per year for the five years preceding 1998. Incidence of kidney failure is increasing as a by-product of the aging population, an increasing occurrence of diabetes and hypertension, and increased use of prescription drugs. ESRD patients are essentially treated as chronic patients, with repeated dialysis treatments replacing their nonfunctioning kidneys. Most patients undergoing hemodialysis treatments generally receive three treatments per week or 156 treatments per year, although the amount of weekly treatments may vary. Hemodialysis patients generally receive their treatments at hospitals or independent hemodialysis clinics. A hemodialysis provider, such as a hospital or a freestanding clinic, uses a dialysis station to treat patients. A dialysis station contains a dialysis machine that takes a concentrate solution and certain chemical powders, such as the Company's solutions and powders, and accurately dilutes them with purified water. The resulting solution, known as dialysate, is then pumped through a device known as a dialyzer (artificial kidney), while at the same time the patient's blood is pumped through a membrane within the dialyzer. Excess water and chemicals from the patient's blood pass through the membrane and are carried away in the dialysate while certain chemicals in the dialysate penetrate the membrane and enter the patient's blood to maintain proper chemical levels in the body. Dialysate generally contains dextrose, sodium, calcium, potassium, magnesium, chloride and acetic acid. The patient's physician chooses the formula required for each patient based on each particular patient's needs, although most patients receive one of eight common formulations. In addition to using concentrate solutions and chemical powders (which must be replaced for each use for each patient) a dialysis station requires various other ancillary products such as on-off kits, sterile subclavian dressing change trays, arterial and venous blood tubing lines, fistula needles, intravenous administration sets, transducer protectors, dialyzers and various other ancillary products, many of which the Company sells. INDUSTRY TRENDS The dialysis industry has experienced steady patient population growth based on statistics complied by the DHHS, with the patient population increasing between 7-11% each year over the last ten years. ESRD is an irreversible deterioration of kidney function. Population segments with the highest incidence of ESRD are also the fastest growing within the U.S. population including the elderly, Hispanic and African-American 1 3 population segments. More than 60% of new ESRD cases are attributed to either diabetes or hypertension, while glomerulonephritis is the primary factor behind nearly 11% of treated cases. Hemodialysis providers are generally either independent clinics or hospitals. According to the DHHS, since 1973 the total number of hemodialysis providers in the United States has more than quintupled from 606 in 1973 to over 3,586 in December 1998. Independent providers comprised 2,723 of such providers, hospitals comprised 628 of such providers and kidney transplant centers comprised 235 of such providers at the end of 1998 according to the DHHS. The Company currently supplies hemodialysis clinics in over 27 states across the United States. The number of patients receiving hemodialysis has also grown substantially in recent years. According to the last published statistics by the DHHS, in 1997 more than 228,000 patients were treated in Medicare-approved renal facilities as compared to 68,390 patients in 1985. According to the DHHS, from 1985 to 1998, the number of hemodialysis stations, which are areas equipped to provide adequate and safe dialysis therapy, grew from 17,845 stations to 53,983 stations. The number of Medicare-approved dialysis machines increased by 3,130 stations or 6.2% between 1997 and 1998 based on the latest published statistics by the DHHS. STRATEGY The Company's long term objectives are to increase its market share, expand its product line offering, extend its geographical coverage and improve its profitability by implementing the following strategies: - Acting as a Single Source Supplier. The Company has positioned itself as an independent "one-stop-shop" to its customers for the concentrates, chemicals and supplies necessary to support a hemodialysis provider's operation. Some the Company's competitors for concentrates do not offer a full line of hemodialysis products requiring customers to do business with a number of suppliers in order to purchase necessary supplies. Rockwell offers a full line of hemodialysis supplies. - Increasing Revenue Through Sales of New Products. The Company introduced two new product lines in 1999; Dri-Sate Dry Acid Concentrate and SteriLyte(TM) Liquid Bicarbonate that it believes are superior to competitors' product offerings. The Company successfully introduced the Dri-Sate product line in 1999 and it has grown to represent a significant share of the Company's Acid Concentrate sales in its first two years. The Company anticipates Dri-Sate will continue to capture market share and will allow the Company to achieve its gross margin objectives. The Company also anticipates that its Sterilyte(TM) Liquid Bicarbonate product line will gain market share in the acute care market segment due to its higher quality and longer shelf life. - Increasing Revenue Through Ancillary Product Line Expansion. The Company believes that the market potential for ancillary products and supplies used by hemodialysis providers is equivalent to or greater than the market for dialysis concentrates. The Company's strategy is to offer cost effective ancillary products that include ancillary products such as specialized kits, fistula needles, gloves, chemicals, sterile dressings and blood lines. Many of these ancillary items are purchased based on price and are generally acquired from various suppliers. The Company believes that as it continues to gain market share that it will increasingly be able to procure these ancillary items on a cost effective basis and will provide its customers with both convenience from a single supply source and at a highly competitive price level. - Offering a Higher Level of Delivery/Customer Service. By using its own delivery vehicles and drivers, the Company believes that it can offer a higher level of customer service to hemodialysis providers than if it relied primarily on the use of common carriers to distribute its products. The Company's drivers perform services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. A drum pump-off requires the driver to pump hemodialysis concentrates from a 55 gallon drum into larger holding tanks within the hemodialysis clinic. The Company's main competitors generally use common carriers for delivery of their products. The Company believes it offers a higher level of distribution service to its customers through the use of its own delivery vehicles and drivers. 2 4 - Expanding Market Share in Target Regions. Because of the costs associated with transporting and delivering hemodialysis concentrates, the Company believes that it has a competitive cost advantage with certain clinics that are located within a reasonable proximity to the Company's manufacturing facility over other manufacturers outside of such proximity. The Company also believes that it can add additional manufacturing sites in certain geographic regions that will provide it with a competitive cost advantage and with superior customer service levels due to their proximity to the customer. The Company intends to leverage its existing customer relationships to expand into geographic areas where it currently has a minor or negligible presence. PRODUCTS The Company manufactures hemodialysis concentrates and sells, distributes and delivers such products, as well as a full line of ancillary hemodialysis products to hemodialysis providers and distributors located in more than 27 states as well as several foreign countries. Hemodialysis concentrates are comprised of two primary product types, which are generally described as acid dialysate and bicarbonate. "Acidified Dialysate Concentrate" Acid dialysate generally contains sodium chloride, dextrose and electrolyte additives such as magnesium, potassium, and calcium. Acid products are manufactured in three basic series to reflect the dilution ratios used in dialysis machines which are manufactured by various companies. The Company supplies all three product series and currently manufactures approximately 60 different formulations. The Company supplies liquid acid concentrate in both 55 gallon drums and in cases with 4 -- 1 gallon containers. "Dri-Sate Dry Acid Concentrate" In June of 1998, the Company obtained 510(k) clearance from the FDA to manufacture and market Dri-Sate Dry Acid Concentrate. This product line enhanced the Company's previous product liquid acid product offering. Since its introduction in 1999, the Company's dry acid product line has grown to represent over 45% of acid product sales. The Company's Dri-Sate Dry Acid Concentrate allows a clinic to mix its acid concentrate on-site. The clinical technician, using a specially designed mixer, adds pre-measured packets of the necessary ingredients to 50 or 100 gallons of purified water (AMII standard). Once mixed, the product is equivalent to the acid provided to the clinic in liquid form. By using Dri-Sate Dry Acid Concentrate numerous advantages are realized by the clinics including lower cost per treatment, increased storage space, reduced number of deliveries and more flexibility in scheduling. The Company believes it will attain increased profit margins due to the reduction in freight cost associated with shipping the dry product as compared to the liquid form. The Company also believes it will generate increased back-haul revenue due to the elimination of returning empty drums to the Company's facility, thus allowing its trucks to obtain increased back-haul revenue from third parties. "Bicarbonate" Bicarbonate is generally sold in powder form and each clinic generally mixes bicarbonate on site as required. The company offers approximately 20 bicarbonate products covering all three series of manufacturers' bicarbonate dilution ratios. "SteriLyte(TM) Liquid Bicarbonate" In June of 1997, the Company obtained 510(k) clearance from the FDA to manufacture and market SteriLyte(TM) Liquid Bicarbonate. The Company's SteriLyte(TM) Liquid Bicarbonate, which is used primarily in acute care settings, is currently the only liquid bicarbonate on the market manufactured utilizing a process called gamma irradiation. Historically, other manufacturers have been required to recall product due to excess levels of molds and bacteria in their product. Gamma irradiation is a process that minimizes the presence of mold and bacteria in the product thereby providing a higher quality product to the customer. The Company's 3 5 SteriLyte(TM) Liquid Bicarbonate, by utilizing gamma irradiation, offers the dialysis community a high-quality product and provides the clinic a safe and uninterrupted supply source. "Ancillary Products" The Company offers a wide range of ancillary products including fistula needles, gloves, kits, dressings, cleaning agents, filtration salts and other supplies used by hemodialysis providers. DISTRIBUTION AND DELIVERY OPERATIONS The majority of the distribution of the Company's products is provided by the Company's subsidiary, Rockwell Transportation, Inc. Rockwell Transportation, Inc. leases and operates a fleet of nine trucks which are used to deliver products to the Company's customers. A minor portion of the Company's deliveries, primarily to medical products distributors, is provided by common carriers contracted by the Company on a competitive rate basis. Rockwell Transportation, Inc. currently employs nine drivers to operate its truck fleet and a fleet operations manager to manage its distribution operations. The Company's liquid acid concentrates are generally packaged in 55-gallon re-usable drums weighing approximately 550 pounds each. The Company performs services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. The Company's primary competitors generally use common carriers and/or do not perform the same services for delivery of their products. The Company believes it offers a higher level of service to its customers through the use of its own delivery vehicles and drivers. As the Company continues to grow and migrate its product mix to its Dri-Sate Dry Acid Concentrate the Company anticipates that it will achieve distribution efficiencies from its truck fleet as a result of reduced frequency of deliveries, increased end user sales volume per truckload and increased backhaul revenue. The Company's trucking operations are and will continue to be subject to various state and federal regulations, which if changed or modified, could adversely affect the Company's business, financial condition and results of operations. SALES AND MARKETING The Company primarily sells its products directly to domestic hemodialysis providers through five independent sales representative companies and three direct salespeople employed by the Company. In addition, the President and Chief Executive Officer of the Company leads and directs the sales efforts to the Company's major accounts. The Company also utilizes several independent distributors in the United States. Certain international customers are sold through sales agents. The Company's sales and marketing initiatives are directed at purchasing decision makers at both large for profit national and regional hemodialysis chains and toward independent hemodialysis service providers. The Company's marketing efforts include advertising in trade publications, distribution of product literature and attendance at industry trade shows and conferences. Targeted audiences of the Company's sales and marketing efforts include clinic administrators, purchasing professionals, nurses, hospital administrators and nephrologists. COMPETITION The Company competes against larger more established competitors with substantially greater financial, technical, manufacturing, marketing, research and development and management resources than those of the Company. The Company competes against three major competitors, of which its two largest competitors are primarily in the business of operating hemodialysis clinics. The two largest providers of hemodialysis concentrates are Fresenius Medical Care, Inc. ("Fresenius") and Gambro Healthcare, Inc. ("Gambro") who the Company believes also have the first and third largest ESRD patient base in the United States. These companies produce and sell a more comprehensive line of dialysis equipment, supplies and services. 4 6 Fresenius treats an estimated 75,000 dialysis patients in the United States and operates an estimated 1,000 clinics. It also has a renal products business that manufactures a broad array of equipment including dialysis machines, dialyzers (artificial kidneys), concentrates and other supplies used in hemodialysis. In addition to its captive customer base in its own clinics, Fresenius also serves other clinic chains and independent clinics with its broad array of products. The Company believes that Fresenius sources its concentrate manufacturing through its own manufacturing facilities. Fresenius operates an extensive warehouse network in the United States serving its captive customer base and other independent clinics. Gambro treats an estimated 38,000 dialysis patients in the United States and operates approximately 500 clinics, based upon its public filings. Gambro manufactures and sells hemodialysis machines and other ancillary supplies. Gambro sells its concentrate solutions to both its own captive clinic base and to other clinic chains and independent clinics. The Company believes that Gambro operates one manufacturing facility in Central Florida and additionally sources concentrate through a private label manufacturer in the eastern United States. Gambro also imports products from its European manufacturing facilities. The Company believes that Gambro engages a third party trucking company to deliver its products throughout the United States directly from the point of manufacture and regional public and private warehouse locations. Gambro serves the independent clinic market with liquid acid and powder bicarbonate concentrate products used by its brand of dialysis machines as well as those machines manufactured by its competitors in that segment. Gambro does not offer a liquid bicarbonate product line nor does it offer a powder acidified concentrate product line. The Company also competes against the Renal Systems division of Minntech Corporation ("Minntech"). In its Renal Systems division, Minntech primarily sell concentrates and Renalin, a specialty reuse agent for dialyzers and does not offer the full breadth of products offered by the Company. The Company believes that Minntech has one domestic manufacturing facility located in Minnesota and a distribution center in Camp Hill, Pennsylvania. The Company believes that Minntech largely uses its own vehicles for delivery of product to customers. QUALITY ASSURANCE AND CONTROL The U.S. Food and Drug Administration ("FDA") expanded the regulatory requirements governing manufacturers of medical devices effective January 1, 2000. The Company has revised its operational manuals and quality system to conform with the new regulations. The FDA inspected the Company during 2000 and found the Company to be in substantial compliance with regulatory requirements. To assure quality and consistency of the Company's concentrates, the Company conducts specific analytical tests during the manufacturing process for each type of product that it manufactures. The Company's quality control laboratory conducts analytical tests to verify that the chemical properties of the mix comply with the specifications required by industry standards. Upon verification that a batch meets those specifications, the Company then packages those concentrates. The Company also tests packaged concentrates at the beginning and end of each production run to assure product consistency during the filling process. Each batch is assigned a lot number for tracking purposes and becomes available for shipment subsequent to verification that all product specifications have been met. The Company utilizes automated testing equipment in order to assure quality and consistency in the manufacture of its concentrates. The equipment allows the Company to analyze the materials used in the hemodialysis concentrate manufacturing process, to assay and adjust the in-process hemodialysis concentrate, and to assay and certify that the finished products are within the chemical and biological specifications required by industry regulations. The Company's testing equipment provides it with high degree of accuracy and efficiency in performing the necessary testing. GOVERNMENT REGULATION The testing, manufacture and sale of the Company's hemodialysis concentrates and the ancillary products distributed by the Company are subject to regulation by numerous governmental authorities, principally the United States Food and Drug Administration ("FDA") and corresponding state and foreign agencies. 5 7 Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDA Act"), and the regulations promulgated thereunder, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. A medical device may be marketed in the United States only with prior authorization from the FDA unless it is subject to a specific exemption. Devices classified by the FDA as posing less risk than class III devices are categorized as class I (general controls) or class II (general and specific controls) and are eligible to seek "510(k) clearance." Such clearance generally is granted when submitted information establishes that a proposed device is "substantially equivalent" in intended use to a class I or II device already legally on the market or to a "pre-amendment" class III device (i.e., one that has been in commercial distribution since before May 28, 1976) for which the FDA has not called for pre-market approval ("PMA") applications. The FDA in recent years has been requiring a more rigorous demonstration of substantial equivalence than in the past, including requiring clinical trial data in some cases. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. The Company believes that it now usually takes from one to four months from the date of submission to obtain 510(k) clearance, but it can take substantially longer. The Company's hemodialysis concentrates, liquid bicarbonate and other ancillary products are categorized as class II devices. A device requiring prior marketing authorization that does not qualify for 510(k) clearance is categorized as class III, which is reserved for devices classified by FDA as posing the greatest risk (e.g., life-sustaining, life-supporting or implantable devices), or devices that are not substantially equivalent to a legally marketed class I or class II device. A class III device generally must receive approval of a PMA application, which requires proving the safety and effectiveness of the device to the FDA. The process of obtaining PMA approval is expensive and uncertain. The Company believes that is usually takes from one to three years after filing, but it can take longer. If human clinical trials of a device are required, whether for a 510(k) submission or a PMA application, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "non-significant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. Any devices manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed Good Manufacturing Practice ("GMP") requirements, which include testing, control and documentation requirements. Manufacturers and distributors must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with GMP requirements and other applicable Quality System regulations. The Company also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing 6 8 practices, environmental protection, fire hazard control, transportation and disposal of hazardous or potentially hazardous substances. The Company has 510(k) clearance from the FDA to market hemodialysis concentrates in both liquid and powder form. In addition, the Company has received 510(k) clearance for its Dri-Sate Dry Acid Concentrate Mixer. The Company's retention of such 510(k) clearances is also dependent upon its compliance with the FDA Act and related laws and regulations, including GMP regulations. There can be no assurance that the Company will maintain its 510(k) authority from the FDA to manufacture and distribute its products. Failure to do so could result in the need to cease manufacturing and/or distributing the Company's products, which would have a material adverse effect on the Company's business, financial condition and results of operations. If any of the Company's FDA clearances are denied or rescinded, sales of the Company's products in the United States would be prohibited during the period the Company does not have such clearances. TRADEMARKS & PATENTS The Company has several trademarks on its products and in its advertising of such products, and has applied for U.S. registration of such marks. The Company has applied for U.S. and international patents on its Dri-Sate Dry Acid Concentrate method and apparatus for preparing liquid dialysate. The Company has no other patents. SUPPLIERS The Company believes that the raw materials for the Company's hemodialysis concentrates, the components for the Company's hemodialysis kits and the ancillary hemodialysis products distributed by the Company are generally available from several potential suppliers. Principal suppliers include Morton Salt Company, Church & Dwight Co. Inc., and Ashland Inc. CUSTOMERS The Company operates in one market segment which involves the manufacture and distribution of hemodialysis concentrates, dialysis kits and ancillary products used in the dialysis process to hemodialysis clinics. For the year ended December 31, 2000, the Company had sales in excess of 10% of revenue with three customers representing 36% of total sales. For the year ended December 31, 1999, the Company had sales in excess of 10% of revenue with two customers representing approximately 25% of total sales. EMPLOYEES As of March 15, 2001, the Company had approximately 60 employees, of which three were salespeople, four were laboratory technicians, nine were truck drivers and ten were engaged in corporate management and administration. The remaining employees were hourly workers including clerical and plant employees. The Company's arrangements with its employees are not governed by any collective bargaining agreement. Employees are employed on an "at-will" basis with the exception of Mr. Robert L. Chioini, the Company's Chairman, President and Chief Executive Officer and certain other key managers. The employment agreement of Mr. Thomas E. Klema, the Company's Vice President, Chief Financial Officer and Secretary expired January 12, 2001 and he is currently in negotiation with the Company with respect to a new employment agreement. The Company intends to add personnel to staff a second manufacturing facility. In addition, if the Company's sales volumes increase, the Company expects to add additional production, distribution, and administrative resources. OTHER The Company does not engage in any significant research and development activity. The Company does not anticipate any significant cost or impact from compliance with environmental laws. 7 9 ITEM 2. DESCRIPTION OF PROPERTY. The Company occupies a 34,500 square foot facility located in Wixom, Michigan, which is comprised of manufacturing, warehouse, office and laboratory space. The Company is party to a lease (the "Lease") covering such facility that expired on December 6, 2000. The Company continues to rent the facility on a month to month basis at a rent cost of $29,656. In accordance with the assignment of a facility lease from the Predecessor Company, the landlord required a deposit in escrow. The escrow deposit was applied against lease payments of $59,313 in the year ended December 31, 2000 and $39,542 in the year ended December 31, 1999. The remaining escrow deposit of $79,082 is to be returned as a security deposit refundable at lease termination subject to certain conditions. The Company entered into a lease agreement in October 2000 to lease a new 51,000 square foot facility in Wixom, Michigan. The replacement facility lease is for a seven year term with occupancy of the new facility anticipated in the second quarter of 2001. The lease agreement requires a security deposit of $165,000 with $100,000 payable prior to occupancy. The Company anticipates that it will relocate its current manufacturing operation and administrative offices to the new facility in mid-2001. Base rent for the facility will be $31,786 per month. In addition, the Company will be responsible for all property taxes, insurance premiums and maintenance costs. On March 12, 2000 the Company entered into an agreement to lease a 51,000 square foot facility in Grapevine, Texas. The principal provisions under the five year lease term include base monthly rental payments of $17,521 and payment of common area maintenance costs by the lessee. The Company believes that these facilities are suitable and adequate to meet its production and distribution requirements. However, should the Company's business continue to expand, the Company may require additional capacity to meet its requirements. ITEM 3. LEGAL PROCEEDINGS. The Company filed a civil action on September 20, 2000 in the Circuit Court of Wayne County Michigan against Mr. Gary D. Lewis, individually and Wall Street Partners, Inc., a Michigan Corporation, jointly and severally. The Company has filed a breach of contract suit against Wall Street Partners, Inc. for breach of contract pertaining to consulting services provided the Company by Wall Street Partners, Inc. Also named in the suit was Mr. Gary D. Lewis, the principal of the consulting firm. Mr. Lewis is a former Chairman of the Company, a former director of the Company and is the beneficial owner of record of more than 5% of the Company's common shares. The Company has requested recovery of amounts paid to Wall Street Partners, Inc. and Mr. Lewis. A favorable outcome of this litigation may have a material impact on the Company. Wall Street Partners and Mr. Lewis have entered a counterclaim against the Company and its officers, alleging breach of fiduciary duty, aiding and abetting tortious conduct, indemnity from legal action and damages. On advice of counsel, the counterclaim does not appear to be of significant merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. 8 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Shares and Common Share Purchase Warrants are traded on the Nasdaq SmallCap Market under the symbols RMTI and RMTIW, respectively. The Common Shares and the Common Share Purchase Warrants began trading on the Nasdaq SmallCap Market on January 26, 1998 at an initial public offering price of $4.00 per Common Shares and $0.10 per Common Share Purchase Warrant. It is a requirement for continued listing of the Company's Common Shares and Common Share Purchase Warrants on the Nasdaq SmallCap Market that the Company either maintain a minimum of $2,000,000 in net tangible assets, have a $35,000,000 market capitalization or have earned $500,000 in net income for two of the three most recently completed fiscal years. The Company has relied on having net tangible assets in excess of $2,000,000 to meet this requirement. On December 1, 2000, Nasdaq notified the Company that it no longer meets this requirement. As of December 31, 2000, the Company had net tangible assets of $1,774,400. The Company is currently seeking additional equity funding in order to increase its net tangible assets. There can be no assurance that the Company will raise sufficient capital to meet the Nasdaq continued listing requirements or, even if it does raise such capital, that it will be able to avoid delisting. In addition, it is a requirement for continued listing on the Nasdaq SmallCap Market that the Company's Common Shares have a minimum bid price per share of at least $1. The minimum bid price per share of the Company's Common Shares has been below $1 for in excess of 30 consecutive days and is not currently in compliance with this requirement. While the Company is currently exploring alternatives to return to compliance with the Nasdaq listing requirements, including a reverse stock split, there can be no assurance that the Company will be successful in complying with the minimum bid price requirement or that the Company will be able to avoid delisting. If the Company's Common Shares and Common Share Purchase Warrants are delisted from the Nasdaq SmallCap Market, they would likely be quoted on the OTC Bulletin Board. Any delisting could cause the market price of the Common Shares and Common Share Purchase Warrants to decline and could make it much more difficult to buy or sell Common Shares or Common Share Purchase Warrants on the open market. The Prices below are the high and low bid prices as reported by Nasdaq in each quarter during 1999 and 2000. The below prices reflect inter-dealer prices, without retail mark-up, mark down or commission and may not represent actual transactions.
BID PRICE INFORMATION ---------------- QUARTER ENDED HIGH LOW ------------- ---- --- March 31,1999............................................... $3.625 $1.906 June 30, 1999............................................... 4.313 3.125 September 30, 1999.......................................... 4.750 2.625 December 31, 1999........................................... 4.063 1.938 March 31, 2000.............................................. 6.000 2.438 June 30, 2000............................................... 3.781 1.500 September 30, 2000.......................................... 2.219 1.000 December 31, 2000........................................... 1.563 .344
As of March 20, 2001, there were 33 record holders of the Common Shares and 28 record holders of the Common Share Purchase Warrants. The Company sold 76,843 unregistered Common Shares to an investor for $1.30 per share on August 11, 2000. The Company paid a commission to a broker of 10% of the gross proceeds on the transaction. The net proceeds to the Company were $78,336. The sale of the Common Shares pursuant to this offering was exempt from the registration requirements of the Securities and Exchange Act (the "Act") under Section 4(2) of the Act. The sale was subject to rescission rights because the Company failed to meet the minimum sale requirement of its offering. In consideration for the waiver of these rights, on March 29, 2001, the shareholder was issued an additional 41,641 Common Shares for no additional consideration. 9 11 On December 1, 2000, the Company issued 125,000 Common Shares in exchange for substantially all of the business and assets of a dialysis products manufacturer. The Common Shares had a fair market value of $125,000 on the date of issuance. The shareholder which acquired the Common Shares is required to hold the Common Shares for a period of one year from the date of issuance. The sale of the shares pursuant to this offering was exempt from the registration requirements of the Act under Section 4(2) of the Act. DIVIDENDS The payment of dividends by the Company is within the discretion of its Board of Directors and depends in part upon the Company's earnings, capital requirements, financial condition and requirements, future prospects, restrictions in future financing agreements, business conditions and other factors deemed relevant by the Board. Since its inception, the Company has not paid any cash dividends on its Common Shares and does not anticipate paying such dividends in the foreseeable future. The Company intends to retain earnings, if any, to finance the development and expansion of its operations. ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company was formed for the purpose of acquiring substantially all the assets of Rockwell Medical Supplies, L.L.C., and a related entity, Rockwell Transportation, L.L.C. (collectively the "Predecessor Company"). The Company acquired the Predecessor Company on February 19, 1997 for an adjusted purchase price of approximately $2.1 million. The Company funded the initial payment of $525,000 related to the purchase from the proceeds of a private placement of 495,000 of the Company's Common Shares (the "First Prior Financing"). The balance of the $1.2 million in net proceeds raised in the First Prior Financing was used to fund the Company's net losses and capital equipment purchases. In May through July, 1997, the Company sold 520,000 Common Shares and 520,000 Common Share Purchase Warrants (the "Second Prior Financing") for net proceeds of approximately $1.3 million of which $500,000 was used to further reduce the obligation related to the purchase of the Predecessor Company. The balance of the funds raised in the Second Prior Financing was used to fund the Company's continued net losses and for capital equipment expenditures. The remaining purchase obligation related to the Predecessor Company was converted into 1,095,915 Series A Preferred Shares. On January 26, 1998 the Company sold 1,800,000 Common Shares and 3,105,000 Common Share Purchase Warrants pursuant to a registration statement filed with the Securities and Exchange Commission (the "IPO") for net proceeds of $5.8 million. The proceeds were used to redeem all of the Series A Preferred Shares and reduce other liabilities as stated in the prospectus. The remaining cash of approximately $3.3 million was available to fund the future growth of the Company including working capital and capital expansion. RESULTS OF OPERATIONS For the year ended December 31, 2000 compared to the year ended December 31, 1999 For the year ended December 31, 2000, sales were $7.5 million as compared to sales of $6.7 million for 1998 representing an increase of 11.5%. Sales increased due to a variety of factors including new business development, and growth within existing customers. The Company realized substantial revenue increases in two key areas of strategic focus in 2000. The Company's Dry Acid product line sales increased 95% and its ancillary product sales increased 39% compared to 1999. The Company's concentrate sales, which represented 86% of the Company's 2000 revenue, increased by 9.5% in 2000 over 1999 due to new customers, increased product volumes at existing customers and higher actual average selling prices. During 2000, Rockwell increased its revenue with both regional and national clinic chains that have converted to the Company's dry acid product line. During 1999, the Company realized non-recurring liquid acid drum purchase volumes related to Year 2000 supply stocking and the termination of distributor relationships that together represented 8% of 1999 revenue. Despite these non-recurring sales in 1999, acid dialysate concentrate sales in 2000 were up 8% driven by strong dry acid product sales growth of 10 12 95%. The Company believes that both clinic chains and independent providers are attracted to its dry product offering due to the internal efficiencies and savings derived from dry products. In addition, the customers are attracted to Rockwell due to the Company's high product quality, its broad range of products and formulations and its high level of delivery and customer service. For the Company's other revenue sources, 2000 saw growth in its ancillary sales which was a key area of focus. The Company's sales of ancillary products rose 39% with an increased emphasis on the sale of fistula needles driving the majority of the ancillary product sales growth. The Company was also able to maintain its backhaul revenue at a level comparable to 1999. Largely as a result of the change of the Company's product mix to dry acid from liquid acid in drums, the Company was able to reduce the size of its truck fleet in 2000 over the course of the year, from twelve trucks to nine. Gross profit in 2000 increased $69,000 or 7.6% over 1999. The Company's gross profit margins were 13.1% in 2000 as compared to 13.6% in 1999. The Company's distribution costs rose during the year by approximately 2.5% of sales reflecting a combination of factors including higher fleet operating costs, fleet resources that were surplus to requirements as dry product sales increased and new clinic chain customers with clinics that were in more distant locations. Fleet operating costs rose significantly due mostly to higher fuel and maintenance costs. The Company took actions to reduce its fleet resources in 2000 to reflect its current business profile. Selling, General and Administrative Costs aggregated $2,024,000 in 2000 compared to $2,043,000 in 1999 or a decrease of $19,000. Cost increases were incurred primarily to support increased business activities and for the sales and marketing introduction of new product lines. The Company increased expenditures for marketing and advertising to develop customer and market awareness of its products. In addition, the Company added personnel to transact its business operations during 2000. However, the Company realized reduced expenditures for consulting services due to the termination of consulting fees paid to Wall Street Partners, Inc. in 2000. In 1999, the Company paid $240,000 to Wall Street Partners, Inc. for consulting services. Interest Income, net of expense aggregated $28,000 in 2000 compared to $61,000 in 1999. The decrease in interest income was primarily due to reduced funds available for investment. In addition, the Company incurred interest expense related to notes payable of $7,000. The Company incurred a loss of ($1,017,000) for 2000 which represented a reduction of $54,000 from its loss in 1999 which was ($1,071,000). The Company has not recorded a federal income tax benefit from its current or prior losses given a lack of assurance of realization of the carryforward benefit of those losses. Net Loss per share decreased to ($.21) in 2000 from ($.22) in 1999. The $.01 improvement in the loss per share was principally from improvement in operating results due to increased sales. The increase in shares outstanding had a negligible effect on earnings per share. For the year ended December 31, 1999 compared to the year ended December 31, 1998 For the year ended December 31, 1999, sales were $6.7 million as compared to sales of $5.3 million for 1998. The Company was successful in 1999 at attracting new customers with revenue increasing by 27% over 1998. Sales increased in 1999 due to combination of factors including new products, new business and improved pricing, which was partially offset by a reduction in lower margin distributor sales volume. The Company increased the sales revenue of its concentrate products by $1.4 million in 1999 compared to 1998. The Company's freight revenue which represented 4% of total revenue, increased by 17% in 1999 compared to 1998 while ancillary product sales decreased by 2%. New products sales represented a 20% increase over 1998. The Company's concentrate sales, which represented 88% of the Company's 1999 revenue, increased by 31% in 1999 over 1998 due to new products, improved customer mix and increased business volume. During 1999, Rockwell signed supply agreements with several multi-unit chains of hemodialysis providers that contributed to the Company's increased revenue. The Company successfully introduced two new product lines in 1999 which were its Dri-Sate Dry Acid Concentrate and its Sterilyte(TM) Liquid Bicarbonate product lines. New product sales represented 24% of the total 31% increase in concentrate revenue in 1999 over 1998. As a 11 13 result of changes to customer mix, changes to product mix and improved pricing, the Company's actual average selling prices on its concentrate products increased by 8.6% in 1999 over 1998. Dri-Sate Dry Acid Concentrate was the primary catalyst behind the Company's increased sales in 1999. Dri-Sate, which was rolled out to the market in early 1999, represented 25% of total acid sales in 1999. In addition to sales growth in its customer base, the Company also realized increased sales revenue in the fourth quarter of 1999 from customers electing to purchase and store product that was surplus to normal operating requirements as a risk management measure in anticipation of the possibility of a Year 2000 related disruption to their product supply chain. Subsequently, no such problems were experienced by the Company and the Company believes no such problems were experienced by its suppliers or its customers. The Company estimates that approximately 2-3% of its 1999 sales represented additional stocking by customers in excess of normal supply requirements. The Company's freight revenue, derived primarily from increased backhaul revenue on the Company's truck fleet, increased by $38,000 in 1999 over 1998. Ancillary product revenue consisting of a wide range of ancillary supply decreased approximately 2%. Ancillary sales represented 8% of revenue in 1999 compared to approximately 11% in 1998. Gross profit increased by $1.1 million on a sales increase of $1.4 million, reaching $911,000 in 1999 from a deficit of $171,000 in 1998. Contributing to the Company's improved profitability has been an increase in higher margin direct ship customers with a more favorable product mix. The Company has gained distribution efficiencies through the sale of its Dri-Sate Dry Acid Concentrate product line. Gross profit margins as a percentage of sales improved to 13.6% in 1999 from a deficit of 3.2% in 1998. The Company's gross profit margins increased by 16.6% to sales in 1999 over 1998 due to increased sales volumes, improving customer mix and improved product mix. Selling, General and Administrative Costs were $2,043,000 in 1999 compared to $1,871,000 in 1998 or an increase of $172,000. Cost increases were incurred primarily to support increased business activities and for the marketing introduction and sales of new product lines. The Company rolled out product launches in 1999 for its Dri-Sate Dry Acid Concentrate and Sterilyte(TM) Liquid Bicarbonate product. Sales and marketing expenses increased $80,000 over 1998. Personnel costs increased $100,000 compared to 1998. The Company paid consulting fees to the firm of Wall Street Partners, Inc. in both 1999 and 1998 aggregating $240,000 and $290,000 respectively. As of January 1, 2000, the Company elected not to renew its consulting agreement with Wall Street Partners, Inc. Interest Income aggregated $61,000 in 1999 compared to $113,600 in 1998. The decrease in interest income was due to reduced funds available for investment. The Company incurred a loss of ($1,071,000) for 1999 which represented a reduction of $857,000 from its loss in 1998 which was ($1,928,000). The Company has not recorded a federal income tax benefit from its current or prior losses given a lack of assurance of realization of the carryforward benefit of those losses. Net Loss per share decreased to ($.22) in 1999 from ($.41) in 1998. Of the $.19 improvement in the loss per share, nearly all of the improvement was from improvement in operating results due to increased sales and improving gross profit margins. An increase in average shares outstanding in 1999 contributed $.005, or less than one half of one cent, of the improvement in loss per share. LIQUIDITY & CAPITAL RESOURCES The Company has utilized cash since its inception and anticipates that it will continue to utilize cash to fund its development and operating requirements. The Company has incurred operating losses since inception. The initial purchase of a predecessor company coupled with subsequent operating losses have been primarily funded from the proceeds generated through the issuance of common shares and common share purchase warrants pursuant to two private equity financing arrangements and an initial public offering in January of 1998. 12 14 In 2000, the Company utilized approximately $882,000 in cash to fund its business development efforts, to fund operating losses and to expand its operations. As of December 31, 2000, the Company had cash on hand of approximately $211,000 and restricted cash of $150,000. In order to continue to operate its business and fund its growth strategy, the Company requires additional sources of financing. The Company's long term strategy is to expand its operations to serve its customers throughout North America. The Company anticipates that as a result of its existing supply agreements and customer relationships that it has the capability to capture sufficient new business to support additional manufacturing locations. The Company has plans to start-up its second manufacturing facility during the second quarter of 2001. The Company has received equipment lease financing commitments of $300,000 related to new equipment in its second facility. The Company has also entered into financing arrangements to support the development of its business and will continue to seek equity investments to develop the Company's business. As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. The Company is soliciting interest in a private placement of equity investments from accredited investors. As of March 28, 2001 the Company has not received a firm commitment for investment in its common shares. There can be no assurance that the Company will be successful in raising additional equity funds. If additional equity funds are not raised by the Company, the Company may be required to alter its growth strategy, curtail its expansion plans or take other measures to conserve its cash resources. There can be no assurance that the Company will be able to achieve the planned efficiencies and increase its sales levels and market share to sustain its operations. There can be no assurance that the Company has sufficient funds should the business plans not yield the expected results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. ITEM 7. FINANCIAL STATEMENTS The Consolidated Financial Statements of the Registrant and the Combined Financial Statements of the Predecessor Company required by this item are set forth on pages F-1 through F-15. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 15 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 10. EXECUTIVE COMPENSATION. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. 14 16 ITEMS 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3(i).1 Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).2 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).3 Certificate of Correction to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).4 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(ii) Bylaws of the Company, incorporated by reference to Exhibit 3(ii) to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.1 Form of Warrant Agreement, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.2 Form of Underwriters Warrant Agreement, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.3 Registration Rights Agreement among the Company and the holders of certain of the Company's Common Share Purchase Warrants, incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.4 Form of Lock-up Agreement, incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan, incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.2 Employment Agreement dated as of February 19, 1997 between the Company and Robert L. Chioini, incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.3 Consulting and Financial Advisory Services Agreement dated as of February 19, 1997 between the Company and Wall Street Partners, Inc., incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.4 Asset Purchase Agreement dated as of November 1, 1996 by and among the Predecessor Company, the Family Partnerships (as defined therein), the Members (as defined therein) and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.5 First Amendment to Asset Purchase Agreement dated as of January 31, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.6 Second Amendment to Asset Purchase Agreement dated as of February 19, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.7 Letter Agreement dated April 4, 1997 among the parties to the Asset Purchase Agreement concerning the conversion of the promissory note payable to the Supply Company, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
15 17 10.8 Lease Agreement dated as of September 5, 1995 between the Supply Company, as tenant, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.9 Assignment and First Amendment to Wixom Building Lease dated as of February 19, 1997 among the Supply Company, as assignor, the Company, as assignee, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.10 Letter Agreement dated November 21, 1997 among the parties to the Asset Purchase Agreement to confirm the reduction of the purchase price of the Asset Purchase Agreement, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.11 Employment Agreement dated as of January 12, 1999 between the Company and Thomas E. Klema. 10.12 Lease Agreement dated March 12, 2000 between the Company and DFW Trade Center III Limited Partnership. 10.13 Employment Agreement dated as of January 12, 1999 between the Company and Robert L. Chioini. 10.14 Lease Agreement dated October 23, 2000 between the Company and International-Wixom, LLC. 10.15 Loan and Security Agreement dated March 28, 2001 between the Company and Heller Healthcare Finance, Inc. 21.1 List of Subsidiaries.
(b) Reports on Form 8-K None 16 18 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. ROCKWELL MEDICAL TECHNOLOGIES, INC. (Registrant) By: /s/ ROBERT L. CHIOINI ------------------------------------ Robert L. Chioini President and Chief Executive Officer In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT L. CHIOINI President, Chief Executive Officer March 30, 2001 --------------------------------------------- and Director (Principal Executive Robert L. Chioini Officer) /s/ THOMAS E. KLEMA Vice President of Finance, Chief March 30, 2001 --------------------------------------------- Financial Officer, Treasurer and Thomas E. Klema Secretary (Principal Financial Officer and Principal Accounting Officer)
17 19 INDEX TO FINANCIAL STATEMENTS
PAGE ---- I. Consolidated Financial Statements for Rockwell Medical Technologies, Inc. and Subsidiary Report of Independent Accountants for the years ended December 31, 2000 and 1999............................. F-1 Consolidated Balance Sheets at December 31, 2000 and December 31, 1999...................................... F-2 Consolidated Income Statement for the years ended December 31, 2000 and 1999...................................... F-3 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2000 and 1999......... F-4 Consolidated Statements of Cash Flow for the years ended December 31, 2000 and 1999............................. F-5 Notes to the Consolidated Financial Statements............ F-6-F-15
18 20 [PLANTE & MORAN, LLP LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Rockwell Medical Technologies, Inc. and Subsidiary We have audited the consolidated balance sheet of Rockwell Medical Technologies, Inc. and Subsidiary as of December 31, 2000 and 1999 and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Rockwell Medical Technologies, Inc. and Subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred substantial losses from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Plante & Moran, LLP Auburn Hills, Michigan February 9, 2001, except for Notes 3 and 14 as to which the date is March 28, 2001 and Note 10 as to which the date is March 29, 2001. F-1 21 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Cash and Cash Equivalents................................... $ 210,801 $ 1,093,293 Restricted Certificate of Deposit........................... 150,000 -- Accounts Receivable, net of a reserve of $63,000 in 2000 and $53,000 in 1999........................................... 926,879 980,689 Inventory................................................... 585,121 413,240 Other Current Assets........................................ 98,619 30,618 ----------- ----------- TOTAL CURRENT ASSETS................................... 1,971,420 2,517,840 Property and Equipment, net................................. 823,749 699,233 Other Noncurrent Assets..................................... 170,994 138,396 Excess of Purchase Price over Fair Value of Net Assets Acquired, net............................................. 1,085,770 1,118,437 ----------- ----------- TOTAL ASSETS........................................... $ 4,051,933 $ 4,473,906 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes Payable............................................... $ 10,637 $ -- Accounts Payable............................................ 740,888 527,290 Accrued Liabilities......................................... 419,375 341,022 ----------- ----------- TOTAL CURRENT LIABILITIES.............................. 1,170,900 868,312 Long Term Notes Payable..................................... 19,839 -- SHAREHOLDERS' EQUITY: Common Share, no par value, 5,256,948 and 4,854,397 shares issued and outstanding.................................... 9,035,345 8,762,941 Common Share Purchase Warrants, 3,625,000 shares issued and outstanding............................................... 251,150 251,150 Accumulated Deficit......................................... (6,425,301) (5,408,497) ----------- ----------- TOTAL SHAREHOLDER'S EQUITY............................. 2,861,194 3,605,594 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 4,051,933 $ 4,473,906 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-2 22 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
2000 1999 ---- ---- SALES....................................................... $ 7,457,001 $ 6,688,914 Cost of Sales............................................... 6,477,343 5,778,154 ----------- ----------- GROSS PROFIT........................................... 979,658 910,760 Selling, General and Administrative......................... 2,024,396 2,043,098 ----------- ----------- OPERATING LOSS......................................... (1,044,738) (1,132,338) Interest Income............................................. 27,934 61,068 ----------- ----------- LOSS BEFORE INCOME TAXES............................... (1,016,804) (1,071,270) Income Tax Expense.......................................... -- -- ----------- ----------- NET LOSS............................................... $(1,016,804) $(1,071,270) =========== =========== Basic And Diluted Loss Per Share............................ $ (.21) $ (.22)
The accompanying notes are an integral part of the consolidated financial statements. F-3 23 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
COMMON SHARES PURCHASE WARRANTS TOTAL ----------------------- --------------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT WARRANTS AMOUNT DEFICIT EQUITY ------ ------ -------- ------ ----------- ------------- Balance as of December 31, 1998............... 4,830,450 $8,652,175 3,625,000 $251,150 $(4,337,227) $ 4,566,098 Issuance of Common Shares................. 23,947 35,778 35,778 Compensation related to Stock Options.......... -- 74,988 74,988 Net Loss................. (1,071,270) (1,071,270) --------- ---------- --------- -------- ----------- ----------- Balance as of December 31, 1999............... 4,854,397 $8,762,941 3,625,000 $251,150 $(5,408,497) $ 3,605,594 Issuance of Common Shares................. 402,551 223,104 223,104 Compensation related to Stock Options.......... -- 49,300 49,300 Net Loss................. (1,016,804) (1,016,804) --------- ---------- --------- -------- ----------- ----------- Balance as of December 31, 2000............... 5,256,948 $9,035,345 3,625,000 $251,150 $(6,425,301) $ 2,861,194 ========= ========== ========= ======== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 24 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $(1,016,804) $(1,071,270) Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities: Depreciation and Amortization.......................... 379,127 410,104 Compensation Recognized For Stock Options.............. 68,050 74,988 Changes in Working Capital: Decrease (Increase) in Accounts Receivable........... 53,810 (272,001) (Increase) Decrease in Inventory..................... (171,881) (191,145) Decrease (Increase) in Other Assets.................. (100,599) 34,399 Increase (Decrease) in Accounts Payable.............. 213,598 (1,418) Increase (Decrease) in Other Liabilities............. 78,353 167,674 ----------- ----------- Net change in Working Capital..................... 73,281 (262,491) ----------- ----------- CASH USED IN OPERATING ACTIVITIES................. (496,346) (848,669) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Equipment..................................... (304,530) (27,013) Purchase of Certificate of Deposit........................ (150,000) -- Purchase of Business...................................... (4,736) -- ----------- ----------- CASH USED IN INVESTING ACTIVITIES................. (459,266) (27,013) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Shares and Purchase Warrants........... 79,354 35,778 Payments on Notes Payable................................. (6,234) -- ----------- ----------- CASH PROVIDED BY FINANCING ACTIVITIES............. 73,120 35,778 (DECREASE) IN CASH.......................................... (882,492) (839,904) CASH AT BEGINNING OF PERIOD................................. 1,093,293 1,933,197 ----------- ----------- CASH AT END OF PERIOD....................................... $ 210,801 $ 1,093,293 =========== =========== Supplemental Cash Flow disclosure: 2000 1999 ---- ---- Interest Paid............................................... $ 7,086 None
The accompanying notes are an integral part of the consolidated financial statements. F-5 25 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Rockwell Medical Technologies, Inc.(the "Company") manufactures, sells and distributes hemodialysis concentrates and other ancillary medical products and supplies used in the treatment of patients with End Stage Renal Disease "ESRD". The Company supplies medical service providers who treat patients with kidney disease. The Company's products are used to cleanse patients' blood and replace nutrients lost during the kidney dialysis process. The Company primarily sells its products in the United States. The Company is regulated by the Federal Food and Drug Administration under the Federal Drug and Cosmetics Act, as well as by other federal, state and local agencies. Rockwell Medical Technologies, Inc. has received 510(k) approval from the FDA to market hemodialysis solutions and powders. The Company also has 510(k) approval to sell its Dri-Sate Dry Acid Concentrate product line and its Dri-Sate Mixer that were introduced during 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of Rockwell Medical Technologies, Inc. and its wholly owned subsidiary, Rockwell Transportation, Inc. All intercompany balances and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes revenue at the time of transfer of title to the buyer of the Company's products consistent with generally accepted accounting principles. CASH AND CASH EQUIVALENTS The Company considers cash on hand, unrestricted certificates of deposit and short term marketable securities as cash and cash equivalents. RESTRICTED CASH The Company considers certificates of deposit securing letters of credit as restricted cash. INVENTORY Inventory is stated at the lower of cost or net realizable value. Cost is determined on the first-in first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and Equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over their useful lives, which range from three to eight years. EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF ASSETS ACQUIRED The excess of the price paid by the Company over the fair value of the net assets acquired in various business combinations has been recorded as an intangible asset and is being amortized on a straight line basis over an estimated useful lives of between 10 and 15 years. Accumulated amortization of this asset was $606,065 and $448,662 at December 31, 2000 and 1999, respectively. The Company assesses the recover- F-6 26 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ability of the asset based on estimated future discounted cash flows of the business. Based upon the Company's analysis no impairment of the asset exists at December 31, 2000. INCOME TAXES A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting and operating loss and tax credit carryforwards. STOCK OPTIONS Options granted to employees are accounted for using the intrinsic value method, under which compensation expense is recorded at the amount by which the market price of the underlying stock at the date of the grant exceeds the exercise price of the option. Stock options granted to non-employees are recorded at the fair value of the awards at the date of the grant. ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. NET LOSS PER SHARE Basic and Diluted net loss per share for the years ended December 31, 2000 and December 31, 1999 were calculated based on the weighted average shares outstanding of 4,879,999 and 4,844,149, respectively The dilutive effect of stock options has not been included in the average shares outstanding for the calculation of diluted loss per share as the effect, considering the Company's net loss, would be antidilutive. At December 31, 2000 potentially dilutive securities comprised 668,693 stock options exercisable at prices from $1.00 to $3.00 per share, 3,625,000 Common Share Purchase Warrants exercisable at $4.50 per Common Share; and Underwriter's Warrants which are comprised of an option to purchase 95,000 Common Shares at a price of $6.60 per share and 142,500 warrants to purchase shares at $7.43 per share. At December 31, 1999 potentially dilutive securities comprised 619,401 stock options exercisable at prices from $1.44 to $3.00 per share; 3,625,000 Common Share Purchase Warrants exercisable at $4.50 per Common Share; and Underwriter's Warrants which are comprised of an option to purchase 95,000 Common Shares at a price of $6.60 per share and 142,500 warrants to purchase shares at $7.43 per share. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1999 financial statements to conform to the current year presentation. 3. MANAGEMENT'S PLAN OF OPERATION Rockwell Medical Technologies, Inc. is engaged in the manufacture, sale and distribution of hemodialysis concentrates and kits to various clinics primarily in the United States. The Company provides hemodialysis solutions and supplies to leading national hemodialysis provider chains along with a number of independently operated regional and local clinics. The Company has established relationships with a number of the leading hemodialysis treatment providers to supply its hemodialysis solutions and other hemodialysis supplies. The F-7 27 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company manufactures hemodialysis solutions and delivers those directly to its customers through its distribution subsidiary, Rockwell Transportation, Inc. The Company has followed a strategy of developing market share through a differentiated value proposition to its customers including new products, superior delivery and customer service, and tailoring product line offerings to match customer requirements, including offering a full line of formulations and supplies. In 2000, the Company's revenue increased $ 768,000 or 11.5% over 1999. In 1999, the Company successfully grew its revenue by $1.4 million or 27% over 1998. The Company anticipates that it will continue to increase its revenue and to increase its market share. The Company successfully introduced its dry acid concentrate product line in 1999. Dri-Sate revenue increased rapidly after introduction and represented 14% of total company sales in 1999 and grew to 24% of Company sales in 2000. The Company expects continued growth in its business. The Company anticipates that it will continue to require cash to fund the working capital requirements associated with future sales increases. STRATEGY The Company's long term objectives are to increase its market share, expand its product line offering, extend its geographical coverage and improve its profitability by implementing the following strategies: - Acting as a Single Source Supplier. The Company has positioned itself as an independent "one-stop-shop" to its customers for the concentrates, chemicals and supplies necessary to support a hemodialysis provider's operation. Some the Company's competitors for concentrates do not offer a full line of hemodialysis products requiring customers to do business with a number of suppliers in order to purchase necessary supplies. Rockwell offers a full line of hemodialysis supplies. - Increasing Revenue Through Sales of New Products. The Company introduced two new product lines in 1999; Dri-Sate Dry Acid Concentrate and SteriLyte(TM) Liquid Bicarbonate that it believes are superior to competitors' product offerings. The Company successfully introduced the Dri-Sate product line in 1999 and it has grown to represent a significant share of the Company's Acid Concentrate sales in its first two years. The Company anticipates Dri-Sate will continue to capture market share and will allow the Company to achieve its gross margin objectives. The Company also anticipates that its Sterilyte(TM) Liquid Bicarbonate product line will gain market share in the acute care market segment due to its higher quality and longer shelf life. - Increasing Revenue Through Ancillary Product Line Expansion. The Company believes that the market potential for ancillary products and supplies used by hemodialysis providers is equivalent to or greater than the market for dialysis concentrates. The Company's strategy is to offer cost effective ancillary products that include ancillary products such as specialized kits, fistula needles, gloves, chemicals, sterile dressings and blood lines. Many of these ancillary items are purchased based on price and are generally acquired from various suppliers. The Company believes that as it continues to gain market share that it will increasingly be able to procure these ancillary items on a cost effective basis and will provide its customers with both convenience from a single supply source and at a highly competitive price level. - Offering a Higher Level of Delivery/Customer Service. By using its own delivery vehicles and drivers, the Company believes that it can offer a higher level of customer service to hemodialysis providers than if it relied primarily on the use of common carriers to distribute its products. The Company's drivers perform services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. A drum pump-off requires the driver to pump hemodialysis concentrates from a 55 gallon drum into larger holding tanks within the hemodialysis clinic. The Company's main competitors generally use common carriers for delivery of their products. F-8 28 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes it offers a higher level of distribution service to its customers through the use of its own delivery vehicles and drivers. - Expanding Market Share in Target Regions. Because of the costs associated with transporting and delivering hemodialysis concentrates, the Company believes that it has a competitive cost advantage with certain clinics that are located within a reasonable proximity to the Company's manufacturing facility over other manufacturers outside of such proximity. The Company also believes that it can add additional manufacturing sites in certain geographic regions that will provide it with a competitive cost advantage and with superior customer service levels due to their proximity to the customer. The Company intends to leverage its existing customer relationships to expand into geographic areas where it currently has a minor or negligible presence. LIQUIDITY & CAPITAL RESOURCES The Company has utilized cash since its inception and anticipates that it will continue to utilize cash to fund its development and operating requirements. The Company has incurred operating losses since inception. The initial purchase of a predecessor company coupled with subsequent operating losses have been primarily funded from the proceeds generated through the issuance of common shares and common share purchase warrants pursuant to two private equity financing arrangements and an initial public offering in January of 1998. In 2000, the Company utilized approximately $882,000 in cash to fund its business development efforts, to fund operating losses and to expand its operations. As of December 31, 2000, the Company had cash on hand of approximately $211,000 and restricted cash of $150,000. In order to continue to operate its business and fund its growth strategy, the Company requires additional sources of financing. The Company's long term strategy is to expand its operations to serve its customers throughout North America. The Company anticipates that as a result of its existing supply agreements and customer relationships that it has the capability to capture sufficient new business to support additional manufacturing locations. The Company has plans to start-up its second manufacturing facility during the second quarter of 2001. The Company has received equipment lease financing commitments of $300,000 related to new equipment in its second facility. The Company has also entered into financing arrangements to support the development of its business and will continue to seek equity investments to develop the Company's business. As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. The Company is soliciting interest in a private placement of equity investments from accredited investors. As of March 28, 2001 the Company has not received a firm commitment for investment in its common shares. There can be no assurance that the Company will be successful in raising additional equity funds. If additional equity funds are not raised by the Company, the Company may be required to alter its growth strategy, curtail its expansion plans or take other measures to conserve its cash resources. There can be no assurance that the Company will be able to achieve the planned efficiencies and increase its sales levels and market share to sustain its operations. There can be no assurance that the Company has sufficient funds should the business plans not yield the expected results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying F-9 29 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts or the amount or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 4. SIGNIFICANT MARKET SEGMENTS The Company operates in one market segment which involves the manufacture and distribution of hemodialysis concentrates, dialysis kits and ancillary products used in the dialysis process to hemodialysis clinics. For the year ended December 31, 2000, the Company had sales in excess of 10% of revenue with three customers representing 36% of total sales. For the year ended December 31, 1999, the Company had sales in excess of 10% of revenue with two customers representing approximately 25% of total sales 5. INVENTORY Components of inventory as of December 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Raw Materials............................................ $133,203 $124,233 Finished Goods........................................... 451,918 289,007 -------- -------- Total............................................... $585,121 $413,240 ======== ========
6. PROPERTY AND EQUIPMENT Major classes of Property and Equipment, stated at cost, as of December 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Leasehold Improvements................................ $ 193,720 $ 36,232 Machinery and Equipment............................... 1,030,288 908,715 Office Furniture and Equipment........................ 139,762 136,046 Laboratory Equipment.................................. 135,893 135,893 Vehicles, including trailers........................ 132,016 104,784 ---------- ---------- 1,631,679 1,321,670 Accumulated Depreciation............................ (807,930) (622,437) ---------- ---------- Net Property and Equipment............................ $ 823,749 $ 699,233 ========== ==========
7. NOTES PAYABLE The Company has two notes payable related to material handling equipment and a vehicle which secure the notes payable. The notes payable are payable in even monthly installments of principal and interest payable over a period of three years. Interest rates on the notes range from 10.4 -- 11.5%. Monthly payments aggregate $1,200. Future maturities of notes payables are $10,637 in 2001, $12,973 in 2002 and $5,846 in 2003. 8. LEASES The Company leases its production facilities and administrative offices as well as transportation equipment used by the Company's subsidiary, Rockwell Transportation, Inc. The lease terms are three to seven years. These leases have been accounted for as operating leases. Lease payments under all operating leases were $583,064 and $515,513 for the years ended December 31, 2000 and 1999, respectively. F-10 30 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In accordance with the assignment of a facility lease from the Predecessor Company, the landlord required a deposit in escrow. The escrow deposit was applied against lease payments of $59,313 in the year ended December 31, 2000 and $39,542 in the year ended December 31, 1999. The remaining escrow deposit of $79,082 is to be returned as a security deposit refundable at lease termination subject to certain conditions. In the instance of early termination, the transportation equipment leases require the Company to pay the excess of the purchase price for such vehicles (determined in accordance with the terms of the lease) over the equipment's fair market value. In 2000, the Company entered into two lease agreements for new facilities both approximating 51,000 square feet. A five year lease arrangement for a second manufacturing facility was entered into by the Company on March 12, 2000. In addition, the Company entered into a lease agreement to lease a new manufacturing facility to replace its existing facility lease which expired December 5, 2000. The replacement facility lease is for a seven year term and was entered into in October 2000 with occupancy of the new facility anticipated in the second quarter of 2001. The lease agreement requires a $100,000 security deposit payable prior to occupancy. The Company will relocate its current manufacturing operation and administrative offices to the new facility. Future minimum rental payments under these lease agreements are as follows: Year ending December 31, 2001............................... $ 835,799 Year ending December 31, 2002............................... 825,113 Year ending December 31, 2003............................... 783,369 Year ending December 31, 2004............................... 677,991 Year ending December 31, 2005............................... 594,258 Thereafter.................................................. 894,212 ---------- Total..................................................... $4,610,742 ==========
9. INCOME TAXES The Company recorded no income tax expense or benefit for the years ended December 31, 2000 and 1999 due to the Company incurring net operating losses in each of those years. As a result, the Company has recorded a valuation allowance against its net deferred tax assets. A reconciliation of income tax expense at the statutory rate to income tax expense at the Company's effective tax rate is as follows:
2000 1999 ---- ---- Tax Recovery Computed at 34 % of Pretax Loss.............. $ (345,000) $ (364,000) Effect of Permanent Difference Principally Related to Stock Compensation Expense............................. 16,000 8,000 Effect of Change in Valuation Allowance................... 329,000 356,000 ----------- ----------- Total Income Tax Benefit.................................. $ -0- $ -0- =========== ===========
The details of the net deferred tax asset are as follows:
2000 1999 ---- ---- Total Deferred Tax Assets................................. $ 1,925,000 $ 1,580,000 Total Deferred Tax Liabilities............................ (41,000) (25,000) Valuation Allowance Recognized for Deferred Tax Assets.... (1,884,000) (1,555,000) ----------- ----------- Net Deferred Tax Asset.................................... $ -0- $ -0- =========== ===========
F-11 31 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax liabilities result primarily from the use of accelerated depreciation for tax reporting purposes. Deferred income tax assets result primarily from net operating loss carryforwards. For tax purposes, the Company has net operating loss carryforwards of approximately $5,287,000 that expire between 2012 and 2020. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Due to the Company's history of operating losses, management has placed a full valuation allowance against the net deferred tax assets as of December 31, 2000 and as of December 31, 1999. 10. CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 Common Shares, no par value per share, of which 5,256,948 shares were outstanding at December 31, 2000 and 4,854,397 shares were outstanding at December 31, 1999; 2,000,000 Preferred Shares, none issued or outstanding, and 1,416,664 of 8.5% non-voting cumulative redeemable Series A Preferred Shares, $1.00 par value (the "Series A Preferred Shares"), of which none were outstanding as of December 31, 2000. For the year ended December 31, 2000, the Company issued 76,843 Common Shares at a price of $1.30 per Common Share to an individual investor in a private placement of its Common Shares for net proceeds to the Company of $78,336. The sale was subject to rescission rights because the Company failed to meet the minimum sale requirement of its offering. In consideration for the waiver of these rights, on March 29, 2001, the shareholder was issued 41,641 Common Shares for no additional consideration. COMMON SHARES Holders of the Common Shares are entitled to one vote per share on all matters submitted to a vote of shareholders of the Company and are to receive dividends when and if declared by the Board of Directors. The Board is authorized to issue additional Common Shares within the limits of the Company's Articles of Incorporation without further shareholder action. WARRANTS Holders of the Common Share Purchase Warrants ("Warrants"), are entitled to purchase one Common Share at the exercise price of $4.50 per share for a period of three years commencing January 26, 1999 and expiring January 26, 2002. The exercise price and the number of Common Shares to be issued upon the exercise of each Warrant are subject to adjustment in the event of share split, share dividend, recapitalization, merger, consolidation or certain other events. At December 31, 2000 there were 3,625,000 Warrants issued and outstanding. Under certain conditions, the Warrants may be redeemed by the Company at a redemption price of $.10 per Warrant upon not less than 30 days prior written notice to the holders of such Warrants, provided the closing bid price of the Common Shares has been at least $7.00 for 20 consecutive trading days ending on the third day prior to the date the notice of redemption is given. UNDERWRITERS' WARRANTS In conjunction with the Company's Initial Public Offering in January 1998, the Underwriters' of the offering were entitled to warrants ("the Underwriters' Warrants") which provided them the option to purchase 180,000 Common Shares for a purchase price of $6.60 per share and 270,000 warrants for a purchase price of $.165 per warrant. Each underlying warrant entitled the Underwriter to purchase a Common share at a purchase price of $7.43 per share, exercisable at any time from January 26, 1999 to January 26, 2003. F-12 32 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2000, 95,000 of the Underwriters' options to purchase Common Shares and 142,500 underlying warrants remained outstanding of the Underwriters' Warrants. 11. STOCK OPTIONS The Board of Directors approved the Rockwell Medical Technologies, Inc., 1997 Stock Option Plan on July 15, 1997 (the "Plan"). The Stock Option Committee as appointed by the Board of Directors administers the Plan, which provides for grants of nonqualified or incentive stock options to key employees, officers, directors, consultants and advisors to the Company. As of May 10, 1999, the Shareholders of the Company adopted an amendment to the stock option plan to increase the number of options available to be granted to 900,000 from 450,000. Under the amendment to the Plan, the Company may grant up to 900,000 options to purchase Common Shares. Exercise prices, subject to certain plan limitations, are at the discretion of the Committee. Options granted normally expire 10 years from the date of grant or upon termination of employment. The Committee determines vesting rights on the date of grant. Employee options typically vest over a three year period from the date of grant. Employee stock options awarded in July and November of 1997 had an exercise price of $3.00, which is less than the deemed fair market value of the stock at the date of grant as determined by the Company as $4.00. On April 13, 1998 these option holders, excluding the President and members of the Board of Directors, were offered the alternative of receiving new stock options in the same quantity as previously awarded but at an exercise price of $1.4375, the closing price on the Nasdaq SmallCap Market on the date of the offer. Vesting rights on the new options began to accrue on the date of the offer. Under the provisions of APB No. 25, compensation expense on these employee stock options is recognized over the vesting period and is determined as the difference between the IPO price of $4.00 per share (the deemed fair value of the shares on the date of the award), and the exercise price, as adjusted on April 13, 1998. Compensation expense related to employee stock options for the years ended December 31, 2000 and 1999 was $49,300 and $ 74,988, respectively. The Company also granted 202,020 stock options to a consultant on November 30, 2000 with an exercise price of $.01 per Common Share. The consultant immediately exercised their options which resulted in the issuance of 200,000 shares of common stock. These options had a fair market value of $ 225,000 on the date of grant. The fair market value is being amortized to expense over the one year term of the consulting agreement. F-13 33 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's Employee Stock Option Plan excluding options granted to consultants is as follows:
SHARES PRICE ------ ----- Outstanding at December 31, 1998............................ 407,450 $2.14 Granted................................................... 336,250 $2.16 Exercised................................................. 23,947 1.49 Cancelled................................................. 100,352 2.10 ------- Outstanding at December 31, 1999............................ 619,401 $2.18 Granted................................................... 81,000 $1.56 Exercised................................................. 708 1.44 Cancelled................................................. 31,000 2.19 ------- Outstanding at December 31, 2000............................ 668,693 $2.11 =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- -------------------- WEIGHTED NUMBER REMAINING WEIGHTED NUMBER AVERAGE RANGE OF OF CONTRACTUAL EXERCISE OF EXERCISE EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE --------------- ------- ----------- -------- ------- -------- $1.00 to $1.44 65,510 7.3-9.9 yrs $1.30 48,115 $1.26 $1.50 to $2.00 211,000 7.9-9.9 yrs $1.69 120,000 $1.67 $2.25 to $3.00 392,183 6.6-9.0 yrs $2.47 268,596 $2.59 ------- ------- Total 668,693 8.3 yrs $2.11 449,011 $2.19
Had compensation expense for the employee stock options been determined based on the fair value of the option at the grant dates of the awards, consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts as follows:
2000 1999 ---- ---- Net loss As reported....................................... $(1,016,804) $(1,071,270) Pro forma......................................... $(1,292,069) $(1,315,833) Basic and Diluted loss per share As reported....................................... $ (.21) $ (.22) Pro forma......................................... $ (.27) $ (.27)
The per share weighted average fair values at the date of grant for the options granted to employees during the years ended December 31, 2000 and 1999 were $ 1.00 and $1.90 respectively. For the period ended December 31, 2000 the fair value was determined using the Black Scholes option pricing model using the following assumptions: dividend yield of 0.0 percent, risk free interest rate of 6.00 percent, volatility of 126% and expected lives of up to 3.0 years. For the year ended December 31, 1999, the fair value was estimated using the following assumptions: dividend yield of 0.0 percent, risk free interest rate of 6.25 percent, volatility of 133% and expected lives of 5.0 years. 12. RELATED PARTY TRANSACTIONS During the year ended December 31, 1999, the Company paid or accrued fees to the consulting firm of Wall Street Partners, Inc. for financial and management services of $240,000. Effective January 1, 2000, the consulting agreement with Wall Street Partners, Inc. was not renewed by the Company. Mr. Gary L. Lewis F-14 34 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was the sole principal of Wall Street Partners, Inc. Mr. Lewis served as Chairman of the Board of Directors of the Company from its inception until March 14, 2000 and is also a shareholder. During the year ended December 31, 2000, the Company had revenue from companies in which its outside directors held an equity interest. Mr. Ronald D. Boyd, a director of the Company as of March 14, 2000, holds an equity interest in a distributor of the Company's products. Revenue from this distributor in 2000 was $ 62,000. Mr. Kenneth L. Holt, a director of the Company as of March 14, 2000, holds an equity interest in a customer of the Company. Revenue from this customer in 2000 was $ 53,000. 13. SUPPLEMENTAL CASH FLOW INFORMATION The Company entered into the below described non-cash transactions during the year ended December 31, 2000 which have not been included in the Consolidated Statement of Cash Flows. In the year ended December 31, 2000, the Company issued 125,000 shares of common stock valued at $125,000 and paid $ 4,736 to acquire the assets and business of a small company. The Company recorded fixed assets related to this acquisition of $ 5,000 with the remainder allocated to the excess of purchase price over net assets acquired. The Company issued 200,000 shares of common stock related to a stock option grant to a consultant in exchange for consulting services. The fair market value on the date of the grant was $ 225,000 which is being amortized to expense over the one year service period of the agreement. The Company acquired $ 36,710 of equipment during the year ended December 31, 2000 which was financed through the issuance of notes payable. 14. SUBSEQUENT EVENTS As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. F-15 35 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 3(i).1 Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).2 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).3 Certificate of Correction to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).4 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(ii) Bylaws of the Company, incorporated by reference to Exhibit 3(ii) to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.1 Form of Warrant Agreement, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.2 Form of Underwriters Warrant Agreement, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.3 Registration Rights Agreement among the Company and the holders of certain of the Company's Common Share Purchase Warrants, incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.4 Form of Lock-up Agreement, incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan, incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.2 Employment Agreement dated as of February 19, 1997 between the Company and Robert L. Chioini, incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.3 Consulting and Financial Advisory Services Agreement dated as of February 19, 1997 between the Company and Wall Street Partners, Inc., incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.4 Asset Purchase Agreement dated as of November 1, 1996 by and among the Predecessor Company, the Family Partnerships (as defined therein), the Members (as defined therein) and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.5 First Amendment to Asset Purchase Agreement dated as of January 31, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.6 Second Amendment to Asset Purchase Agreement dated as of February 19, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
36
EXHIBIT NO. DESCRIPTION ------- ----------- 10.7 Letter Agreement dated April 4, 1997 among the parties to the Asset Purchase Agreement concerning the conversion of the promissory note payable to the Supply Company, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.8 Lease Agreement dated as of September 5, 1995 between the Supply Company, as tenant, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.9 Assignment and First Amendment to Wixom Building Lease dated as of February 19, 1997 among the Supply Company, as assignor, the Company, as assignee, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.10 Letter Agreement dated November 21, 1997 among the parties to the Asset Purchase Agreement to confirm the reduction of the purchase price of the Asset Purchase Agreement, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.11 Employment Agreement dated as of January 12, 1999 between the Company and Thomas E. Klema. 10.12 Lease Agreement dated March 12, 2000 between the Company and DFW Trade Center III Limited Partnership. 10.13 Employment Agreement dated as of January 12, 1999 between the Company and Robert L. Chioini. 10.14 Lease Agreement dated October 23, 2000 between the Company and International-Wixom, LLC. 10.15 Loan and Security Agreement dated March 28, 2001 between the Company and Heller Healthcare Finance, Inc. 21.1 List of Subsidiaries.