e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-23661
ROCKWELL MEDICAL TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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Michigan
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38-3317208
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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30142 Wixom Road
Wixom, Michigan
(Address of principal
executive offices)
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48393
(Zip Code)
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(248) 960-9009
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common Stock, no par value
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Nasdaq Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
(None)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of June 30,
2007 is $59,439,199. For purposes of this computation, shares of
common stock held by our executive officers, directors and
common shareholders with 10% or more of the outstanding shares
of common stock were excluded. Such determination should not be
deemed an admission that such officers, directors and beneficial
owners are, in fact, affiliates.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date. 13,817,453 common shares outstanding as of
February 29, 2008.
Documents
Incorporated by Reference
Portions of the Registrants definitive Proxy Statement
pertaining to the 2008 Annual Meeting of Shareholders (the
Proxy Statement) to be filed pursuant to
Regulation 14A are herein incorporated by reference in
Part III of this Annual Report on
Form 10-K.
PART I
References to the Company, we,
us and our are to Rockwell Medical
Technologies, Inc. and its subsidiaries unless otherwise
specified or the context otherwise requires.
Forward
Looking Statements
We make forward-looking statements in this report and may make
such statements in future filings with the Securities and
Exchange Commission. We may also make forward-looking statements
in our press releases or other public or shareholder
communications. Our forward-looking statements are subject to
risks and uncertainties and include information about our
expectations and possible or assumed future results of our
operations. When we use words such as may,
might, will, should,
believe, expect, anticipate,
estimate, continue, predict,
forecast, projected, intend
or similar expressions, or make statements regarding our intent,
belief, or current expectations, we are making forward-looking
statements. Our forward looking statements also include, without
limitation, statements about our competitors, statements
regarding the potential for the CMS to change its reimbursement
policies and the effect on our business if such change is made,
and statements regarding the timing and costs of obtaining FDA
approval of our new iron product.
We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995 for all of our forward-looking statements. While we
believe that our forward-looking statements are reasonable, you
should not place undue reliance on any such forward-looking
statements, which are based on information available to us on
the date of this report or, if made elsewhere, as of the date
made. Because these forward-looking statements are based on
estimates and assumptions that are subject to significant
business, economic and competitive uncertainties, many of which
are beyond our control or are subject to change, actual results
could be materially different. Factors that might cause such a
difference include, without limitation, the risks and
uncertainties discussed in this report, including without
limitation in Item 1A Risk Factors,
and from time to time in our other reports filed with the
Securities and Exchange Commission. Other factors not currently
anticipated may also materially and adversely affect our results
of operations, cash flows and financial position. We do not
undertake, and expressly disclaim, any obligation to update or
alter any statements whether as a result of new information,
future events or otherwise except as required by law.
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Item 1.
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Description
of Business.
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General
Rockwell Medical Technologies, Inc., incorporated in the state
of Michigan in 1996, manufactures hemodialysis concentrate
solutions and dialysis kits, and we sell, distribute and deliver
these and other ancillary hemodialysis products primarily to
hemodialysis providers in the United States as well as
internationally primarily in Latin America, Asia and Europe.
Hemodialysis duplicates kidney function in patients with failing
kidneys also known as End Stage Renal Disease (ESRD). ESRD is an
advanced stage of chronic kidney disease characterized by the
irreversible loss of kidney function. Without properly
functioning kidneys, a patients body cannot get rid of
excess water and toxic waste products. Without frequent and
ongoing dialysis treatments these patients would not survive.
Our dialysis solutions (also known as dialysate) are used to
maintain life, removing toxins and replacing nutrients in the
dialysis patients bloodstream. We have licensed and are
currently developing proprietary renal drug therapies for both
iron-delivery and carnitine/vitamin-delivery, utilizing
dialysate as the delivery mechanism. Iron supplementation is
routinely administered to approximately 90% of patients
receiving treatment for anemia. We have licensed a drug therapy
for the delivery of iron supplementation for anemic dialysis
patients which we refer to as dialysate iron and more
specifically as soluble ferric pyrophosphate (SFP). To realize a
commercial benefit from this therapy, and pursuant to the
licensing agreement, we must complete clinical trials and obtain
U.S. Food and Drug Administration (FDA)
approval to market iron supplemented dialysate. We also plan to
seek foreign market approval for this product. We believe this
product will substantially improve iron maintenance therapy and,
if approved, will compete for the global market for iron
maintenance therapy. Based on reports from manufacturers of
intravenous (IV) iron products, the market size in the
United States for this iron therapy is over $400,000,000 per
1
year. We estimate the global market is in excess of
$750,000,000. We cannot, however, give any assurance that this
product will be approved by the FDA or, if approved, that it
will be successfully marketed.
We have also entered into a licensing agreement related to a
patent for the delivery of carnitine and vitamins via our
hemodialysis solutions. To realize a commercial benefit of this
product we must obtain regulatory approval of this product. We
seek to add other renal therapies to our pipeline in the future.
How
Hemodialysis Works
Hemodialysis patients generally receive their treatments at
independent hemodialysis clinics or at hospitals. A hemodialysis
provider such as a hospital or a free standing clinic uses a
dialysis station to treat patients. A dialysis station contains
a dialysis machine that takes concentrate solutions primarily
consisting of nutrients and minerals, such as our liquid
concentrate solutions or our concentrate powders mixed with
purified water, and accurately dilutes those solutions 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 patients blood is
pumped through a semi-permeable membrane within the dialyzer.
Excess water and chemicals from the patients blood pass
through the membrane and are carried away in the dialysate while
certain nutrients and minerals in the dialysate penetrate the
membrane and enter the patients blood to maintain proper
blood chemistry. Dialysate generally contains dextrose, sodium
chloride, calcium, potassium, magnesium, sodium bicarbonate and
acetic acid. The patients physician chooses the formula
required for each patient based on each particular
patients 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 provider also requires various other ancillary products
such as blood tubing, fistula needles, specialized custom kits,
dressings, cleaning agents, filtration salts and other supplies,
many of which we sell.
Dialysis
Industry Trends
Hemodialysis treatments are generally performed in independent
clinics or hospitals with the majority of dialysis services
performed by regional and national for profit dialysis chains.
The two largest national for-profit dialysis chains service
approximately 60% of the domestic hemodialysis market. According
to the latest industry statistics published by the
U.S. Renal Data Systems (USRDS),
341,000 patients in the United States were receiving
dialysis treatments at the end of 2005. The domestic dialysis
industry has experienced steady patient population growth over
the last two decades. In the last five years, the patient growth
rate has increased between 3% and 5% per year. Population
segments with the highest incidence of ESRD are also among the
fastest growing within the U.S. population including the
elderly, Hispanic and
African-American
population segments. Recent U.S. demographic projections
indicate that the incidence of ESRD is expected to increase in
the years ahead and will exceed current incidence levels.
ESRD incidence rates vary by country with some higher and some
lower than the United States. Based on industry reports, the
global ESRD population is estimated to be over 2 million
and to be growing at a rate of approximately 6% annually. The
three major dialysis markets are the United States, the European
Union and Japan, which together represent approximately 60% of
the global treatments based on industry estimates.
Our
Strategy
Our strategy is to develop our dialysis concentrate and supply
business and to develop drugs, nutrients and vitamins to be
delivered by our dialysis concentrate products. Our long term
objectives are to increase our market share, expand our product
line, expand our geographical selling territory and improve our
profitability by implementing the following strategies:
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increasing our revenues through new innovative products, such as
our
Dri-Sate®
Dry Acid Concentrate Mixing System and
SteriLyte®
Liquid Bicarbonate Concentrate,
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gaining FDA approval to market innovative products such as iron
supplemented dialysate,
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acting as a single source supplier to our customers for the
concentrates, chemicals and supplies necessary to support a
hemodialysis providers operation,
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increasing our revenues by expanding our ancillary product line,
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offering our customers a higher level of delivery and customer
service by using our own delivery vehicles and drivers, and
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expanding our market share in target regions, including regions
where our proximity to customers will provide us with a
competitive cost advantage and allow us to provide superior
customer service levels.
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Products
We manufacture, sell, distribute and deliver hemodialysis
concentrates as well as a full line of ancillary hemodialysis
products to hemodialysis providers and distributors located in
approximately 40 states as well as a number of foreign
countries, primarily in Latin America, Asia and Europe.
Hemodialysis concentrates are comprised of two primary product
types, which are generally described as acidified dialysate
concentrate, also known as acid concentrate, and bicarbonate.
Renal
Pure Liquid Acid Concentrate
Acid concentrate generally contains sodium chloride, dextrose
and electrolyte additives such as magnesium, potassium, and
calcium. Acid concentrate products are manufactured in three
basic series to reflect the dilution ratios used in various
types of dialysis machines. We supply all three series and
currently manufacture approximately 60 different liquid acid
concentrate formulations. We supply liquid acid concentrate in
both 55 gallon drums and in cases containing four one gallon
containers.
Dri-Sate®
Dry Acid Concentrate & Mixing System
In June of 1998, we obtained 510(k) clearance from the FDA to
manufacture and market Dri-Sate Dry Acid Concentrate &
Mixing System. This product line enhanced our previous liquid
acid concentrate product offerings. Since its introduction, our
dry acid concentrate product line has been a significant
catalyst behind our growth. See Government
Regulation for a discussion of 510(k) clearance and other
applicable governmental regulation.
Our Dri-Sate Dry Acid Concentrate & Mixing System
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 concentrate provided to our
customers in liquid form. Clinics using Dri-Sate Dry Acid
Concentrate realize numerous advantages, including lower cost
per treatment, reduced storage space requirements, reduced
number of deliveries and more flexibility in scheduling
deliveries. In addition to the advantages to our customers, the
freight costs to us are lower for Dri-Sate Dry Acid Concentrate
than for acid concentrate in the liquid form. We can also
realize greater productivity from our truck fleet resources
delivering dry products.
RenalPure
Powder Bicarbonate Concentrate
Bicarbonate is generally sold in powder form and each clinic
generally mixes bicarbonate on site as required. We offer
approximately 20 bicarbonate products covering all three series
of generally used bicarbonate dilution ratios.
SteriLyte®
Liquid Bicarbonate Concentrate
In June of 1997, we obtained 510(k) clearance from the FDA to
manufacture and market SteriLyte Liquid Bicarbonate. Our
SteriLyte Liquid Bicarbonate is used in both acute care and
chronic care settings. Our SteriLyte Liquid Bicarbonate offers
the dialysis community a high-quality product and provides the
clinic a safe supply of bicarbonate.
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Ancillary
Products
We offer a wide range of ancillary products including blood
tubing, fistula needles, specialized custom kits, dressings,
cleaning agents, filtration salts and other supplies used by
hemodialysis providers.
Iron
Supplemented Dialysate
We have licensed the exclusive right to manufacture and sell a
product that we believe will substantially improve the treatment
of dialysis patients with iron deficiency, which is pervasive in
the dialysis patient population. Iron deficiency in dialysis
patients typically results from the demands placed upon the body
by current dialysis drug therapies. Most dialysis patients
receive replacement therapy of recombinant human erythropoetin
(Epoetin alfa or EPO). EPO is a hormone that acts in the bone
marrow to increase the production of red blood cells, which
carry oxygen throughout the body to nourish tissues and sustain
life. Hemoglobin, an important constituent of red blood cells,
is composed largely of iron and protein.
Treatment with EPO therapy requires adequate amounts of iron, as
well as the rapid mobilization of iron reserves, for new
hemoglobin synthesis and new red blood cell formation. The
demands of this therapy can outstrip the bodys ability to
mobilize iron stores. EPO is commonly administered as a
large IV injection on an intermittent basis, which creates
an unnatural strain on the iron release process when the need
for iron outstrips its rate of delivery, called functional iron
deficiency. In addition, the majority of dialysis patients also
suffer from iron deficiency resulting from blood loss from
dialysis treatments and reduced dietary intake of iron.
Accordingly, iron supplementation is required to maintain proper
iron balance and ensure good therapeutic response from EPO
treatments. The liver is the site of most stored iron. Iron
stores typically will be depleted before the production of
iron-containing proteins, including hemoglobin, is impaired.
Most dialysis patients receiving EPO therapy also receive iron
supplement therapy in order to maintain sufficient iron stores
and to achieve the full benefit of EPO treatments.
Current iron supplement therapy involves IV parenteral iron
compounds, which deposit their iron load onto the liver rather
than directly to blood plasma to be carried to the bone marrow.
The liver slowly processes these iron deposits into a useable
form. As a result of the time it takes for the liver to process
a dosage of IV iron into useable form, there can be
volatility in iron stores, which can reduce the effectiveness of
EPO treatments.
Our iron supplemented dialysate is distinctly different
from IV iron compounds because our product transfers iron
in a useable form directly from dialysate into the blood plasma,
from which it is carried directly to the bone marrow for the
formation of new red blood cells. The kinetic properties of our
iron compound allows for the rapid uptake of iron in blood
plasma by molecules that transport iron called transferrin. The
frequency and dosage of our iron supplemented dialysate is
designed and intended to maintain iron balance in a steady
state. We believe that this more direct method of iron delivery
will be more effective at maintaining iron balance in a steady
state and to achieve superior therapeutic response from EPO
treatments.
Iron supplemented dialysate has other benefits that we believe
are important. Iron administered by our product bypasses the
liver altogether and thereby avoids causing oxidative stress to
the liver, which we believe is a significant risk of current
iron supplement therapies. In addition, we believe that clinics
may realize significant drug administration savings due to
decreased nursing time for administration and elimination of
supplies necessary to administer IV iron compounds.
We are currently in the process of preparing to seek FDA
approval of iron supplemented dialysate. A Phase II
clinical trial on one of our licensed iron supplemented
dialysate products under an Investigational New Drug (IND)
exemption was completed by one of our licensors primary to us
licensing the product. We plan to conduct the testing required
to obtain FDA approval to market SFP in the United States. We
commenced a second Phase II clinical trial, our dose
ranging study, in the fourth quarter of 2007. It is our
intention to commence Phase III clinical trials after the
FDA approves our Phase III protocol and following
successful completion of our dose ranging study.
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Distribution
and Delivery Operations
The majority of our domestic sales are delivered by our
subsidiary, Rockwell Transportation, Inc. Rockwell
Transportation, Inc. operates a fleet of trucks which are used
to deliver products to our customers. A portion of our
deliveries, primarily to medical products distributors, is
provided by common carriers chosen by us based on rates.
We perform services for customers that are generally not
available from common carriers, such as stock rotation,
non-loading-dock delivery and drum pump-offs. Certain of our
competitors use common carriers
and/or do
not perform the same services upon delivery of their products.
We believe we offer a higher level of service to our customers
because of the use of our own delivery vehicles and drivers.
Our Dri-Sate Dry Acid Concentrate provides an economic incentive
to our customers to migrate from liquid acid dialysate in drums
to our dry acid concentrate as a result of distribution
synergies realized from Dri-Sate. As an example, a pallet
containing four drums of liquid acid concentrate contains 220
gallons of liquid acid concentrate. On a pallet containing our
Dri-Sate Dry Acid Concentrate, we can ship the equivalent of
1,200 gallons of acid concentrate in powder form. The potential
distribution savings offered with Dri-Sate coupled with other
advantages over drums make Dri-Sate an attractive alternative
for many customers.
Sales and
Marketing
We primarily sell our products directly to domestic hemodialysis
providers through direct salespeople employed by us and through
several independent sales representation companies. Our
President and Chief Executive Officer leads and directs our
sales efforts to our major accounts. We also utilize several
independent distributors in the United States. Our products are
sold to certain international customers through independent
sales agents and distributors.
Our sales and marketing initiatives are directed at purchasing
decision makers at large for-profit national and regional
hemodialysis chains and toward independent hemodialysis service
providers. Our marketing efforts include advertising in trade
publications, distribution of product literature and attendance
at industry trade shows and conferences. We target our sales and
marketing efforts to clinic administrators, purchasing
professionals, nurses, medical directors of clinics, hospital
administrators and nephrologists.
Competition
Dialysis
Concentrate and Supplies Competition
We compete against larger more established competitors with
substantially greater financial, technical, manufacturing,
marketing, research and development and management resources. We
had three major competitors until one of our major competitors,
Gambro Healthcare, Inc. (Gambro), exited the
hemodialysis concentrate market at the end of 2006. Our largest
competitor is Fresenius Medical Care, Inc.
(Fresenius) which is primarily in the business of
operating dialysis clinics. Fresenius is also vertically
integrated and manufactures a broad range of dialysis products.
They produce and sell a more comprehensive line of dialysis
equipment, supplies and services than we sell.
Fresenius treats over 121,000 dialysis patients in North America
and operates approximately 1,600 clinics. It also has a renal
products business that manufactures a broad array of equipment
and supplies, 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. Fresenius manufactures
its concentrate in its own regional manufacturing facilities.
Fresenius operates an extensive warehouse network in the United
States serving its captive customer base and other independent
clinics.
Gambro manufactures and sells hemodialysis machines, dialyzers
and other ancillary supplies. Until the end of 2006, Gambro
marketed its concentrate solutions to dialysis chains and
independent clinics. Gambro sold products to its own clinics
until October 2005 when it sold those clinics to DaVita, Inc.
(DaVita), our largest customer. The sale resulted in
DaVita having approximately 107,000 patients and 1,350
clinics. Concurrent with Gambros exit from the concentrate
business in late 2006, we began to service many of the DaVita
clinics previously serviced by Gambro.
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We also compete against Cantel Medical Corp.s subsidiary,
Minntech Corporation (Minntech). Minntechs
Renal Systems division primarily sells dialysis concentrates and
Renalin, a specialty reuse agent for sanitizing dialyzers.
Minntech has one domestic manufacturing facility located in
Minnesota. We believe Minntechs primary concentrate
marketing strategy is to sell its liquid concentrate products to
domestic customers within a 300 mile radius of its
facility. We believe Minntech largely uses its own vehicles to
deliver its products to its customers.
In addition, we compete against other distributors with respect
to certain ancillary products and supplies.
Iron
Maintenance Therapy Market Competition
We intend to enter the iron maintenance therapy market for the
treatment of dialysis patients with anemia. We must obtain FDA
approval for our iron supplemented dialysate to enter this
market. The iron therapy market for IV iron in the United
States is presently serviced by two companies. We believe the
market leader is Watson Pharmaceutical, Inc.
(Watson). Watson markets a product called
Ferrlecit®
which is an injectable iron supplement made of sodium ferric
gluconate complex in sucrose, and also markets a product called
IN-FeD®
which is an injectable iron supplement made of dextran and
ferric hydroxide. Watson is a large manufacturer of both generic
and branded drugs. A second competitor in the IV iron
market is American Regent Laboratories, Inc., which markets
Venofer®,
an injectable iron sucrose product. Both Watson and American
Regent Laboratories, Inc. have substantially greater resources
than us. American Regent Laboratories, Inc. is a subsidiary of
Luitpold, Inc. who has the U.S. marketing rights for
Venofer which was developed and is owned by the Galenica Group
through its subsidiary, Vifor International, Ltd.
The markets for drug products are highly competitive. New
products we are developing will face competition from both
conventional forms of iron delivery (i.e., oral and parenteral).
In addition we believe that several companies including Galenica
are attempting to develop new IV iron drugs. Galenica is
seeking FDA approval of an additional parenteral iron product,
Ferrinject. Advanced Magnetics, Inc. is also seeking FDA
approval for Ferumoxytol, a parenteral iron product. Both of
these products are under FDA review. We believe that both of
these products are primarily intended to target the pre-ESRD
markets and other indications such as oncology but if approved
by the FDA they may compete against us in the ESRD market as
well.
Competition in drug delivery systems is generally based on
marketing strength, product performance characteristics (i.e.,
reliability, safety, patient convenience) and product price.
Acceptance by dialysis providers and nephrologists is also
critical to the success of a product. The first product on the
market in a particular therapeutic area typically is able to
obtain and maintain a significant market share. In a highly
competitive marketplace and with evolving technology, additional
product introductions or developments by others might render our
products or technologies noncompetitive or obsolete. In
addition, pharmaceutical and medical device companies are
largely dependent upon health care providers being reimbursed by
private insurers and government agencies. Drugs approved by the
FDA might not receive reimbursement from private insurers or
government agencies. Even if approved by the FDA, providers of
dialysate iron maintenance therapy might not obtain
reimbursement from insurers or government agencies. If providers
do not receive reimbursement for dialysate iron maintenance
therapy, the commercial prospects and marketability of the
product would be severely diminished.
CMS has historically paid providers for dialysis treatments in
two parts: the composite rate and separately reimbursed drugs
and services. CMS reimbursement practices are changing, which we
think may benefit our marketing efforts. CMS has already
implemented a change in its reimbursement practices to
reclassify the administration portion of drug payments to the
composite rate. Currently, it reimburses separately for the drug
cost and has included the amount paid for drug administration
into the composite rate.
We believe that CMSs payment practices may eventually
result in a single composite rate per treatment, thereby
eliminating reimbursement for individual drugs to providers. We
believe that if and when a single reimbursement rate per
treatment is implemented by CMS that the provider market may
find the potential economic advantages of our iron supplemented
dialysate an attractive alternative to IV iron drugs.
Providers may be attracted to SFP over IV iron products due
to lower cost of administration and due to the potential of
improved therapeutic response from EPO treatments.
6
Quality
Assurance and Control
We place significant emphasis on providing quality products and
services to our customers. Quality management plays an essential
role in determining and meeting customer requirements,
identifying, preventing and correcting variance from
specifications and improving our products. We have implemented
quality systems that involve control procedures that result in
rigid conformance to specifications. Our quality systems also
include assessments of suppliers of raw materials, packaging
components and finished goods, and quality management reviews
designed to inform management of key issues that may affect the
quality of products, assess the effectiveness of our quality
systems and identify areas for improvement.
Technically trained professionals at our production facilities
develop and implement our quality systems which include specific
product testing procedures and training of employees reinforcing
our commitment to quality and promoting continuous process
improvements. To assure quality and consistency of our
concentrates, we conduct specific analytical tests during the
manufacturing process for each type of product that we
manufacture. Our quality control laboratory at each facility
conducts analytical tests to verify that the chemical properties
of the concentrates comply with the specifications required by
industry standards. Upon verification that a batch meets those
specifications, we then package those concentrates. We also test
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 after verification
that all product specifications have been met.
We use automated testing equipment in order to assure quality
and consistency in the manufacture of our concentrates. The
equipment allows us 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. Our
testing equipment provides us with a high degree of accuracy and
efficiency in performing the necessary testing.
Government
Regulation
The testing, manufacture and sale of our hemodialysis
concentrates and the ancillary products we distribute are
subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign
agencies. Under the Federal Food, Drug and Cosmetic Act (the
FDA Act), and FDA regulations, 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.
We plan to develop and commercialize selected drug candidates by
ourselves such as our iron supplemented dialysate product. The
regulatory review and approval process, which includes
preclinical testing and clinical trials of each product
candidate, is lengthy and uncertain. Before marketing in the
United States, any pharmaceutical or therapeutic product must
undergo rigorous preclinical testing and clinical trials and an
extensive regulatory approval process implemented by the FDA
under the FDA Act.
Moreover, the FDA imposes substantial requirements on new
product research and the clinical development, manufacture and
marketing of pharmaceutical products, including testing and
clinical trials to establish the safety and effectiveness of
these products.
Medical
Device Approval and Regulation
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 as Class I devices
(general controls) or Class II devices (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 and which has not
been significantly changed or modified) for
7
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. We have been advised that it usually takes
from three to six months from the date of submission to obtain
510(k) clearance, and may take substantially longer. Our
hemodialysis concentrates, liquid bicarbonate and other
ancillary products are categorized as Class II devices.
A device which sustains or supports life, prevents impairment of
human health or which presents a potential unreasonable risk of
illness or injury is categorized as a Class III device.
Class III devices and devices that are not substantially
equivalent to a legally marketed Class I or Class II
device. A Class III device generally must receive approval
through 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. We have been advised
that it usually takes from one to three years to obtain approval
after filing the request, and may take substantially 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), the
device may be shipped for the purpose of conducting the
investigations without compliance with all of the requirements
of the FDA Act and human clinical trials may begin. The FDA will
specify the number of investigational sites and the number of
patients that may be included in the investigation. If the
device does not present a 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 us pursuant to FDA
clearances or approvals are subject to pervasive and continuing
regulation by the FDA and certain state agencies. As a
manufacturer of medical devices for marketing in the United
States we are required to adhere to regulations setting forth
detailed good manufacturing practice (GMP)
requirements, which include testing, control and documentation
requirements. We must also comply with medical device reporting
regulations which require that we report to the FDA any incident
in which our products may have caused or contributed to a death
or serious injury, or in which our products 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.
We are subject to routine inspection by the FDA and certain
state agencies for compliance with GMP requirements and other
applicable quality system regulations. We are also subject to
numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, transportation
and disposal of hazardous or potentially hazardous substances.
We have 510(k) clearance from the FDA to market hemodialysis
concentrates in both liquid and powder form. In addition, we
have received 510(k) clearance for our Dri-Sate Dry Acid
Concentrate Mixer.
We must comply with the FDA Act and related laws and
regulations, including GMP, to retain 510(k) clearances. We
cannot assure you that we will be able to maintain our 510(k)
clearances from the FDA to manufacture and distribute our
products. If we fail to maintain our 510(k) clearances, we may
be required to cease manufacturing
and/or
distributing our products, which would have a material adverse
effect on our business, financial condition and results of
operations. If any of our FDA clearances are denied or
rescinded, sales of our products in the United States would be
prohibited during the period we do not have such clearances.
In addition to the regulations for medical devices covering our
current dialysate products, our new product development efforts
will be subject to the regulations pertaining to pharmaceutical
products. We have signed a licensing agreement for iron
supplemented dialysate to be included in our dialysate products.
Water soluble iron supplements when coupled with our dialysate
are intended to be used as an iron maintenance therapy for
dialysis
8
patients, and we have been advised that this dialysate iron
product will be considered a drug/device combination by the FDA.
As a result, our iron maintenance therapy product will be
subject to the FDA regulations for pharmaceutical products, as
well.
Drug
Approval and Regulation
The marketing of pharmaceutical products, such as our new iron
maintenance therapy product, in the United States requires
the approval of the FDA. The FDA has established regulations,
guidelines and safety standards which apply to the pre-clinical
evaluation, clinical testing, manufacturing and marketing of our
new iron maintenance therapy product and other pharmaceutical
products. The process of obtaining FDA approval for our new
product may take several years and involves the expenditure of
substantial resources. The steps required before a product can
be produced and marketed for human use include:
(i) pre-clinical studies; (ii) submission to the FDA
of an Investigational New Drug Exemption (IND),
which must become effective before human clinical trials may
commence in the United States; (iii) adequate and well
controlled human clinical trials; (iv) submission to the
FDA of a New Drug Application (NDA) or, in some
cases, an Abbreviated New Drug Application (ANDA);
and (v) review and approval of the NDA or ANDA by the FDA.
An NDA generally is required for products with new active
ingredients, new indications, new routes of administration, new
dosage forms or new strengths. An NDA requires that complete
clinical studies of a products safety and efficacy be
submitted to the FDA, the cost of which is substantial. These
costs can be reduced, however, for delivery systems which
utilize approved drugs.
An ANDA involves an abbreviated approval process that may be
available for products that have the same active ingredient(s),
indication, route of administration, dosage form and dosage
strength as an existing
FDAd-approved
product, if clinical studies have demonstrated bio-equivalence
of the new product to the FDA-approved product. Under applicable
regulations, companies that seek to introduce an ANDA product
must also certify that the product does not infringe on the
approved products patent or that such patent has expired.
If the applicant certifies that its product does not infringe on
the approved products patent, the patent holder may
institute legal action to determine the relative rights of the
parties and the application of the patent, and the FDA may not
finally approve the ANDA until a court finally determines that
the applicable patent is invalid or would not be infringed by
the applicants product.
Pre-clinical studies are conducted to obtain preliminary
information on a products efficacy and safety. The results
of these studies are submitted to the FDA as part of the IND and
are reviewed by the FDA before human clinical trials begin.
Human clinical trials may begin 30 days after receipt of
the IND by the FDA unless the FDA objects to the commencement of
clinical trials.
Human clinical trials are typically conducted in three
sequential phases, but the phases may overlap. Phase I trials
consist of testing the product primarily for safety in a small
number of patients at one or more doses. In Phase II
trials, the safety and efficacy of the product are evaluated in
a patient population somewhat larger than the Phase I trials.
Phase III trials typically involve additional testing for
safety and clinical efficacy in an expanded population at
different test sites. A clinical plan, or protocol, accompanied
by the approval of the institution participating in the trials,
must be reviewed by the FDA prior to commencement of each phase
of the clinical trials. The FDA may order the temporary or
permanent discontinuation of a clinical trial at any time.
The results of product development and pre-clinical and clinical
studies are submitted to the FDA as an NDA or an ANDA for
approval. If an application is submitted, there can be no
assurance that the FDA will review and approve the NDA or an
ANDA in a timely manner. The FDA may deny an NDA or an ANDA if
applicable regulatory criteria are not satisfied or it may
require additional clinical testing. Even if such data are
submitted, the FDA may ultimately deny approval of the product.
Further, if there are any modifications to the drug, including
changes in indication, manufacturing process, labeling, or a
change in a manufacturing facility, an NDA or an ANDA supplement
may be required to be submitted to the FDA. Product approvals
may be withdrawn after the product reaches the market if
compliance with regulatory standards is not maintained or if
problems occur regarding the safety or efficacy of the product.
The FDA may require testing and surveillance programs to monitor
the effect of products which have been commercialized, and has
the power to prevent or limit further marketing of these
products based on the results of these post-marketing programs.
9
The approval procedures for the marketing of our products in
foreign countries vary from country to country, and the time
required for approval may be longer or shorter than that
required for FDA approval. Even after foreign approvals are
obtained, further delays may be encountered before products may
be marketed. For example, many countries require additional
governmental approval for price reimbursement under national
health insurance systems.
Manufacturing facilities are subject to periodic inspections for
compliance with regulations and each domestic drug manufacturing
facility must be registered with the FDA. Foreign regulatory
authorities may also have similar regulations. We expend
significant time, money and effort in the area of quality
assurance to insure full technical compliance. FDA approval to
manufacture a drug is site specific. In the event an approved
manufacturing facility for a particular drug becomes inoperable,
obtaining the required FDA approval to manufacture such drug at
a different manufacturing site could result in production
delays, which could adversely affect our business and results of
operations.
Other
government regulations
The federal and state governments in the United States, as well
as many foreign governments, from time to time explore ways to
reduce medical care costs through health care reform. Due to
uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, we cannot
predict what impact any reform proposal ultimately adopted may
have on the pharmaceutical and medical device industry or on our
business or operating results. Our activities are subject to
various federal, state and local laws and regulations regarding
occupational safety, laboratory practices, and environmental
protection and may be subject to other present and possible
future local, state, federal and foreign regulations.
The approval procedures for the marketing of our products in
foreign countries vary from country to country, and the time
required for approval may be longer or shorter than that
required for FDA approval. We generally depend on our foreign
distributors or marketing partners to obtain the appropriate
regulatory approvals to market our products in those countries
which typically do not involve additional testing for products
that have received FDA approval. Even after foreign approvals
are obtained, further delays may be encountered before products
may be marketed. Many countries require additional governmental
approval for price reimbursement under national health insurance
systems. Additional studies may be required to obtain foreign
regulatory approval. Further, some foreign regulatory agencies
may require additional studies involving patients located in
their countries.
Product
License Agreements
We entered into two license agreements with an entity covering
drugs and vitamin additives to dialysate. These license
agreements cover both issued and pending patents in the United
States and abroad. We entered into these license agreements in
2002 and 2006. Both U.S. and foreign license rights extend
until approximately 2023.
We are a party to a product license agreement for an issued
U.S. patent for a combination drug and vitamin supplement
to be delivered by dialysate. This product license includes a
complex of carnitine and vitamins. In addition to a
U.S. patent, patents are pending internationally. The
license agreement requires us to seek and to
fund U.S. regulatory approval. The license agreement
calls for ongoing royalties for any product sales following
regulatory approval during the life of the patent and a reduced
royalty rate for ten years thereafter.
We are also a party to a license agreement for iron supplemented
dialysate that covers issued patents in the United States, the
European Union and Japan and other jurisdictions as well as
pending patents in a number of foreign jurisdictions. The
license agreement continues for the duration of the underlying
patents in each country, or until August 14, 2016 in the
United States, and may be extended thereafter. Patents were
issued in the United States in 1999 and 2004. A European patent
was issued in 2005
Our iron supplemented dialysate product license agreement
requires us to obtain FDA approval of iron supplemented
dialysate. Under the applicable license agreement, we are
required to pay the cost of obtaining marketing approval of the
product in order to realize any benefit from commercialization
of the product. In addition to funding, safety pharmacology
testing, clinical trials and patent maintenance expenses, we are
obligated to make certain milestone payments and to pay ongoing
royalties upon successful introduction of the product. The
milestone
10
payments include a payment of $50,000 which will become due upon
completion of Phase III clinical trials, a payment of
$100,000 which will become due upon FDA approval of the product
and a payment of $175,000 which will become due upon issuance of
a reimbursement code covering the product.
Trademarks &
Patents
We have several trademarks and servicemarks used on our products
and in our advertising and promotion of our products, and we
have applied for U.S. registration of such marks. Most such
applications have resulted in registration of such trademarks
and servicemarks.
We were issued a U.S. patent for our Dri-Sate Dry Acid
Concentrate method and apparatus for preparing liquid dialysate
on May 28, 2002 which expires on September 17, 2019.
We have applied for a corresponding patent in Canada that is
pending at this time.
In addition to the patent protection afforded SFP, our iron
drug, under our licensing agreement, we have a pending patent
application which covers SFPs active pharmaceutical
ingredient, its synthesis and its manufacture.
Suppliers
We believe the raw materials for our hemodialysis concentrates,
the components for our hemodialysis kits and the ancillary
hemodialysis products distributed by us are generally available
from several potential suppliers. Our principal suppliers
include Roquette, Inc., Church & Dwight Co. Inc. and
Morton Salt Company.
Customers
We operate 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. One customer, DaVita, accounted for 52% and 33% of our
total sales during 2007 and 2006, respectively. Our accounts
receivable from this customer was $1,268,000 and $925,000 as of
December 31, 2007 and 2006, respectively. We are dependent
on this key customer and the loss of its business would have a
material adverse effect on our business, financial condition and
results of operations. Our international sales, including
products sold to domestic distributors that were delivered
internationally, accounted for 5% and 18% of overall sales in
2007 and 2006, respectively.
Employees
As of December 31, 2007, we had approximately
210 employees, substantially all of whom are full time
employees. Our arrangements with our employees are not governed
by any collective bargaining agreement. Our employees are
employed on an at-will basis.
Research &
Development
We have licensed an iron maintenance therapy product for the
treatment of iron deficiency in anemic dialysis patients which
we refer to as iron supplemented dialysate. We incurred expenses
during 2007 and 2006 for product development and testing to
obtain regulatory approval and for regulatory maintenance of the
intellectual property underlying our licensing agreements. In
2007, we also completed our pre-clinical testing plan and
initiated human clinical trials. We engaged outside consultants
and legal counsel to assist us with product development and
obtaining regulatory approval. In addition, we incurred ongoing
expenses related to obtaining additional protection of the
intellectual property underlying our licensing agreements. In
2007 and 2006, we incurred aggregate expenses related to the
commercial development of our iron supplemented dialysate
product of approximately $3,264,000 and $4,778,000, respectively.
We must undertake substantial testing to obtain FDA approval for
our new iron supplemented dialysate product. A Phase II
clinical trial under an Investigational New Drug exemption was
completed by our licensors. We completed our pre-clinical
testing in 2007 and commenced a Phase IIb, dose ranging study in
late 2007. We plan to conduct product testing and clinical
trials in order to obtain FDA approval to market this product.
We are required to pay the cost of obtaining approval from the
FDA to market the product in order to realize any benefit from
commercialization of the product, which we expect will take
several years and be costly to us. We estimate the
11
remaining cost from 2008 until approval is received to be
between $12 million and $13 million. In addition to
funding clinical trials and patent maintenance expenses, we are
obligated to make certain milestone payments and to pay ongoing
royalties upon successful introduction of the product as
previously described. These costs will have a material impact on
us and we expect to incur losses for the duration of the
clinical trials. Should our testing and clinical trial expenses
exceed our capital resources, we may need to seek additional
sources of financing to obtain FDA approval of our new iron
maintenance therapy product. If we are unable to obtain FDA
approval of SFP or to make certain milestone payments we may
forfeit our rights under our license agreements.
Where You
Can Get Information We File with the SEC
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can read and copy any
materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a website on the internet that contains
reports, proxy and information statements and other information
regarding issuers, such as us, that file electronically with the
SEC. The address of the SECs Web site is
http://www.sec.gov.
We also maintain a website at
http://www.rockwellmed.com.
We make our annual reports on
Form 10-K
and
Form 10-KSB
available free of charge on or through our website.
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks and uncertainties
described below before purchasing our common stock. The risks
and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties may also impair
our business operations. If any of the following risks actually
occur, our business, financial condition or results of
operations would likely suffer. In that case, the trading price
of our common stock could fall, and you may lose all or part of
the money you paid to buy our common stock.
RISKS
RELATED TO OUR BUSINESS
The
dialysis provider market is highly concentrated in national and
regional dialysis chains that account for the majority of our
domestic revenue. Our business is substantially dependent on one
of our customers that accounts for a substantial portion of our
sales. The loss of this customer would have a material adverse
affect on our results of operations and cash flow.
Our revenue is highly concentrated in a few customers and the
loss of any of those customers could adversely affect our
results. One customer in particular accounted for 52% of our
total sales during 2007 and 33% in 2006. If we were to lose this
customer or our relationship with any of our other major
national and regional dialysis chain customers, it would have a
substantial negative impact on our cash flow and operating
results and could have a detrimental impact on our ability to
continue our operations in their current form or to continue to
execute our business strategy. If we lost a substantial portion
of our business, we would be required to take actions to
conserve our cash resources and to mitigate the impact of any
such losses on our business operations.
We
operate in a very competitive market against substantially
larger competitors with greater resources.
There is intense competition in the hemodialysis product market
and most of our competitors are large diversified companies
which have substantially greater financial, technical,
manufacturing, marketing, research and development and
management resources than we do. We may not be able to
successfully compete with these other companies. Our national
competitors have historically used product bundling and low
pricing as marketing techniques to capture market share of the
products we sell and as we do not manufacture or sell the same
breadth of products as our competitors, we may be at a
disadvantage in competing against their marketing strategies.
12
Our new
drug product requires FDA approval and expensive clinical trials
before it can be marketed.
We are seeking FDA approval for SFP, a drug used in the
treatment of anemia. Obtaining FDA approval for any drug is
expensive and can take a long time. We may not be successful in
obtaining FDA approval for SFP. The FDA may change, expand or
alter its requirements for testing which may increase the scope,
duration and cost of our clinical development plan. Clinical
trials are expensive and time consuming to complete, and we may
not be able to raise sufficient funds to complete the clinical
trials to obtain marketing approval. Our clinical trials might
not prove successful. In addition, the FDA may order the
temporary or permanent discontinuation of a clinical trial at
any time. Many products that undergo clinical trials are never
approved for patient use. Thus, it is possible that our new
proprietary products may never be approved to be marketed. If we
are unable to obtain marketing approval, our entire investment
in new products may be worthless and our licensing rights could
be forfeited.
Even if
our new drug product is approved by the FDA it may not be
successfully marketed.
Several drugs currently dominate treatment for iron deficiency
and new drugs treating this indication will have to compete
against existing products. It may be difficult to gain market
acceptance of a new product. Nephrologists, anemia managers and
dialysis chains may be slow to change their clinical practice
protocols for new products or may not change their protocols at
all.
Dialysis providers are dependent upon government reimbursement
practices for the majority of their revenue. Even if we obtain
FDA approval for our new product, there is no guarantee that our
customers would receive reimbursement for the new product, even
though the current treatment method is reimbursed by the
government. Without such reimbursement, it is unlikely that our
customers would adopt a new treatment method. There is a risk
that our new product may not receive reimbursement or may not
receive the same level of reimbursement that is currently in
place.
We depend
on government funding of healthcare.
Many of our customers receive the majority of their funding from
the government and are supplemented by payments from private
health care insurers. Our customers depend on Medicare funding
to be viable businesses. If Medicare funding were to be
materially decreased, our customers would be severely impacted
and could be unable to pay us.
We may
not be successful in improving our gross profit margins and our
business may remain unprofitable.
Our products are distribution-intensive, resulting in a high
cost to deliver relative to the selling prices of our products.
The cost of diesel fuel represents a significant operating cost
for us. If oil costs continue to increase or if oil prices spike
upward, we may be unable to recover those increased costs
through higher pricing. Also, as we increase our business in
certain markets and regions, which are farther from our
manufacturing facilities than we have historically served, we
may incur additional costs that are greater than the additional
revenue generated from these initiatives. Our customer mix may
change to a less favorable customer base with lower gross profit
margins.
Our competitors have often used bundling techniques to sell a
broad range of products and have often offered low prices on
dialysis concentrate products to induce customers to purchase
their other higher margin products, such as dialysis machines
and dialyzers. It may be difficult for us to raise prices due to
these competitive pressures.
Our suppliers may increase their prices faster than we are able
to raise our prices to offset such increases. We may have
limited ability to gain a raw material pricing advantage by
changing vendors for certain raw materials.
As we increase our manufacturing and distribution infrastructure
we may incur costs for an indefinite period that are greater
than the incremental revenue we derive from these expansion
efforts.
13
Orders
from our international distributors may not result in recurring
revenue.
Our revenue from international distributors may not recur
consistently or may not recur at all. Such revenue is often
dependent upon government funding in those nations and there may
be local, regional or geopolitical changes that may impact
funding of healthcare expenditures in those nations.
We depend
on key personnel.
Our success depends heavily on the efforts of Robert L. Chioini,
our President and Chief Executive Officer, and Thomas E. Klema,
our Chief Financial Officer, Secretary and Treasurer.
Mr. Chioini is primarily responsible for managing our sales
and marketing efforts, which has driven our growth. We maintain
key man life insurance on Mr. Chioini in the amount of
$1 million. Neither Mr. Chioini nor Mr. Klema are
parties to a current employment agreement with the Company. If
we lose the services of Mr. Chioini or Mr. Klema, our
business, financial condition and results of operations could be
adversely affected.
Our
business is highly regulated.
The testing, manufacture and sale of the products we manufacture
and distribute are subject to extensive regulation by the FDA
and by other federal, state and foreign authorities. Before
medical devices can be commercially marketed in the United
States, the FDA must give either 510(k) clearance or pre-market
approval for the devices. If we do not comply with these
requirements, we may be subject to a variety of sanctions,
including fines, injunctions, seizure of products, suspension of
production, denial of future regulatory approvals, withdrawal of
existing regulatory approvals and criminal prosecution. Our
business could be adversely affected by any of these actions.
Although our hemodialysis concentrates have been cleared by the
FDA, it could rescind these clearances and any new products or
modifications to our current products that we develop could fail
to receive FDA clearance. If the FDA rescinds or denies any
current or future clearances or approvals for our products, we
would be prohibited from selling those products in the United
States until we obtain such clearances or approvals. Our
business would be adversely affected by any such prohibition,
any delay in obtaining necessary regulatory approvals, and any
limits placed by the FDA on our intended use. Our products are
also subject to federal regulations regarding manufacturing
quality. In addition, our new products will be subject to review
as a pharmaceutical drug by the FDA. Changes in applicable
regulatory requirements could significantly increase the costs
of our operations and may reduce our profitability if we are
unable to recover any such cost increases through higher prices.
Foreign
approvals to market our new drug products may be difficult to
obtain.
The approval procedures for the marketing of our new drug
products in foreign countries vary from country to country, and
the time required for approval may be longer or shorter than
that required for FDA approval. Even after foreign approvals are
obtained, further delays may be encountered before products may
be marketed. Many countries require additional governmental
approval for price reimbursement under national health insurance
systems.
Additional studies may be required to obtain foreign regulatory
approval. Further, some foreign regulatory agencies may require
additional studies involving patients located in their countries.
Health
care reform could adversely affect our business.
The federal and state governments in the United States, as well
as many foreign governments, from time to time explore ways to
reduce medical care costs through health care reform. Due to
uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, we cannot
predict what impact any reform proposal ultimately adopted may
have on the pharmaceutical and medical device industry or on our
business or operating results.
14
We may
not have sufficient cash to fund SFP development in future
years.
Our research and development plan for SFP is expected to result
in significant cash outlays in 2008 and 2009. We expect to spend
between $4-$5 million in 2008 on SFP product development
and approval. We expect that our cash resources are adequate to
fund our cash requirements in 2008. We believe we have adequate
sources of liquidity to fund the testing and regulatory approval
for SFP. However, if additional testing is required that is
beyond that which we have planned for, we may not have adequate
cash resources to fund our product development and approval
efforts. If our clinical trial efforts do not achieve acceptable
results, we may have to do more testing and, depending on the
scope and duration of any additional testing, our available cash
resources may not be sufficient to fund that additional testing.
We may
not have sufficient products liability insurance.
As a supplier of medical products, we may face potential
liability from a person who claims that he or she suffered harm
as a result of using our products. We maintain products
liability insurance in the amount of $3 million per
occurrence and $3 million in the aggregate. We cannot be
sure that it will remain economical to retain our current level
of insurance, that our current insurance will remain available
or that such insurance would be sufficient to protect us against
liabilities associated with our business. We may be sued, and we
may have significant legal expenses that are not covered by
insurance. In addition, our reputation could be damaged by
product liability litigation and that could harm our marketing
ability. Any litigation could also hurt our ability to retain
products liability insurance or make such insurance more
expensive. Our business, financial condition and results of
operations could be adversely affected by an uninsured or
inadequately insured product liability claim in the future.
Our Board
of Directors is subject to potential deadlock.
Our Board of Directors presently has four members, and under our
bylaws, approval by a majority of the Directors is required for
many significant corporate actions. It is possible that our
Board of Directors may be unable to obtain majority approval in
certain circumstances, which would prevent us from taking action.
RISKS
RELATED TO OUR COMMON STOCK
Shares
eligible for future sale may affect the market price of our
common shares.
We are unable to predict the effect, if any, that future sales
of common shares, or the availability of our common shares for
future sales, will have on the market price of our common shares
from time to time. Sales of substantial amounts of our common
shares (including shares issued upon the exercise of stock
options or warrants), or the possibility of such sales, could
adversely affect the market price of our common shares and also
impair our ability to raise capital through an offering of our
equity securities in the future. 9,807,510 of our common shares
are freely tradable as of December 31, 2007, and an
additional 1,159,169 shares which may be issued upon
exercise of outstanding warrants will be freely tradable upon
issuance. In the future, we may issue additional shares or
warrants in connection with investments, repayment of our debt
or for other purposes considered advisable by our Board of
Directors. Any substantial sale of our common shares may have an
adverse effect on the market price of our common shares.
In addition, as of December 31, 2007, there were
3,052,035 shares issuable upon the exercise of outstanding
and exercisable stock options, 755,000 shares issuable upon
the exercise of outstanding stock options that are not yet
exercisable and 245,000 additional shares available for grant
under our 2007 Long Term Incentive Plan. The market price of the
common shares may be depressed by the potential exercise of
these options. The holders of these options are likely to
exercise them when we would otherwise be able to obtain
additional capital on more favorable terms than those provided
by the options. Further, while the options are outstanding, we
may be unable to obtain additional financing on favorable terms.
The
market price of our securities may be volatile.
The historically low trading volume of our common shares may
also cause the market price of the common shares to fluctuate
significantly in response to a relatively low number of trades
or transactions.
15
Voting
control and anti-takeover provisions reduce the likelihood that
you will receive a takeover premium.
As of December 31, 2007, our officers and directors
beneficially owned approximately 21.6% of our voting shares
(assuming the exercise of exercisable options granted to such
officers and directors). Accordingly, they may be able to
effectively control our affairs. Our shareholders do not have
the right to cumulative voting in the election of directors. In
addition, the Board of Directors has the authority, without
shareholder approval, to issue shares of preferred stock having
such rights, preferences and privileges as the Board of
Directors may determine. Any such issuance of preferred stock
could, under certain circumstances, have the effect of delaying
or preventing a change in control and may adversely affect the
rights of holders of common shares, including by decreasing the
amount of earnings and assets available for distribution to
holders of common shares and adversely affect the relative
voting power or other rights of the holders of the common
shares. In addition, we are subject to Michigan statutes
regulating business combinations, takeovers and control share
acquisitions which might also hinder or delay a change in
control. Anti-takeover provisions that could be included in the
preferred stock when issued and the Michigan statutes regulating
business combinations, takeovers and control share acquisitions
can have a depressive effect on the market price of our common
shares and can limit shareholders ability to receive a
premium on their shares by discouraging takeover and tender
offer offers.
Our directors serve staggered three-year terms, and directors
may not be removed without cause. Our Articles of Incorporation
also set the minimum and maximum number of directors
constituting the entire Board at three and fifteen,
respectively, and require approval of holders of a majority of
our voting shares to amend these provisions. These provisions
could have an anti-takeover effect by making it more difficult
to acquire us by means of a tender offer, a proxy contest or
otherwise, or to remove incumbent directors. These provisions
could delay, deter or prevent a tender offer or takeover attempt
that a shareholder might consider in his or her best interests,
including those attempts that might result in a premium over the
market price for the common shares.
We do not
anticipate paying dividends in the foreseeable future.
Since inception, we have not paid any cash dividend on our
common shares and do not anticipate paying such dividends in the
foreseeable future. Our line of credit agreement prohibits the
payment of dividends without the consent of the lender. The
payment of dividends is within the discretion of our Board of
Directors and depends upon our earnings, capital requirements,
financial condition and requirements, future prospects,
restrictions in future financing agreements, business conditions
and other factors deemed relevant by the Board. We intend to
retain earnings and cash resources, if any, to finance our
operations.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
Not applicable.
We occupy a 51,000 square foot facility in Wixom, Michigan
under a lease expiring in July 2008 which we have an option to
renew. We also occupy a 51,000 square foot facility in
Grapevine, Texas under a lease expiring in August 2010. In
addition, we lease a 57,000 square foot facility in Greer,
South Carolina under a three year lease expiring
February 28, 2011. We have an option to renew thereafter
for one or two years.
We intend to use each of our facilities to manufacture and
warehouse our products. All such facilities and their contents
are covered under various insurance policies which management
believes provide adequate coverage. We also use the office space
in Wixom, Michigan as our principal administrative office. With
our continued growth we expect that we will require additional
office space, manufacturing capacity and distribution facilities
to meet our business requirements.
16
|
|
Item 3.
|
Legal
Proceedings
|
We are not currently subject to any litigation that we expect to
have a material adverse effect on our financial condition and
results of operations. For more information on outstanding
litigation, see Note 13 of the Notes to Consolidated
Financial Statements.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
We did not submit any matter to a vote of security holders
during the fourth quarter of 2007.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Until January 2007, our common shares were traded on the Nasdaq
Capital Market under the symbol RMTI. In January 2007, our
shares began trading on the Nasdaq Global Market under the same
symbol.
The prices below are the high and low sale prices as reported by
the Nasdaq Global Market in each quarter during 2006 and 2007.
|
|
|
|
|
|
|
|
|
|
|
Sale Price
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2006
|
|
|
9.39
|
|
|
|
3.91
|
|
June 30, 2006
|
|
|
8.60
|
|
|
|
5.94
|
|
September 30, 2006
|
|
|
8.02
|
|
|
|
6.31
|
|
December 31, 2006
|
|
|
7.74
|
|
|
|
6.86
|
|
March 31, 2007
|
|
|
8.10
|
|
|
|
5.46
|
|
June 30, 2007
|
|
|
7.20
|
|
|
|
5.07
|
|
September 30, 2007
|
|
|
6.30
|
|
|
|
4.33
|
|
December 31, 2007
|
|
|
7.99
|
|
|
|
5.54
|
|
As of February 28, 2008, there were 47 holders of record of
our common shares.
Dividends
Our Board of Directors has discretion whether or not to pay
dividends. Among the factors our Board of Directors considers
when determining whether or not to pay dividends are our
earnings, capital requirements, financial condition, future
business prospects and business conditions. We have never paid
any cash dividends on our common shares and do not anticipate
paying dividends in the foreseeable future. We intend to retain
earnings, if any, to finance the development and expansion of
our operations. Our credit line agreement does not permit the
payment of cash dividends.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information contained under Item 12
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters of this Annual Report on
Form 10-K
under the heading Securities Authorized for Issuance Under
Equity Compensation Plans is incorporated herein by
reference.
17
|
|
Item 6.
|
Selected
Financial Data
|
The financial data in the following tables should be read in
conjunction with the consolidated financial statements and notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operation included in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net sales
|
|
$
|
43,045,304
|
|
|
$
|
28,638,859
|
|
|
$
|
27,694,955
|
|
|
$
|
17,944,710
|
|
|
$
|
14,970,144
|
|
Cost of sales
|
|
|
40,015,466
|
|
|
|
25,837,294
|
|
|
|
24,689,912
|
|
|
|
15,139,215
|
|
|
|
12,414,462
|
|
Gross profit
|
|
|
3,029,838
|
|
|
|
2,801,565
|
|
|
|
3,005,043
|
|
|
|
2,805,495
|
|
|
|
2,555,682
|
|
Income from continuing operations before interest expense and
income taxes
|
|
|
(3,608,353
|
)
|
|
|
(4,637,830
|
)
|
|
|
274,903
|
|
|
|
409,180
|
|
|
|
187,909
|
|
Interest expense, net
|
|
|
110,542
|
|
|
|
(62,851
|
)
|
|
|
198,095
|
|
|
|
197,658
|
|
|
|
183,056
|
|
Income from continuing operations before income taxes
|
|
|
(3,718,895
|
)
|
|
|
(4,574,979
|
)
|
|
|
76,808
|
|
|
|
211,522
|
|
|
|
4,853
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(3,718,895
|
)
|
|
$
|
(4,574,979
|
)
|
|
$
|
76,808
|
|
|
$
|
211,522
|
|
|
$
|
4,853
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
Weighted average number of common and common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,771,381
|
|
|
|
11,189,001
|
|
|
|
8,674,651
|
|
|
|
8,546,302
|
|
|
|
8,495,134
|
|
Diluted
|
|
|
11,771,381
|
|
|
|
11,189,001
|
|
|
|
9,356,990
|
|
|
|
9,305,123
|
|
|
|
9,229,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Total assets
|
|
$
|
22,803,134
|
|
|
$
|
13,152,833
|
|
|
$
|
9,260,660
|
|
|
$
|
7,700,552
|
|
|
$
|
7,044,786
|
|
Current assets
|
|
|
18,645,945
|
|
|
|
9,058,846
|
|
|
|
5,380,080
|
|
|
|
4,241,037
|
|
|
|
3,739,127
|
|
Current liabilities
|
|
|
4,637,271
|
|
|
|
4,452,675
|
|
|
|
4,682,139
|
|
|
|
3,459,555
|
|
|
|
2,946,448
|
|
Working capital
|
|
|
14,008,674
|
|
|
|
4,606,171
|
|
|
|
697,941
|
|
|
|
781,482
|
|
|
|
792,679
|
|
Long-term debt
|
|
|
204,837
|
|
|
|
326,045
|
|
|
|
733,723
|
|
|
|
818,678
|
|
|
|
926,230
|
|
Stockholders equity(1)
|
|
|
17,961,026
|
|
|
|
8,374,113
|
|
|
|
3,844,798
|
|
|
|
3,422,319
|
|
|
|
3,172,108
|
|
Book value per outstanding common share
|
|
$
|
1.30
|
|
|
$
|
0.73
|
|
|
$
|
0.43
|
|
|
$
|
0.40
|
|
|
$
|
0.37
|
|
Common shares outstanding
|
|
|
13,815,186
|
|
|
|
11,500,349
|
|
|
|
8,886,948
|
|
|
|
8,556,531
|
|
|
|
8,519,405
|
|
|
|
|
(1) |
|
There were no cash dividends paid during the periods presented. |
18
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Overview
and Recent Developments
We operate in a single business segment, the manufacture and
distribution of hemodialysis concentrates, dialysis kits and
ancillary products used in the kidney dialysis process. We have
gained domestic market share each year since our inception in
1996. Our sales in 2007 increased by 50.3% compared to 2006. Our
strategy is to continue to develop and expand our dialysis
products business while at the same time developing new
products, including pharmaceutical products for this market.
Our strategy is also to expand the geographic footprint of our
business in North America. We realized a unique business
opportunity to do so in the last quarter of 2006 and the first
quarter of 2007 due to the exit of one of our competitors,
Gambro, from the market. Concurrent with Gambros
withdrawal from the concentrate business, we began to service
many of the chain and independent clinics previously serviced by
Gambro, including many clinics owned by DaVita, the second
largest dialysis provider in the United States. As a result, the
number of clinics we service increased by over 50%.
We intend to continue to increase the size of our customer
portfolio in order to expand our production and distribution
operations into regions where we previously had business but no
production facility. We believe this strategic initiative will
ultimately lead to efficiencies and economies of scale, and will
position us for an adequate and sustainable return on
investment. We anticipate that we will continue to gain domestic
market share though not as dramatically as in 2007.
As a result of the increase in sales volume and the increased
geographic diversity of the clinics we serve, we took actions
during 2007 to ensure adequacy of product supply and
uninterrupted order fulfillment for the new business we added.
We relocated one of our production facilities in a region where
the additional business we acquired had outstripped our ability
to properly supply, distribute and service the business. As a
result of this relocation, we incurred costs aggregating
approximately $500,000 for physical relocation, extra labor,
plant
start-up
expenses, distribution
start-up
expenses, inventory write-offs and dual facility operating costs
during the
start-up
period. Although these costs are not expected to recur at this
location, we expect to incur similar types of costs in other
regions as we continue to adjust our production and distribution
facilities to meet new or changing demand. Our intention is to
open two additional manufacturing facilities during 2008.
Increased operating costs that are subject to inflation, such as
fuel and material costs, may not be recoverable through price
increases to our customers if our competitors do not also raise
prices. Unexpected further increases in our costs could further
negatively impact gross profit. If we are not able to recover
cost increases, it could materially adversely affect our
business, financial condition and results of operations. We
generally enter into short and medium term contracts of one to
two years for our major raw materials and we generally enter
into customer contracts of similar duration to mitigate our
exposure to raw material and other cost increases.
Also, since we sell a wide range of products with varying profit
margins and to customers with varying order patterns, our gross
profit and our gross profit margins could vary from period to
period due to these changes in our customer and product mix. As
we increase our business in certain markets and regions, we may
incur additional costs that are greater than the additional
revenue generated from these initiatives until we have achieved
a scale of operations that is profitable. In 2007, we raised our
average selling prices in part to offset these additional costs
and the higher costs of raw materials and fuel. We implemented
price increases on maturing contracts during 2007 and expect to
continue implementing price increases in 2008. Our price
increases during 2007 were not able to keep pace with rising
costs, however, resulting in a decrease in margins. We
anticipate that our margins will improve in 2008 if we are
successful at increasing our prices in advance of prospective
cost increases in our key operating costs.
While the majority of our business is with domestic clinics who
order routinely, certain major distributors of our products
internationally have not ordered consistently resulting in
variation in our sales from period to period. We anticipate that
we will realize substantial orders from time to time from our
largest international distributors but we expect the size and
frequency of these orders to fluctuate from period to period.
These orders may increase in future periods or may not recur at
all.
19
We are seeking to gain FDA approval for our iron supplemented
dialysate product, SFP. We believe our SFP product, which has a
unique method of action and other substantive benefits compared
to current treatment options, has the potential to compete in
the iron maintenance therapy market. The cost to obtain
regulatory approval for a drug in the United States is expensive
and can take several years. We currently expect to spend
approximately $12 to $13 million to complete testing and
the regulatory approval process in the United States from the
beginning of 2008 until approval is obtained. This amount is
substantially higher than our previous estimates due to
additional testing and study costs that we have determined will
be required in order to complete the approval process. Due to
these additional expenditures, we expect to incur losses during
the approval process.
Results
of Operations
For
the year ended December 31, 2007 compared to the year ended
December 31, 2006
Sales
For the year ended December 31, 2007, our sales were
$43.0 million, an increase of $14.4 million or 50.3%
over sales for the year ended December 31, 2006. This
increase was largely due to the domestic sales growth and market
share gains resulting from the exit of Gambro from the dialysis
concentrate market. The increase in 2007 was partially offset by
the effect of a breach of contract settlement that increased
sales in 2006 by $755,000. Domestic sales in 2007 increased by
$17.0 million or 70.7% over 2006. Unit volume increases in
our business accounted for the majority of the domestic sales
increase in 2007 compared to 2006.
Sales to DaVita clinics represented approximately 75% of the
total increase in domestic sales, while growth in sales to other
national chains, regional chains and other independent clinics
increased by over 29% and represented 25% of the growth in
domestic business in 2007 compared to 2006. Our sales to both
foreign and domestic based international distributors of our
products were approximately 5% of total sales in 2007 compared
to 18% of total sales in 2006. The $2.6 million decrease in
international sales in 2007 compared to 2006 was attributable to
$2.9 million in orders from major distributors for certain
business in Latin America in 2006 that was not renewed in 2007.
Our other international business increased by $250,000 compared
to 2006.
Sales of our dialysis concentrate product lines, which
represented 93.5% of our sales in 2007, increased 49.3% in 2007
over 2006. Sales of our acid concentrate product lines, which
represented 66% of our sales in 2007, increased 78% in 2007 over
2006 while sales of our liquid bicarbonate decreased by
$2.4 million in 2007 due to the aforementioned reduction in
sales to certain Latin American markets.
Gross
Profit
Gross profit in 2007 increased by $0.2 million or 7.1% to
$3.0 million compared to $2.8 million in 2006. This
increase in gross profit was due to a combination of higher
prices and higher volumes of products sold. We have increased
prices on maturing contractual arrangements in response to
rising raw material, fuel and other operating costs incurred
over the last year.
Gross profit margins decreased to 7.0% of sales from 9.8% in
2006. This decrease was primarily due to the impact on sales of
the aforementioned $755,000 breach of contract settlement
received in 2006, and higher costs due to the $500,000 of
facility relocation costs incurred in the first quarter of 2007.
To a lesser extent, the decrease was due to higher raw material
and fuel costs, offset in part by price increases implemented
during 2007. Some of the new business we added was in geographic
areas that were distant from our facilities. In order to improve
the margins on our new business, we expect to continue raising
prices and are working to better position our supply chain to
service this business.
Selling,
General and Administrative Expenses
Selling, general and administrative, or SG&A,
expenses were $3.4 million or 7.8% of sales in 2007
compared to 9.3% of sales in 2006. This improvement was due to
economies of scale as a result of the increase in sales.
SG&A expense increased $713,000 or 26.8% in 2007 compared
to 2006 due to additional costs to support our business growth
and development, including additional personnel, increased
marketing expenditures and investments in information technology
resources. In addition, in 2007, we incurred non-cash charges of
$86,000 for
20
investor relations services expense through the issuance of
warrants and $58,000 for employee and director stock option
expenses . No such expenses were incurred in 2006. Non-cash
related option expense in 2008 for options granted in 2007 is
anticipated to aggregate $1.1 million.
Research
and Development
We incurred product development and research costs related to
the commercial development, patent approval and regulatory
approval of new products, including SFP, aggregating
approximately $3.3 million and $4.8 million in 2007
and 2006, respectively. Costs incurred in 2006 were primarily
for non-clinical testing of SFP. Expenditures in 2007 included
expenditures for non-clinical testing and costs related to
preparation for human clinical testing of SFP.
R&D spending is expected to be between $4 million and
$5 million in 2008 as a result of the human clinical
trials, depending on the timing of certain expenditures.
Interest
Expense, Net
Net interest expense in 2007 increased by $173,393 compared to
2006 largely due to a decrease in interest income on short term
investments of $140,265. Interest income in 2006 was the result
of the investment of the net proceeds of the $8.3 million
stock offering that occurred in the first quarter of 2006. Those
funds have been largely used for the development and approval of
SFP during 2006 and 2007.
Income
Tax Expense
We have substantial tax loss carryforwards from our earlier
losses. We have not recorded a federal income tax benefit from
either our prior losses or our current year losses because we
might not realize the carryforward benefit of the remaining
losses.
Critical
Accounting Estimates and Judgments
Our consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally
accepted in the United States of America. These accounting
principles require us to make estimates, judgments and
assumptions that affect the reported amounts of revenues,
expenses, assets, liabilities, and contingencies. All
significant estimates, judgments and assumptions are developed
based on the best information available to us at the time made
and are regularly reviewed and updated when necessary. Actual
results will generally differ from these estimates. Changes in
estimates are reflected in our financial statements in the
period of change based upon on-going actual experience, trends,
or subsequent realization depending on the nature and
predictability of the estimates and contingencies.
Interim changes in estimates are generally applied prospectively
within annual periods. Certain accounting estimates, including
those concerning revenue recognition, allowance for doubtful
accounts, impairments of long-lived assets, and accounting for
income taxes, are considered to be critical in evaluating and
understanding our financial results because they involve
inherently uncertain matters and their application requires the
most difficult and complex judgments and estimates. These are
described below. For further information on our accounting
policies, see Note 2 to our Consolidated Financial
Statements.
Revenue
recognition
We recognize revenue at the time we transfer title to our
products to our customers consistent with generally accepted
accounting principles. Our products are generally sold
domestically on a delivered basis and as a result we do not
recognize revenue until delivered to the customer with title
transferring upon completion of the delivery. For our
international sales, we recognize revenue upon the transfer of
title as defined by standard shipping terms and conventions
uniformly recognized in international trade.
21
Allowance
for doubtful accounts
Accounts receivable are stated at invoice amounts. The carrying
amount of trade accounts receivable is reduced by an allowance
for doubtful accounts that reflects our best estimate of
accounts that may not be collected. We review outstanding trade
account receivable balances and based on our assessment of
expected collections, we estimate the portion, if any, of the
balance that may not be collected as well as a general valuation
allowance for other accounts receivable based primarily based on
historical experience. All accounts or portions thereof deemed
to be uncollectible are written off to the allowance for
doubtful accounts. If we underestimate the allowance, we would
incur a current period expense and could have a material adverse
effect on earnings.
Impairments
of long-lived assets
We account for impairment of long-lived assets, which include
property and equipment, amortizable intangible assets and
goodwill, in accordance with the provisions of
SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets or SFAS No. 142
Goodwill and Other Intangible Assets, as applicable. An
impairment review is performed annually or whenever a change in
condition occurs which indicates that the carrying amounts of
assets may not be recoverable. Such changes may include changes
in our business strategies and plans, changes to our customer
contracts, changes to our product lines and changes in our
operating practices. We use a variety of factors to assess the
realizable value of long-lived assets depending on their nature
and use.
Goodwill is not amortized; however, it must be tested for
impairment at least annually. The goodwill impairment analysis
is based on the fair market value of our common shares.
Amortization continues to be recorded for other intangible
assets with definite lives over the estimated useful lives.
Intangible assets subject to amortization are reviewed for
potential impairment whenever events or circumstances indicate
that carrying amounts may not be recoverable based on future
cash flows. If we determine that goodwill has been impaired, the
change in value will be accounted for as a current period
expense and could have a material adverse effect on earnings.
Accounting
for income taxes
We estimate our income tax provision to recognize our tax
expense and our deferred tax liabilities and assets for future
tax consequences of events that have been recognized in our
financial statements using current enacted tax laws. Deferred
tax assets must be assessed based upon the likelihood of
recoverability from future taxable income and to the extent that
recovery is not likely, a valuation allowance is established.
The allowance is regularly reviewed and updated for changes in
circumstances that would cause a change in judgment about
whether the related deferred tax asset may be realized. These
calculations and assessments involve complex estimates and
judgments because the ultimate tax outcome can be uncertain and
future events unpredictable. If we determine that the deferred
tax asset will be realized in the future, it may result in a
material beneficial effect on earnings.
Liquidity
and Capital Resources
We have two major areas of strategic focus in our business.
First, we plan to develop our dialysis products business and to
expand our product offering to include drugs and vitamins
administered to dialysis patients. Second, we expect to expend
substantial amounts in support of our clinical development plan
and regulatory approval of SFP. Both of these initiatives
require investments of substantial amounts of capital.
In 2007, we used $3.4 million in cash to fund operating
activities which included research and development costs of
$3.26 million and an increase of $1.2 million in our
accounts receivable in 2007 resulting from the overall growth in
our business. We incurred cash expenditures for fixed assets
aggregating approximately $925,000. To fund these expenditures,
we used available cash resources and borrowed on our line of
credit. Also in November 2007, we completed a private offering
of common stock and warrants and raised net equity capital of
$12.74 million. We intend to use the majority of the cash
we raised to fund business development initiatives and primarily
for human clinical testing of SFP.
We expect to add additional manufacturing facilities and
equipment to continue expanding our production and distribution
network in 2008, which will require additional capital. We
anticipate that we will enter into equipment leasing
arrangements and other lending arrangements to fund the majority
of capital expenditures associated with
22
facility expansions or additions. If we require additional
working capital to support facility or business growth, we
believe our current working capital line will be sufficient to
meet our short term working capital needs.
Over the next year, we anticipate spending approximately
$4 million to $5 million on SFP testing and approval.
Should our testing and clinical trial expenses exceed our
capital resources, we will need to seek additional sources of
financing to complete the FDA approval process for SFP.
We are currently a defendant in litigation with a former lessor
who is seeking damages aggregating $1.7 million for breach
of contract and related claims. We intend to vigorously defend
against these claims. We are responsible for our legal costs. As
a result, an adverse judgment or settlement in this matter could
result in a significant cash expenditure.
Our cash resources include cash generated from our business
operations and the remaining proceeds from our November 2007
offering. As of December 31, 2007, we had
$11.1 million in cash.
The maximum amount of borrowing permitted under our working
capital line is $2.75 million. As of December 31,
2007, we had unused borrowing capacity of $2.75 million
under our working capital line. The working capital line is due
to expire on April 1, 2008. We are in the process of
negotiating an extension of this line with the bank lender and
expect to receive an extension on substantially the same terms
as currently exist or enter into an agreement with another
lender under similar terms. The terms of our working capital
line and the related borrowing limitations are discussed in
Note 7 of our Consolidated Financial Statements. We believe
that these sources of liquidity and capital resources will be
adequate to fund our cash requirements for 2008 and may be
adequate for our long term needs as well. However, we may need
to raise additional capital in order to execute our strategic
plan. In our efforts to obtain additional capital resources, we
will evaluate both debt and equity financing as potential
sources of funds. We will also evaluate alternative sources of
business development funding, licensing agreements with
international marketing partners, sub-licensing of certain
products for certain markets as well as other potential funding
sources. Should we not be able to obtain additional financing,
we may be forced to alter our strategy, delay spending on
development initiatives or take other actions to conserve cash
resources.
|
|
Item 8.
|
Financial
Statements
|
The Consolidated Financial Statements of the Registrant required
by this item are set forth on pages F-1 through F-17 and
incorporated herein by reference.
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure material information required to be disclosed in our
reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required financial disclosure. In designing and
evaluating the disclosure controls and procedures, we recognized
that a control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected.
As of December 31, 2007, we carried out an evaluation under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not
effective at the reasonable assurance level as of
December 31, 2007 in ensuring that information required to
be disclosed by us
23
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified under the Exchange
Act rules and forms due to the material weaknesses described
below. As a result, we performed additional analysis and other
post-closing procedures to ensure our consolidated financial
statements were prepared in accordance with generally accepted
accounting principles. Accordingly, management believes the
consolidated financial statements included in this
Form 10-K
fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods
presented.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rule 13a-15(f).
The Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, management
assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making its
assessment of internal control over financial reporting,
management used the criteria described in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. In
conjunction with our auditors, management identified two
material weaknesses in the Companys internal control over
financial reporting. A material weakness is a significant
deficiency, or a combination of significant deficiencies which
when aggregated, results in there being more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a
timely basis by employees in the normal course of their assigned
functions. As a result of these material weaknesses, we
concluded that the Companys internal control over
financial reporting was not effective as of December 31,
2007 based on the criteria in Internal Control
Integrated Framework. This material weakness in internal control
resulted in several adjustments to the financial statements
which in the aggregate resulted in a net increase to our net
loss for 2007 of approximately $76,000. We are taking steps to
address these material weaknesses which could possibly have led
to a material misstatement in our financial statements if not
detected and corrected.
We identified a material weakness in our internal control for
revenue recognition. Our policy is to recognize revenue upon
transfer of title to our customer. In determining revenue
recognition by period we had used the delivery date generated by
our order entry system to determine the date of delivery and
transfer of title. However, we determined that our actual
delivery schedule sometimes deviates from the order entry system
generated delivery date. This resulted in errors due to
recording revenue on certain orders not delivered by
December 31, 2007 and not recording revenue on certain
orders that were delivered by December 31, 2007. We have
modified our sales cut-off procedures to ensure that orders
delivered before the end of our fiscal period are properly
identified and recorded in the appropriate period and that
orders in-transit are not recorded as revenue until actually
delivered to our customer.
We also identified a material weakness in our internal control
for financial reporting due to incomplete and undocumented
supervisory review of account reconciliations and closing
procedures which resulted in errors occurring related to certain
accrued liability and prepaid expense accounts. Several changes
to accounting procedures were made in 2007 that did not receive
adequate supervisory review to ensure and document that the
transactions were recorded as intended. In particular, we
incurred large non-recurring expenditures with third parties for
product testing and research for drug development and approval.
These were unusual and complicated transactions with a degree of
complexity different from our normal business operations and
under which expense recognition and funding of those expenses
were not consistent by period. We have taken corrective action
to improve our review procedures for account reconciliations and
closing procedures and to document supervisory review of these
account reconciliations and closing procedures.
This Annual Report on
Form 10-K
does not include an attestation report of the Companys
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by the Companys registered public
accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only
managements report in this Annual Report on
Form 10-K.
24
Changes
in Internal Controls
The Company maintains a system of internal controls that are
designed to provide reasonable assurance that its books and
records accurately reflect the Companys transactions and
that its established policies and procedures are followed. There
was no change in our internal control over financial reporting
identified in connection with such evaluation that occurred
during our fiscal quarter ended December 31, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Since
December 31, 2007, the Company has implemented actions for
the remediation of the identified material weaknesses, as
described above.
|
|
Item 9B.
|
Other
Information.
|
Approval
of Discretionary Bonuses
On December 17, 2007, the Compensation Committee of the
Board of Directors approved the payment of a discretionary bonus
to the Companys executive officers for their efforts on
behalf of the Company in 2007. The award reflects recognition
for management and leadership during the year, as well as the
progress in the testing of the Companys SFP product and
the Companys success in raising the development capital
necessary to fund clinical trials of SFP. These are the
first bonuses awarded to our executive officers since 2000.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
2007 Bonus
|
|
|
Robert L. Chioini
|
|
President, CEO and Chairman of the Board
|
|
$
|
40,000
|
|
Thomas E. Klema
|
|
Chief Financial
Officer, Secretary And Treasurer
|
|
$
|
25,000
|
|
Approval
of Executive Salary Adjustments
On January 14, 2008, following a review of a salary
benchmarking study of over 200 similarly situated companies, the
Compensation Committee approved the changes to base salaries for
the Companys executive officers disclosed in the table
below. Executive compensation had not been previously
benchmarked or peer reviewed with a formal study by the Board or
the Compensation Committee, These are the first salary increases
awarded to our executive officers since 2000. The increases
became effective as of January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Title
|
|
2007 Salary
|
|
|
2008 Salary
|
|
|
Robert L. Chioini
|
|
President, CEO and Chairman of the Board
|
|
$
|
275,000
|
|
|
$
|
465,000
|
|
Thomas E. Klema
|
|
Chief Financial Officer, Secretary And Treasurer
|
|
$
|
160,000
|
|
|
$
|
275,000
|
|
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The required information will be contained in the Proxy
Statement under the captions Election of Directors
and Section 16(a) Beneficial Ownership Reporting
Compliance and (excluding the Report of the Audit
Committee) is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation.
|
The required information will be contained in the Proxy
Statement under the captions Compensation of Executive
Officers and Directors, Other Information Relating
to Directors and Compensation Committee and is
incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The required information will be contained in the Proxy
Statement under the caption Voting Securities and
Principal Holders and is incorporated herein by reference.
25
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table summarizes our compensation plans under
which our equity securities are authorized for issuance as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities to be
|
|
|
|
|
|
|
|
|
|
issued upon exercise of
|
|
|
Weighted-average
|
|
|
Number of securities remaining
|
|
|
|
outstanding options,
|
|
|
exercise price of
|
|
|
available for future issuance under
|
|
|
|
warrants
|
|
|
outstanding options,
|
|
|
equity compensation plans (excluding
|
|
|
|
and rights
|
|
|
warrants and rights
|
|
|
securities reflected in column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans
approved by security
holders
|
|
|
3,807,035
|
|
|
$
|
3.42
|
|
|
|
245,000
|
|
Equity compensation plans
not approved by security
holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,807,035
|
|
|
$
|
3.42
|
|
|
|
245,000
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The required information will be contained in the Proxy
Statement under the caption Other Information Relating to
Directors and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The required information will be contained in the Proxy
Statement under the caption Independent Accountants
and is incorporated herein by reference.
The following documents are filed as part of this report. Those
exhibits previously filed and incorporated herein by reference
are identified below. Exhibits not required for this report have
been omitted. Our Commission file number is
000-23-661.
|
|
|
|
|
|
3
|
(i).1
|
|
Articles of Incorporation of the Company, incorporated by
reference to the Companys 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 the Companys
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 the Companys
Registration Statement on
Form SB-2,
File
No. 333-31991.
|
|
3
|
(i).4
|
|
4 Certificate of Amendment to Articles of Incorporation of the
Company, incorporated by reference to the Companys
Registration Statement on
Form SB-2,
File
No. 333-31991.
|
|
3
|
(ii)
|
|
Amended and Restated Bylaws of the Company, filed as an exhibit
to the Companys Current Report on
Form 8-K
on December 20, 2007 and incorporated herein by reference.
|
|
4
|
.1
|
|
Form of Warrant, filed as an exhibit to the Companys
Current Report on
Form 8-K
on December 4, 2007 and incorporated herein by reference.
|
|
4
|
.2
|
|
RJ Aubrey Warrant Agreement, dated November 28, 2007, filed
as an exhibit to the Companys Current Report on
Form 8-K
on December 4, 2007 and incorporated herein by reference.
|
|
*10
|
.1
|
|
Rockwell Medical Technologies, Inc. 1997 Stock Option Plan,
incorporated by reference to Rockwells Proxy Statement for
the Annual Meeting of Shareholders filed with the Securities and
Exchange Commission on April 17, 2006.
|
|
10
|
.2
|
|
Lease Agreement dated March 12, 2000 between the Company
and DFW Trade Center III Limited Partnership, incorporated
by reference to the annual report on
Form 10-KSB
filed March 30, 2000.
|
26
|
|
|
|
|
|
10
|
.3
|
|
Lease Agreement dated October 23, 2000 between the Company
and International-Wixom, LLC, incorporated by reference to the
quarterly report on
Form 10-QSB
filed November 14, 2000.
|
|
10
|
.4
|
|
Licensing Agreement between the Company and Charak LLC and
Dr. Ajay Gupta dated January 7, 2002 (with certain
portions of the exhibit deleted under a request for confidential
treatment under
Rule 24b-2
of the Securities Exchange Act of 1934), incorporated by
reference to the annual report on
Form 10-KSB
filed April 1, 2002.
|
|
10
|
.5
|
|
Supply Agreement between the Company and DaVita, Inc. dated
March 7, 2003 (with certain portions of the exhibit deleted
under a request for confidential treatment under
Rule 24b-2
of the Securities Exchange Act of 1934), incorporated by
reference to the annual report on
Form 10-KSB
filed March 28, 2003.
|
|
10
|
.6
|
|
Supply Agreement between the Company and DaVita, Inc. dated
May 5, 2004 (with certain portions of the exhibit deleted
under a request for confidential treatment under
Rule 24b-2
of the Securities Exchange Act of 1934), incorporated by
reference to the quarterly report on
Form 10-QSB
filed on May 17, 2004.
|
|
10
|
.7
|
|
Loan and Security Agreement dated as of March 29, 2005
between the Company and Standard Federal Bank National
Association, incorporated by reference to the annual report on
Form 10-KSB
filed March 31, 2005.
|
|
10
|
.8
|
|
Revolving Note dated as of March 29, 2005 executed by the
Company for the benefit of Standard Federal Bank National
Association, incorporated by reference to the annual report on
Form 10-KSB
filed March 31, 2005.
|
|
10
|
.9
|
|
Unconditional Guaranty dated as of March 29, 2005 executed
by Rockwell Transportation, Inc. for the benefit of Standard
Federal Bank National Association, incorporated by reference to
the annual report on
Form 10-KSB
filed March 31, 2005.
|
|
10
|
.10
|
|
Second Amendment of Industrial Lease Agreement between Rockwell
Medical Technologies, Inc. and DCT DFW, LP dated August 17,
2005, incorporated by reference to Exhibit 99.1 on
Form 8-K
filed on August 19, 2005.
|
|
10
|
.11
|
|
Amending Agreement made the 16th day of January, 2006, by
and between Dr. Ajay Gupta, Charak LLC and Rockwell Medical
Technologies, Inc., incorporated by reference to the annual
report on
Form 10-KSB
filed March 31, 2006.
|
|
10
|
.12
|
|
Letter dated March 29, 2006 from LaSalle Bank Midwest
National Association to Rockwell Medical Technologies, Inc.,
incorporated by reference to Exhibit 99.1 to
Form 8-K
filed with the Securities and Exchange Commission on
April 11, 2006.
|
|
10
|
.13
|
|
Securities Purchase Agreement between Rockwell Medical
Technologies, Inc. and Emerald Asset Advisors, LLC dated
June 22, 2006 incorporated by reference to
Exhibit 10.1 on
Form 8-K
filed with the Securities and Exchange Commission on
June 23, 2006.
|
|
10
|
.14
|
|
Registration Rights Agreement between Rockwell Medical
Technologies, Inc. and Emerald Asset Advisors, LLC dated
June 22, 2006, incorporated by reference to
Exhibit 10.2 on
Form 8-K
filed with the Securities and Exchange Commission on
June 23, 2006.
|
|
10
|
.15
|
|
Letter dated March 23, 2007 from LaSalle Bank Midwest
National Association to Rockwell Medical Technologies, Inc.,
incorporated by reference to the Annual Report on
Form 10-KSB
filed on March 27, 2007.
|
|
*10
|
.16
|
|
Rockwell Medical Technologies, Inc. 2007 Long Term Incentive
Plan, incorporated by reference to the Proxy Statement for the
Annual Meeting of Shareholders filed on April 18, 2007.
|
|
10
|
.17
|
|
Consulting Agreement, dated as of October 3, 2007, filed as
an exhibit to the Companys Current Report on
Form 8-K
on October 9, 2007 and incorporated herein by reference.
|
|
10
|
.18
|
|
Common Stock Purchase Agreement dated November 28, 2007,
between the Company and certain Purchasers, filed as an exhibit
to the Companys Current Report on
Form 8-K
on December 4, 2007 and incorporated herein by reference.
|
|
10
|
.19
|
|
Registration Rights Agreement, dated November 28, 2007,
between the Company and certain Purchasers, filed as an exhibit
to the Companys Current Report on
Form 8-K
on December 4, 2007 and incorporated herein by reference.
|
27
|
|
|
|
|
|
*10
|
.20
|
|
Form of Nonqualified Stock Option Agreement (Director Version),
filed as an exhibit to the Companys Current Report on
Form 8-K
on December 20, 2007 and incorporated herein by reference.
|
|
*10
|
.21
|
|
Form of Nonqualified Stock Option Agreement (Employee Version),
filed as an exhibit to the Companys Current Report on
Form 8-K
on December 20, 2007 and incorporated herein by reference.
|
|
10
|
.22
|
|
Lease Agreement dated March 19, 2008 between the Company
and EZE Management Properties Limited Partners.
|
|
14
|
.1
|
|
Rockwell Medical Technologies, Inc. Code of Ethics, incorporated
by reference to the Definitive Proxy Statement for the 2004
Annual Meeting of Shareholders filed April 23, 2004.
|
|
21
|
.1
|
|
List of Subsidiaries, incorporated by reference to
Exhibit 21.1 to the Companys Registration Statement
on
Form SB-2,
File
No. 333-31991.
|
|
23
|
.1
|
|
Consent of Plante & Moran, PLLC.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a).
|
|
31
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a).
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
* |
|
Current management contracts or compensatory plans or
arrangements. |
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
ROCKWELL MEDICAL TECHNOLOGIES, INC. (Registrant)
|
|
|
|
By:
|
/s/ ROBERT
L. CHIOINI
|
Robert L. Chioini
President and Chief Executive Officer
Date: March 21, 2008
Pursuant to Section 13 or 15(d) of the Exchange Act, this
report has been signed by the following persons on behalf of
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ ROBERT
L. CHIOINI
Robert
L. Chioini
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 21, 2008
|
|
|
|
|
|
/s/ THOMAS
E. KLEMA
Thomas
E. Klema
|
|
Vice President of Finance, Chief Financial Officer, Treasurer
and Secretary (Principal Financial Officer and Principal
Accounting Officer)
|
|
March 21, 2008
|
|
|
|
|
|
/s/ KENNETH
L. HOLT
Kenneth
L. Holt
|
|
Director
|
|
March 21, 2008
|
|
|
|
|
|
/s/ RONALD
D. BOYD
Ronald
D. Boyd
|
|
Director
|
|
March 21, 2008
|
|
|
|
|
|
/s/ PATRICK
J. BAGLEY
Patrick
J. Bagley
|
|
Director
|
|
March 21, 2008
|
29
INDEX TO
FINANCIAL STATEMENTS
PLANTE &
MORAN, PLLC LETTERHEAD
REPORT OF
INDEPENDENT REGISTERED ACCOUNTING FIRM
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, 2007 and 2006 and the related consolidated
statements of income, shareholders equity, and cash flows
for the years ended December 31, 2007 and 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. Rockwell Medical Technologies,
Inc. and Subsidiary is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. 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, 2007 and 2006, and the
results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally
accepted in the United States of America.
Auburn Hills, Michigan
March 20, 2008
F-1
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash and Cash Equivalents
|
|
$
|
11,097,092
|
|
|
$
|
2,662,873
|
|
Accounts Receivable, net of a reserve of $69,000 in 2007 and
$72,500 in 2006
|
|
|
4,687,229
|
|
|
|
3,474,402
|
|
Inventory
|
|
|
2,559,051
|
|
|
|
2,660,098
|
|
Other Current Assets
|
|
|
302,573
|
|
|
|
261,473
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
18,645,945
|
|
|
|
9,058,846
|
|
Property and Equipment, net
|
|
|
2,840,331
|
|
|
|
2,587,771
|
|
Intangible Assets
|
|
|
270,446
|
|
|
|
457,846
|
|
Goodwill
|
|
|
920,745
|
|
|
|
920,745
|
|
Other Non-current Assets
|
|
|
125,667
|
|
|
|
127,625
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
22,803,134
|
|
|
$
|
13,152,833
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Notes Payable & Capitalized Lease Obligations
|
|
$
|
194,239
|
|
|
$
|
369,551
|
|
Accounts Payable
|
|
|
2,982,899
|
|
|
|
2,920,258
|
|
Accrued Liabilities
|
|
|
1,122,737
|
|
|
|
1,114,592
|
|
Customer Deposits
|
|
|
337,396
|
|
|
|
48,274
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,637,271
|
|
|
|
4,452,675
|
|
Long Term Notes Payable & Capitalized Lease Obligations
|
|
|
204,837
|
|
|
|
326,045
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common Shares, no par value, 13,815,186 and
11,500,349 shares issued and outstanding
|
|
|
33,415,106
|
|
|
|
23,147,709
|
|
Common Share Purchase Warrants, 1,204,169 and -0- shares issued
and outstanding
|
|
|
3,038,411
|
|
|
|
|
|
Accumulated Deficit
|
|
|
(18,492,491
|
)
|
|
|
(14,773,596
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
17,961,026
|
|
|
|
8,374,113
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities And Shareholders Equity
|
|
$
|
22,803,134
|
|
|
$
|
13,152,833
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales
|
|
$
|
43,045,304
|
|
|
$
|
28,638,859
|
|
Cost of Sales
|
|
|
40,015,466
|
|
|
|
25,837,294
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,029,838
|
|
|
|
2,801,565
|
|
Selling, General and Administrative
|
|
|
3,374,458
|
|
|
|
2,661,419
|
|
Research and Product Development
|
|
|
3,263,733
|
|
|
|
4,777,976
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(3,608,353
|
)
|
|
|
(4,637,830
|
)
|
Interest (Income) Expense, net
|
|
|
110,542
|
|
|
|
(62,851
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(3,718,895
|
)
|
|
|
(4,574,979
|
)
|
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(3,718,895
|
)
|
|
$
|
(4,574,979
|
)
|
|
|
|
|
|
|
|
|
|
Basic And Diluted Earnings (Loss) Per Share
|
|
$
|
(.32
|
)
|
|
$
|
(.41
|
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
Purchase Warrants
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Amount
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance as of December 31, 2005
|
|
|
8,886,948
|
|
|
$
|
12,628,539
|
|
|
|
3,591,385
|
|
|
$
|
1,414,876
|
|
|
$
|
(10,198,617
|
)
|
|
$
|
3,844,798
|
|
Issuance of Common Shares
|
|
|
245,995
|
|
|
|
836,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
836,601
|
|
Exercise of Purchase Warrants
|
|
|
2,367,406
|
|
|
|
9,523,210
|
|
|
|
(2,367,406
|
)
|
|
|
(1,255,517
|
)
|
|
|
|
|
|
|
8,267,693
|
|
Expiration of Warrants
|
|
|
|
|
|
|
159,359
|
|
|
|
(1,223,979
|
)
|
|
|
(159,359
|
)
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,574,979
|
)
|
|
|
(4,574,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
11,500,349
|
|
|
$
|
23,147,709
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
(14,773,596
|
)
|
|
$
|
8,374,113
|
|
Issuance of Common Shares
|
|
|
2,314,837
|
|
|
|
10,209,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,209,459
|
|
Issuance of Purchase Warrants
|
|
|
|
|
|
|
|
|
|
|
1,204,169
|
|
|
|
3,038,411
|
|
|
|
|
|
|
|
3,038,411
|
|
Stock Option Based Expense
|
|
|
|
|
|
|
57,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,938
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,718,895
|
)
|
|
|
(3,718,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
13,815,186
|
|
|
$
|
33,415,106
|
|
|
|
1,204,169
|
|
|
$
|
3,038,411
|
|
|
$
|
(18,492,491
|
)
|
|
$
|
17,961,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For The
Years Ended December 31, 2007 and 2006
(Whole Dollars)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
$
|
(3,718,895
|
)
|
|
$
|
(4,574,979
|
)
|
Adjustments To Reconcile Net Loss To Net Cash Used In Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
949,739
|
|
|
|
756,868
|
|
Warrants issued for Services
|
|
|
85,911
|
|
|
|
|
|
Stock Option Compensation
|
|
|
57,938
|
|
|
|
|
|
Loss (Gain) on Asset Disposal
|
|
|
17,710
|
|
|
|
(4,539
|
)
|
Changes in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase) in Accounts Receivable
|
|
|
(1,212,827
|
)
|
|
|
(638,330
|
)
|
(Increase) Decrease in Inventory
|
|
|
101,047
|
|
|
|
(608,279
|
)
|
(Increase) in Other Assets
|
|
|
(39,142
|
)
|
|
|
( 61,146
|
)
|
Increase (Decrease) in Accounts Payable
|
|
|
62,641
|
|
|
|
1,124,865
|
|
Increase in Other Liabilities
|
|
|
297,267
|
|
|
|
598,559
|
|
|
|
|
|
|
|
|
|
|
Changes in Assets and Liabilities
|
|
|
(791,014
|
)
|
|
|
415,669
|
|
|
|
|
|
|
|
|
|
|
Cash (Used) In Operating Activities
|
|
|
(3,398,611
|
)
|
|
|
(3,406,981
|
)
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of Equipment
|
|
|
(924,608
|
)
|
|
|
(907,554
|
)
|
(Increase) Decrease in Restricted Cash Equivalents
|
|
|
|
|
|
|
|
|
Purchase of Intangible Assets
|
|
|
(8,189
|
)
|
|
|
(105,730
|
)
|
|
|
|
|
|
|
|
|
|
Cash (Used ) In Investing Activities
|
|
|
(932,797
|
)
|
|
|
(1,013,284
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds From Borrowings on Line of Credit
|
|
|
1,800,000
|
|
|
|
|
|
Payments on Line of Credit
|
|
|
( 1,800,000
|
)
|
|
|
( 1,800,000
|
)
|
Issuance of Common Shares and Purchase Warrants
|
|
|
13,161,959
|
|
|
|
9,104,294
|
|
Payments on Notes Payable
|
|
|
(396,332
|
)
|
|
|
(520,187
|
)
|
|
|
|
|
|
|
|
|
|
Cash Provided By Financing Activities
|
|
|
12,765,627
|
|
|
|
6,784,107
|
|
Increase In Cash
|
|
|
8,434,219
|
|
|
|
2,363,842
|
|
Cash At Beginning Of Period
|
|
|
2,662,873
|
|
|
|
299,031
|
|
|
|
|
|
|
|
|
|
|
Cash At End Of Period
|
|
$
|
11,097,092
|
|
|
$
|
2,662,873
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Interest Paid
|
|
$
|
159,444
|
|
|
$
|
126,316
|
|
Non-Cash Investing and Financing Activity Equipment
Acquired Under Capital Lease Obligations
|
|
$
|
99,812
|
|
|
$
|
133,120
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
We manufacture, sell and distribute hemodialysis concentrates
and other ancillary medical products and supplies used in the
treatment of patients with End Stage Renal Disease, or
ESRD. We supply our products to medical service
providers who treat patients with kidney disease. Our products
are used to cleanse patients blood and replace nutrients
lost during the kidney dialysis process. We primarily sell our
products in the United States.
We are 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. We have received 510(k)
approval from the FDA to market hemodialysis solutions and
powders. We also have 510(k) approval to sell our Dri-Sate Dry
Acid Concentrate product line and our Dri-Sate Mixer. We have
obtained global licenses for certain dialysis related drugs for
which we are developing and seeking FDA approval to market.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
Our consolidated financial statements include our accounts and
the accounts for our wholly owned subsidiary, Rockwell
Transportation, Inc.
All intercompany balances and transactions have been eliminated.
Revenue
Recognition
We recognize revenue at the time we transfer title to our
products to our customers consistent with generally accepted
accounting principles. Generally, we recognize revenue when our
products are delivered to our customers location
consistent with our terms of sale. We recognize revenue for
international shipments when title has transferred consistent
with standard terms of sale.
We require certain customers, mostly international customers, to
pay for product prior to the transfer of title to the customer.
Deposits received from customers and payments in advance for
orders are recorded as liabilities under Customer Deposits until
such time as orders are filled and title transfers to the
customer consistent with our terms of sale. At December 31,
2007 and 2006 we had customer deposits of $337,396 and $48,274,
respectively.
For the quarter ended March 31, 2006, we reached a
settlement with a customer related to its breach of several
purchase contracts. Under the terms of the settlement, we were
paid $755,000 in exchange for release of the customers
future obligations under these contracts. All of this settlement
was recognized as a component of revenue in 2006.
Shipping
and Handling Revenue and Costs
Our products are generally priced on a delivered basis with the
price of delivery included in the overall price of our products
which is reported as sales. Separately identified freight and
handling charges are also included in sales. Our trucks that
deliver our products to our customers sometimes generate
backhaul revenue from hauling freight for other third parties.
Revenue from backhaul activity is recognized upon completion of
the delivery service.
We include shipping and handling costs, including expenses of
Rockwell Transportation, Inc.. in cost of sales.
Cash
and Cash Equivalents
We consider cash on hand, unrestricted certificates of deposit
and short term marketable securities as cash and cash
equivalents.
F-6
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
Receivable
Accounts receivable are stated at invoice amounts. The carrying
amount of trade accounts receivable is reduced by an allowance
for doubtful accounts that reflects our best estimate of
accounts that may not be collected. We review outstanding trade
account receivable balances and based on our assessment of
expected collections, we estimate the portion, if any, of the
balance that may not be collected as well as a general valuation
allowance for other accounts receivable based primarily on
historical experience. All accounts or portions thereof deemed
to be uncollectible are written off to the allowance for
doubtful accounts.
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 ten years. Leasehold improvements are amortized using
the straight-line method over the shorter of their useful lives
or the related lease term.
Licensing
Fees
License fees related to the technology, intellectual property
and marketing rights for dialysate iron covered under certain
issued patents have been capitalized and are being amortized
over the life of the related patents which is generally
17 years.
Goodwill,
Intangible Assets and Long Lived Assets
The recorded amounts of goodwill and other intangibles from
prior business combinations are based on managements best
estimates of the fair values of assets acquired and liabilities
assumed at the date of acquisition. Goodwill is not amortized;
however, it must be tested for impairment at least annually.
Amortization continues to be recorded for other intangible
assets with definite lives over their estimated useful lives.
Intangible assets subject to amortization are reviewed for
potential impairment whenever events or circumstances indicate
that carrying amounts may not be recoverable.
An impairment review of goodwill, intangible assets, and
property and equipment is performed annually or whenever a
change in condition occurs which indicates that the carrying
amounts of assets may not be recoverable. Such changes may
include changes in our business strategies and plans, changes to
our customer contracts, changes to our product lines and changes
in our operating practices. We use a variety of factors to
assess the realizable value of long-lived assets depending on
their nature and use.
The useful lives of other intangible assets are based on
managements best estimates of the period over which the
assets are expected to contribute directly or indirectly to our
future cash flows. Management annually evaluates the remaining
useful lives of intangible assets with finite useful lives to
determine whether events and circumstances warrant a revision to
the remaining amortization periods. It is reasonably possible
that managements estimates of the carrying amount of
goodwill and the remaining useful lives of other intangible
assets may change in the near term.
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
F-7
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
between book and tax accounting and operating loss and tax
credit carryforwards. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits as an
income tax expense.
Research
and Product Development
We recognize research and product development costs as expenses
as incurred. We incurred product development and research costs
related to the commercial development, patent approval and
regulatory approval of new products, including iron supplemented
dialysate, aggregating approximately $3,264,000 and $4,778,000
in 2007 and 2006, respectively.
We are conducting human clinical trial on iron supplemented
dialysate and we recognize the costs of the human clinical trial
as the costs are incurred and services performed over the
duration of the trial.
Stock
Options
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123R
(SFAS 123R), a revision to Statement
No. 123, Accounting for Stock-Based
Compensation. This standard requires us to measure the
cost of employee services received in exchange for equity
awards, including stock options, based on the grant date fair
value of the awards. The cost will be recognized as compensation
expense over the vesting period of the awards. The Company has
adopted SFAS 123R as of January 1, 2006 using the
modified prospective method, and therefore has not restated
results for prior periods. Under this method, the Company began
recognizing compensation cost for equity based compensation for
all new or modified grants after the date of adoption. In
addition, the standard requires the Company to recognize
compensation cost for the remaining unvested portion of prior
option grants over the remaining service period. All of the
Companys options granted in 2005 and prior years were
fully vested as of December 31, 2005, and therefore, the
Company did not record any expense for options granted prior to
2006 upon adoption of SFAS 123R.
We estimate the fair value of compensation involving stock
options utilizing the Black-Scholes option pricing model. This
model requires the input of several factors such as the expected
option term, expected volatility of our stock price over the
expected option term, and an expected forfeiture rate, and is
subject to various assumptions. We believe the valuation
methodology is appropriate for estimating the fair value of
stock options we grant to employees and directors which are
subject to SFAS 123R requirements. These amounts are
estimates and thus may not be reflective of actual future
results or amounts ultimately realized by recipients of these
grants. These amounts, and the amounts applicable to future
quarters, are also subject to future quarterly adjustments based
upon a variety of factors, which include, but are not limited
to, the issuance of new options.
Net
Earnings per Share
We computed our basic earnings (loss) per share using weighted
average shares outstanding for each respective period. Diluted
earnings per share also reflect the weighted average impact from
the date of issuance of all potentially dilutive securities,
consisting of stock options and common share purchase warrants,
unless inclusion would have had an antidilutive effect. Actual
weighted average shares outstanding used in calculating basic
and diluted earnings per share were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
11,771,381
|
|
|
|
11,189,001
|
|
Effect of Dilutive Securities
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
11,771,381
|
|
|
|
11,189,001
|
|
|
|
|
|
|
|
|
|
|
For 2007 and 2006, the dilutive effect of stock options and in
2007 common share purchase warrants have not been included in
the average shares outstanding for the calculation of diluted
loss per share as the effect would be anti-dilutive as a result
of our net loss in both periods.
F-8
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December, 31, 2007, potentially dilutive securities comprised
3,807,035 stock options exercisable at prices from $.55 to $6.50
and 1,079,169 common share purchase warrants exercisable at
$7.18, 90,000 common share purchase warrants exercisable at
$7.00, 90,000 common share purchase warrants exercisable at
$7.50 and 80,000 common share purchase warrants exercisable at
$10.00.
At December 31, 2006 potentially dilutive securities
comprised 3,219,235 stock options exercisable at prices from
$.55 to $4.55 per share.
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.
|
|
3.
|
Significant
Market Segments
|
We operate 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, 2007, one customer
accounted for more than 10% of our sales, representing 52% of
our sales. For the year ended December 31, 2006, one
customer accounted for more than 10% of our total sales,
representing 33% of total sales. Our accounts receivable from
this customer was $1,268,000 and $925,000 as of
December 31, 2007 and 2006, respectively. We are dependent
on a key customer and the loss of its business would have a
material adverse effect on our business, financial condition and
results of operations. Our international sales including
products sold to domestic distributors that are delivered
internationally aggregated 5% and 18% of overall sales in 2007
and 2006, respectively.
Components of inventory as of December 31, 2007 and 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw Materials
|
|
$
|
1,096,191
|
|
|
$
|
717,876
|
|
Finished Goods
|
|
|
1,462,860
|
|
|
|
1,942,222
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,559,051
|
|
|
$
|
2,660,098
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment
|
Major classes of Property and Equipment, stated at cost, as of
December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Leasehold Improvements
|
|
$
|
229,941
|
|
|
$
|
446,150
|
|
Machinery and Equipment
|
|
|
4,333,693
|
|
|
|
3,891,890
|
|
Office Equipment and Furniture
|
|
|
519,278
|
|
|
|
479,427
|
|
Laboratory Equipment
|
|
|
339,380
|
|
|
|
304,992
|
|
Transportation Equipment
|
|
|
389,477
|
|
|
|
637,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,811,770
|
|
|
|
5,760,093
|
|
Accumulated Depreciation
|
|
|
(2,971,439
|
)
|
|
|
(3,172,322
|
)
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
$
|
2,840,331
|
|
|
$
|
2,587,771
|
|
|
|
|
|
|
|
|
|
|
F-9
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Included in the table above are assets under capital lease
obligations with a cost of $791,276 and $1,041,372 and a net
book value of $520,905 and $697,519, as of December 31,
2007 and 2006, respectively.
Depreciation expense was $754,150 for 2007 and $714,165 for 2006.
|
|
6.
|
Goodwill
and Intangible Assets
|
Total goodwill was $920,745 at December 31, 2007 and 2006.
We completed our annual impairment tests as of November 30,
2007 and 2006 and determined that no adjustment for impairment
of goodwill was required.
We have entered into several global licensing agreements for
certain patents covering therapeutic drug compounds and vitamins
to be delivered using our dialysate product lines. We intend to
seek FDA approval for these products. We have capitalized the
licensing fees paid for the rights to use this patented
technology as an intangible asset. As of December 31, 2007
we have capitalized licensing fees of $369,536, net of
accumulated amortization of $99,090. During 2007, we terminated
a licensing agreement related to a patent which we determined we
would not benefit from. As a result, we determined that the
remaining unamortized cost of that licensing agreement of
$146,366 was impaired and expensed this amount, which is
included in research and product development expense in the
consolidated income statement. As of December 31, 2006, we
capitalized licensing fees of $615,868, net of accumulated
amortization of $158,022.
Our policy is to amortize licensing fees over the life of the
patents pertaining to the licensing agreements. We recognized
amortization expense of $49,223 in 2007, and $42,703 in 2006.
Estimated amortization expense for licensing fees for 2008
through 2012 is approximately $32,000 per year. One of the
licensing agreements requires additional payments upon
achievement of certain milestones.
On March 29, 2006 and March 23, 2007, we renewed our
line of credit with a financial institution. The loan agreement
provides for revolving borrowings by us of up to $2,750,000. We
are permitted to borrow up to 80% of our eligible accounts
receivable and up to 40% of our eligible inventory up to
$600,000. Borrowings under the loan agreement are secured by
accounts receivable, inventory and certain other assets. The
annual interest rate payable on revolving borrowings under the
loan agreement is the lenders prime rate plus
75 basis points. The lenders commitment to make
revolving borrowings under the loan agreement expires on
April 1, 2008. As of December 31, 2007 and 2006, we
had no outstanding borrowings under this line of credit.
|
|
8.
|
Notes Payable &
Capital Lease Obligations
|
Notes
Payable
In August 2001, we entered into a financing agreement with a
financial institution to fund $1,000,000 of equipment capital
expenditures for our manufacturing facilities. The note payable
required monthly payments of principal and interest aggregating
$20,884 through June 2007. The note was paid off in 2007. The
note had a balance of $122,206 at December 31, 2006.
Capital
Lease Obligations
We entered into capital lease obligations primarily related to
equipment with a fair market value aggregating $99,812 and
$133,120 for the years ended December 31, 2007 and 2006,
respectively. In addition, we have other capital lease
obligations related to financing other equipment. These capital
lease obligations require even monthly installments through 2011
and interest rates on the leases range from 5% to 15.0%. These
obligations under capital leases had outstanding balances of
$399,076 and $573,390 at December 31, 2007 and 2006,
respectively.
F-10
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum lease payments under capital lease obligations
are:
|
|
|
|
|
Year ending December 31, 2008
|
|
$
|
227,017
|
|
Year ending December 31, 2009
|
|
|
190,277
|
|
Year ending December 31, 2010
|
|
|
29,763
|
|
Year ending December 31, 2011
|
|
|
1,313
|
|
|
|
|
|
|
Total minimum payments on capital lease obligations
|
|
|
448,371
|
|
Interest
|
|
|
(49,295
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
399,076
|
|
Current portion of capital lease obligations
|
|
|
(194,239
|
)
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
204,837
|
|
|
|
|
|
|
We lease our production facilities and administrative offices as
well as certain equipment used in our operations. The lease
terms range from monthly to seven years. Lease payments under
all operating leases were $1,833,670 and $1,597,127 for the
years ended December 31, 2007 and 2006, respectively.
We have long term leases on two buildings that are approximately
51,000 square feet each and that expire in July 2008 and
August 2010, respectively. As of December 31, 2007, we also
had a month to month lease on a building that is approximately
57,000 square feet and for which we subsequently entered
into a long term lease that expires February 28, 2011.
Future minimum rental payments under operating lease agreements
are as follows:
|
|
|
|
|
Year ending December 31, 2008
|
|
$
|
1,437,709
|
|
Year ending December 31, 2009
|
|
|
1,269,248
|
|
Year ending December 31, 2010
|
|
|
1,073,376
|
|
Year ending December 31, 2011
|
|
|
587,552
|
|
Year ending December 31, 2012
|
|
|
462,112
|
|
Thereafter
|
|
|
26,973
|
|
|
|
|
|
|
Total
|
|
$
|
4,856,970
|
|
|
|
|
|
|
We recognized no income tax expense or benefit for the years
ended December 31, 2007 and 2006. We incurred a net loss in
both 2007 and 2006 primarily related to research and development
spending for drug approval. Our business without these drug
approval costs would have reported a loss in 2007 while 2006 was
profitable. However, we have retained a valuation allowance
against our net deferred tax assets due to our limited history
of taxable income coupled with anticipated future spending on
our product development plans which may offset some or all of
our income in the next two years.
F-11
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of income tax expense at the statutory rate to
income tax expense at our effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Tax Expense Computed at 34% of Pretax Income
|
|
$
|
(1,264,000
|
)
|
|
$
|
(1,555,000
|
)
|
Effect of Permanent Differences Principally Related to
Non-deductible expenses
|
|
|
|
|
|
|
|
|
Effect of Change in Valuation Allowance
|
|
|
(1,264,000
|
)
|
|
|
(1,555,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Income Tax Benefit
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
The details of the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Deferred Tax Assets
|
|
$
|
6,092,000
|
|
|
$
|
4,244,000
|
|
Total Deferred Tax Liabilities
|
|
|
(379,000
|
)
|
|
|
(173,000
|
)
|
Valuation Allowance Recognized for Deferred Tax Assets
|
|
|
(5,713,000
|
)
|
|
|
(4,071,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities result primarily from the use of
accelerated depreciation for tax reporting purposes. Deferred
tax assets result primarily from net operating loss
carryforwards. For tax purposes, we have net operating loss
carryforwards of approximately $17,417,000 that expire between
2012 and 2026.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized
upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Due to
anticipated spending on research and development over the next
several years, coupled with our limited history of operating
income, management has placed a full valuation allowance against
the net deferred tax assets as of December 31, 2007 and
2006.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), as of January 1, 2007. FIN 48 clarifies
the guidance for the recognition and measurement of income tax
benefits related to uncertain tax positions in accordance with
SFAS No. 109, Accounting for Income Taxes. The impact
of this change in accounting was immaterial, and the amount of
unrecognized tax benefits related to uncertain tax positions is
not significant at December 31, 2007.
Our authorized capital stock consists of 20,000,000 common
shares, no par value per share, of which 13,815,186 shares
were outstanding at December 31, 2007 and
11,500,349 shares were outstanding at December 31,
2006; 2,000,000 preferred shares, none of which were issued or
outstanding at either December 31, 2007 or
December 31, 2006 and 1,416,664 shares of 8.5%
non-voting cumulative redeemable Series A Preferred Shares,
$1.00 par value, of which none were outstanding at either
December 31, 2007 or December 31, 2006.
During 2007, we issued 2,314,837 common shares and 1,079,169
common share purchase warrants, as noted below, and realized net
cash proceeds of approximately $13,200,000. This total includes
2,158,337 common shares issued pursuant to a private offering of
our common shares with institutional investors for which we
received gross proceeds of $12,950,000. The private offering
consisted of a unit priced at $6.00, which included one common
share and a warrant to purchase one-half of a common share at an
exercise price of $7.18 per share. We realized net proceeds of
$12,743,000 after deducting legal, registration, accounting and
other expenses related to this offering. The shares issued under
this stock purchase agreement were later registered for resale
and such registration statement was declared effective by the
Securities and Exchange Commission on January 29, 2008. We
are required
F-12
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to maintain the registration statement effective until all
registered shares have been sold or January 29, 2010,
whichever occurs first.
During 2007, we also issued 156,500 common shares as a result of
the exercise of stock options by employees and realized proceeds
of $474,828 or $3.03 per share on average.
During 2006, we issued 2,613,401 common shares and realized net
cash proceeds of approximately $9,100,000. This total includes
2,342,406 of freely trading common shares we issued upon the
exercise of publicly traded warrants (Public
Warrants, as defined below). During 2006, we realized
$9,135,000 or $3.90 per share in gross proceeds from these
exercises and net proceeds of $8,205,194 after the expenses of
the offering described below.
In 2006, we also issued 134,100 common shares as a result of the
exercise of stock options by employees and realized proceeds of
$451,744 or $3.36 per share on average. We also issued 111,895
common shares pursuant to a private placement of our common
shares and realized net proceeds of $384,857 after expenses of
the offering. These shares were subsequently registered and were
reissued as free trading common shares.
We also issued 25,000 common shares upon the exercise of
warrants to an investor from an earlier private placement. We
realized proceeds of $62,500 or $2.50 per share on average. The
investor exercising these private placement warrants received
unregistered common shares.
Common
Shares
Holders of the common shares are entitled to one vote per share
on all matters submitted to a vote of our shareholders 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 Companys Articles of
Incorporation without further shareholder action.
Warrants
As of December 31, 2007, we had 1,204,169 common share
purchase warrants outstanding all of which were issued in 2007.
Pursuant to a Securities Purchase Agreement dated
November 28, 2007, we issued 1,079,169 warrants with an
exercise price of $7.18 and a five year term. The warrants are
exercisable at any time during the period November 28, 2008
to November 28, 2012. Also, in conjunction with that
offering, we issued 80,000 warrants to a placement agent with an
exercise price of $10.00 and are exercisable at any time during
the period November 28, 2008 to November 28, 2012.
We also issued 180,000 warrants in exchange for services which
are vested on a monthly basis over a one year period with 90,000
of such warrants exercisable at $7.00 and 90,000 of such
warrants exercisable at $7.50. The warrants have a four year
term expiring October 3, 2011. As of December 31,
2007, 45,000 of the warrants with an exercise price of $7.00
were earned and vested.
Warrants issued in 2007 were valued using the Black Scholes
model. The net proceeds from our private placement of our common
shares and common share purchase warrants described above were
prorated between the fair market value of our common shares
issued and the Black Scholes valuation of the warrants.
As of December 31, 2006, there were no outstanding
warrants. However, at the beginning of 2006, we had both
publicly traded common share purchase warrants (Public
Warrants) issued in 1998 and common share purchase
warrants (Private Warrants) issued in conjunction
with a private placement of our common shares in 2002 and other
investment banking activities.
Holders of the Public Warrants, were entitled to purchase one
common share at the exercise price of $4.50 per share until
January 26, 2006. There were 3,625,000 Public Warrants
originally issued and all were outstanding until
November 28, 2005.
F-13
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In late 2005, we offered to exchange new common share purchase
warrants expiring January 26, 2006 with an exercise price
of $3.90 (New Warrants) for each of the 3,625,000
then-outstanding Public Warrants expiring January 26, 2006
with an exercise price of $4.50 (Old Warrants)
On November 28, 2005, we completed this exchange. All other
terms and conditions, including expiration, remained the same.
There were 354,697 Old Warrants that were not tendered for
exchange and expired unexercised at January 26, 2006.
We issued 3,270,303 New Warrants in the warrant exchange. During
2005, 58,615 New Warrants were exercised and we realized
$228,599 in gross proceeds from these warrant exercises. As of
December 31, 2005, 3,211,688 of the New Warrants remained
outstanding.
In 2006, we issued 2,342,406 Common Shares upon New Warrant
exercises, for which we received gross proceeds of $9,135,000.
All remaining unexercised Public Warrants expired on
January 26, 2006.
|
|
12.
|
Long Term
Incentive Plan & Stock Options
|
Long
Term Incentive Plan & Stock Options
The Board of Directors adopted the Rockwell Medical
Technologies, Inc., 2007 Long Term Incentive Plan (LTIP) on
April 11, 2007 and the shareholders approved the LTIP on
May 24, 2007. There are 1,000,000 common shares reserved
for issuance under the LTIP. The Compensation Committee of the
Board of Directors (the Committee) is responsible
for the administration of the plan including the grant of stock
based awards and other financial incentives including
performance based incentives to employees, non-employee
directors and consultants.
Upon approval of the LTIP, the 1997 Stock Option Plan (the
Old Plan) was terminated as to future grants. No
options were granted under the Old Plan in 2007 or in 2006.
The Committee determines the terms and conditions of options and
other equity based incentives including, but not limited to, the
number of shares, the exercise price, term of option and vesting
requirements. The Committee approved stock option grants under
the LTIP in December 2007. These stock option awards were
granted with an exercise price equal to the market price of the
Companys stock on the date of the grant. The options
expire 10 years from the date of grant or upon termination
of employment and vest in three equal annual installments
beginning on the first anniversary of the date of grant.
Our standard stock option agreement allows for the payment of
the exercise price of vested stock options either through cash
remittance in exchange for newly issued shares, or through
non-cash exchange of previously issued shares held by the
recipient in exchange for our newly issued shares. The latter
method results in no cash being received by us, but also results
in a lower number of total shares being outstanding subsequently
as a direct result of this exchange of shares. Shares returned
to us in this manner would be retired. In 2007, the Company
received cash proceeds of $474,828 in exchange for shares issued
upon exercise of options during the year. No income tax benefits
were recognized during 2007 or 2006 related to stock option
activity as the Company has a full valuation allowance recorded
against its deferred tax assets.
F-14
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of the LTIP and the Old Plan excluding
options granted to consultants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding at December 31, 2005
|
|
|
3,359,335
|
|
|
|
2.12
|
|
|
$
|
6,087,407
|
|
Granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(134,100
|
)
|
|
|
3.37
|
|
|
$
|
363,124
|
|
Cancelled
|
|
|
(6,000
|
)
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
3,219,235
|
|
|
|
2.68
|
|
|
$
|
14,368,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
785,000
|
|
|
|
6.43
|
|
|
|
|
|
Exercised
|
|
|
(156,500
|
)
|
|
|
3.03
|
|
|
$
|
342,853
|
|
Cancelled
|
|
|
(40,700
|
)
|
|
|
5.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
3,807,035
|
|
|
|
3.42
|
|
|
$
|
15,293,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
Options Outstanding
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Number
|
|
|
Average
|
|
Range of
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
Exercise Prices
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$.55 to $1.50
|
|
|
649,500
|
|
|
|
1.0-5.0 yrs.
|
|
|
$
|
.77
|
|
|
|
649,500
|
|
|
$
|
.77
|
|
$1.81 to $2.79
|
|
|
1,320,035
|
|
|
|
1.1-7.5 yrs.
|
|
|
$
|
2.26
|
|
|
|
1,320,035
|
|
|
$
|
2.26
|
|
$3.00 to $4.55
|
|
|
1,082,500
|
|
|
|
5.7-8.0 yrs.
|
|
|
$
|
4.29
|
|
|
|
1,082,500
|
|
|
$
|
4.29
|
|
$5.87 to $6.50
|
|
|
755,000
|
|
|
|
9.8-10.0 yrs.
|
|
|
$
|
6.45
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,807,035
|
|
|
|
6.5 yrs.
|
|
|
$
|
3.42
|
|
|
|
3,052,035
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Fair Market
|
|
|
|
Unvested
|
|
|
Value at
|
|
|
|
Options
|
|
|
Grant Date
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
Granted
|
|
|
785,000
|
|
|
$
|
4.37
|
|
Forfeited
|
|
|
(30,000
|
)
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
755,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The per share weighted average fair market values at the date of
grant for options granted to employees during the year ended
December 31, 2007 was $6.45. The fair market values of
stock options granted during the year ended December 31,
2007 was determined using the Black Scholes option pricing model
using the following assumptions: dividend yield of
0.0 percent, risk free interest rates of 3.7-4.3%,
volatility of 75% and expected lives of 6 years. We believe
this valuation methodology is appropriate for estimating the
fair value of stock options we grant to employees and directors
which are subject to SFAS 123R requirements. The Company
did not grant any stock options during the year ended
December 31, 2006. The Company primarily bases its
determination of expected volatility through its assessment of
the historical volatility of its common shares. The Company does
not believe that it is able to rely on its historical exercise
and post-vested termination activity to provide accurate data
for estimating our expected term for use in determining the fair
value of these options. Therefore, as allowed by Staff
Accounting Bulletin (SAB) No. 107, Share-Based Payment
, the Company has opted to use the simplified method
F-15
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for estimating its expected term equal to the midpoint between
the vesting period and the contractual term. The contractual
term of the option is 10 years from the date of grant and
the vesting term of the option is three years from date of
grant. Risk free interest rates utilized are based upon
published U.S. Treasury yield curves at the date of the
grant for the expected option term.
For the year ended December 31, 2007, we recognized
compensation expense of $57,938 related to options granted to
employees in 2007 with a corresponding credit to common stock.
At December 31, 2007, the amount of unrecorded stock-based
compensation expense for stock options attributable to future
periods was approximately $3,253,000, which is expected to be
amortized to expense on a straight line basis over the next
three years. This estimate is subject to change based upon
future events which include, but are not limited to, changes in
estimated forfeiture rates, and the issuance of new options.
As of December 31, 2007, the remaining number of common
shares available for equity awards under the LTIP was 245,000.
We are the defendant in a legal dispute with two entities
related to each other that leased a facility and equipment to
us. The plaintiffs are seeking damages of $1.7 million for
breach of contract and multiple related claims stemming from our
termination of the lease. We plan to vigorously defend against
these claims and have not accrued any losses for this
contingency, our expectations regarding the ultimate resolution
of the matter could change.
|
|
14.
|
Supplemental
Cash Flow Information
|
We entered into non-cash transactions described below during the
years ended December 31, 2007 and 2006 which have not been
included in the Consolidated Statement of Cash Flows.
We entered into capital leases on equipment with a cost of
$99,812, and $133,120 for the years ended December 31, 2007
and 2006, respectively, and financed those with capital lease
obligations.
|
|
15.
|
Recent
Accounting Pronouncements
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and is required to be adopted by the
Company in the first quarter of 2008. The Company is currently
evaluating the effect that the adoption of SFAS 157 will
have on its consolidated results of operations and financial
condition and is not yet in a position to determine such effects.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159
expands the use of fair value accounting but does not affect
existing standards that require assets or liabilities to be
carried at fair value. Under SFAS 159, a company may elect
to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees and issued
debt. Other eligible items include firm commitments for
financial instruments that otherwise would not be recognized at
inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or
services. If the use of fair value is elected, any upfront costs
and fees related to the item must be recognized in earnings and
cannot be deferred, such as debt issuance costs. The fair value
election is irrevocable and generally made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to
F-16
ROCKWELL
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measure based on fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been
elected are reported as a cumulative adjustment to beginning
retained earnings. Subsequent to the adoption of SFAS 159,
changes in fair value are recognized in earnings. SFAS 159
is effective for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company in the first
quarter of 2008. The Company currently is determining whether
fair value accounting is appropriate for any of its eligible
items and cannot estimate the impact, if any, that SFAS 159
will have on its consolidated results of operations and
financial condition.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141R). SFAS 141R establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination.
SFAS 141R is effective for fiscal years beginning after
December 15, 2008, and will be adopted by the Company in
the first quarter of 2009. The Company is currently evaluating
the potential impact, if any, of the adoption of SFAS 141R
on its consolidated results of operations and financial
condition.
F-17
exv10w22
Exhibit 10.22
|
|
|
|
|
State of South Carolina
|
|
|
) |
|
|
|
|
|
|
County of Greenville
|
|
|
) |
|
LEASE AGREEMENT, OPTIONS TO
PURCHASE AND OPTION TO LEASE
THIS LEASE AGREEMENT (the Lease), also containing Options to Purchase and an Option to Lease
first made and entered into on the 19th day of March, 2008, by and between EZE
Management Properties Limited Partners, hereinafter called Landlord and Rockwell Medical
Technologies, Inc., hereinafter called Tenant;
WITNESSETH:
WHEREAS, the Landlord is the owner of certain property in Greenville County, South Carolina, as
outlined in red on the survey entitled As-Built Survey Calgon Corporation & EZE Management
Properties Limited Partnership, a copy of which is attached hereto as Exhibit C (the
Survey); and
WHEREAS, the Landlord desires to lease to Tenant and Tenant desires to lease from Landlord all that
certain 57,000 square foot building located at 604 High Tech Court, Greer, South Carolina, as more
fully set out below, as shown on the Survey; and
WHEREAS, the Tenant desires to have an Option to Purchase the land and 57,000 square foot building
located at 604 High Tech Court (the Leased Premises) and also desires to have an Option to
Purchase the 20,362 square foot office building located at 603 High Tech Court (the Office
Building), which property is outlined in red on the survey which is attached hereto as Exhibit
E; and
WHEREAS, the Tenant desires to have an Option to Lease the 20,362 square foot office building
located at 603 High Tech Court.
NOW, THEREFORE, Landlord and Tenant covenant and agree as follows:
ARTICLE I
GRANT AND TERM
1.01 Premises. The Landlord, for and in consideration of the rents, covenants, agreements and
stipulations hereinafter mentioned reserved and contained, to be paid, kept and performed by the
Tenant, by these presents does lease and rent to the said Tenant, and said Tenant hereby agrees to
lease and take upon the terms and conditions which hereinafter appear a 57,000 square foot building
(the Building) including approximately 2,000 square feet of office space and approximately 55,000
square feet of warehouse space and related improvements (herein called Demised Premises) as shown
on the floor plan attached hereto as Exhibit B, together with the exclusive right to use
all driveways, parking areas, sidewalks, loading docks and service areas and other improvements and
facilities shown on Exhibit C. The Building is further shown on the drawing Calgon Lot 21
& Part of Lot 22 of a Subdivision Entitled: Riverbanks Energy Center Section 4, Greenville County
S.C. made by Gray Engineering Consultants, Inc., a copy of which is attached hereto as Exhibit
C.
In addition, Landlord agrees to allow Tenant the use of the adjacent lot outlined in yellow on the
attached Exhibit A for the parking of trucks and vehicles and for no other purpose during
the Base Term. The Landlord reserves the right to sell or use this property during the Base Term
of this Lease, with adequate notice to Tenant.
-1-
1.02 Initial Term. The period beginning upon the execution hereof and continuing until delivery of
the Demised Premises shall be hereinafter referred to as the Initial Term.
1.03 Base Term. The term of this Lease shall commence on March 1, 2008 (the Lease Commencement
Date) and continue for a period of three (3) years to end
on
February 28, 2011, (the Base Term).
Landlord hereby grants to Tenant the option to extend the Base Term of this Lease for one (1)
successive and separate term of two (2) years (The Extension Term) beginning on the date of
expiration of the Base Term of this Lease in accordance with all terms and conditions of this Lease
(the Base Term, and the Extension term are sometimes collectively referred to herein as the
Term). To be effective, such option to extend shall be exercised by Tenants providing Landlord
with written notice of Tenants intention to exercise said option at least one hundred twenty (120)
calendar days before the expiration of the Base Term hereof. Tenant shall not have the right to
exercise any such extension option if Tenant is then in default hereunder.
1.04 Delivery of Demised Premises. Landlord shall deliver the Demised Premises to Tenant in its
current As-Is condition upon full execution of this Lease.
ARTICLE II
RENT
2.01 a. Payment of Rent. Tenants obligation to begin payment of Rent shall be the date Landlord
delivers the Demised Premises to Tenant, which date is scheduled to be Saturday March 1, 2008, (the
Rental Commencement Date). Tenant shall pay to Landlord without notice, demand, and, except as
otherwise expressly provided herein, without reduction, abatement, set off or any defense, minimum
base rent (the Base Rent) in equal monthly installments, in advance, on or before the first day
of each month. If the Rental Commencement Date is a date other than the first day of a calendar
month, the Base Rent shall be prorated daily from such date to the first day of the next calendar
month and paid on the Rental Commencement Date.
2.01 b. Rent During Base Term. The annual Base Rent during the Base Term shall be Two Hundred
Seventy-Five Thousand Six Hundred Twenty-Eight and 00/100 Dollars ($275,628.00) payable in equal
monthly installments of Twenty Two Thousand Nine Hundred Sixty-Nine and 00/100 Dollars
($22,969.00).
2.01 c. Rent During Extension Term. The annual Base Rent during the Extension Term shall be Two
Hundred Thirteen Thousand Seven Hundred Fifty and 00/100 Dollars ($213,750.00) payable in equal
monthly installments of Seventeen Thousand Eight Hundred Twelve and 50/100 Dollars ($17,812.50).
2.02 Additional Rent. Tenant shall be responsible for the payment of certain costs relating to real
estate taxes and insurance premiums, each being specifically detailed in Article IV and Article V
respectively.
a. Taxes. Tenant will pay any and all taxes, documentary stamps or assessments of any nature
imposed or assessed upon Tenants occupancy of the Demised Premises or upon Tenants furniture,
furnishings, trade fixtures, equipment, machinery, inventory, merchandise or other personal
property located on the Demised Premises and owned by or in the custody of Tenant promptly as all
such taxes or Assessments may become due and payable without any delinquency. If applicable in the
jurisdiction where the Demised Premises are located, Tenant will pay and be liable for all sales,
use and inventory taxes or other similar taxes, if any, levied or
-2-
imposed by any city, state, county or other governmental body having authority, such payments to be
in addition to all other payments required to be paid Landlord by Tenant under the terms of this
Lease. Such payment will be made by Tenant directly to such governmental body if billed to Tenant,
or if billed to Landlord, such payment will be paid concurrently with the payment of Base Rent, or
such other charge upon which the tax is based, all as set forth herein. Notwithstanding the
foregoing, Tenant will have the right, at its sole cost and expense, to contest any tax
contemplated by this Section provided that Tenant will send Landlord notice of Tenants intent to
contest such taxes. Landlord will reasonably cooperate with Tenant in connection with such contest,
at no expense to Landlord.
b. Reimbursement of Landlords Cost of Insurance. As Additional Rent, Tenant shall pay its
Proportionate Share (defined below) of the cost of any insurance premiums which Landlord is
required to carry under Section 5.01 (a) and Article X.
c. Other Additional Rent Provisions. Any amounts required to be paid by Tenant under this Article
II and any charges or expenses incurred by Landlord on behalf of Tenant shall be considered
Additional Rent payable in the same manner and upon the same terms and conditions as the Base Rent
reserved )hereunder. Any failure on the part of Tenant to pay such Additional Rent when and as the
same shall become due shall entitle Landlord to the remedies available to it for non-payment of
Base Rent. Tenants obligations for payment of Additional Rent shall begin to accrue on the Rental
Commencement Date. As used in this Lease Agreement, the term Rent shall include Base Rent and
Additional Rent, except as otherwise expressly provided to the contrary.
2.03 Additional Rent Estimated and Paid Monthly. The Real Estate Taxes and Insurance Premiums to be
paid by Tenant shall be estimated at the beginning of each calendar year or partial calendar year
during the Base Term and Tenant shall pay to Landlord one-twelfth (1/12) of such sum on the first
day of each calendar month during each such calendar year, or part thereof, during the Base Term.
Within thirty (30) days following the end of each calendar year or, if earlier, the end of the term
of this Lease, Landlord shall submit to Tenant a statement of the actual amount of Real Estate
Taxes and Insurance Premiums for such calendar year, and within thirty (30) days after receipt of
such statements, Tenant shall pay any deficiency between the actual amount owed and the estimates
paid during such calendar year, or in the event of overpayment, Landlord shall, at Landlords
option, credit the amount of such overpayment toward the next installment of Real Estate Taxes
and/or Insurance Premiums, or refund the amount of such overpayment to Tenant within thirty (30)
days, which such obligation shall survive the termination of the Lease. If the Rental Commencement
Date of the Base Term shall fall on other than the first day of. the calendar year, or if the
Expiration Date shall fall on other than the last day of the calendar year, Tenants share of the
Real Estate Taxes and Insurance Premiums for such calendar year shall be apportioned pro rata.
2.04 Estimated Additional Rent for Year 1. The estimate of the Additional Rent for the first Lease
year is shown on Exhibit D, attached hereto.
2.05 Penalty. In the event that any monthly installment of rent is not received by Landlord on or
before the tenth (10th) day from which said rent is due, Tenant agrees to pay to Landlord, as a
penalty each month during which the installment remains unpaid, an additional sum equal to the
$750.
2.06 Tenants Proportionate Share. Tenants Proportionate Share shall be a fraction, the
numerator of which is the gross leasable area of the Demised Premises and the denominator of which
is the greater of (i) the gross leasable area of the buildings depicted on Exhibit A, or
(ii) the gross leasable area of all of the buildings existing on the land depicted on Exhibit
A at the time Tenants payment is due, excluding any buildings or land that are separately
assessed or insured, as the case may be.
-3-
ARTICLE III
HOLDING OVER
3.01 Rent for Holding Over Period. In the event Tenant remains in possession of the Demised
Premises after the termination of the Base Term, same shall be construed to be a tenancy from month
to month, and said rent during hold over shall remain the same as the Base Term Rent for the first
six (6) months of the hold over period to be paid upon the same terms and conditions as specified
herein. Rent after the first six (6) months of the hold over period will be negotiated prior to any
additional hold over or lease extension period. In the event that Tenant holds over, Tenant and
Landlord agree to give the other party no less than ninety (90) days advance notice to vacate the
Demised Premises.
ARTICLE IV
TAXES/ASSESSMENTS
4.01 Real Property Taxes. Throughout the term of this Lease, Landlord shall pay any and all real
estate taxes, storm water management fees and or sanitation charges payable on or with respect to
the Premises, including land and building, as and when the same shall come due. Landlord shall use
Landlords best efforts to keep any tax increases on the real estate to a minimum (including the
utilization of tax assessment appeal procedures where Landlords attorney or tax advisor feel an
appeal is well advised). Tenant shall reimburse Landlord those costs of such taxes and other
charges as referenced above that are applicable solely to the Demised Premises, or its
Proportionate Share thereof if applicable to more than the Demised Premises, in a timely manner
upon receipt of a copy of the paid tax bill each year.
4.02 Personal Property Taxes. Tenant shall timely pay directly to the applicable governmental
taxing authorities any and all taxes with respect to any and all of Tenants personal property
which shall at any time be situated in, at or about the Demised Premises, including, but not
limited to Tenants leasehold improvements, trade fixtures, inventory and personal property.
ARTICLE V
INSURANCE
5.01 Required Coverage by Tenant. Tenant covenants and agrees that from and after the date of
occupancy by the Tenant, Tenant will carry and maintain, at its sole cost and expense, the
insurance required to be carried by Tenant under Paragraphs (b) and (c) below. Landlord covenants
and agrees that, from and after the date of occupancy by Tenant, Landlord will carry and maintain
the insurance required to be carried by Landlord under Paragraph (a) below and Article XIII. All
such policies of the insurance shall be issued by insurance companies with a rating of not less
than A, if available, in the most current available Bests Insurance Reports, and licensed to
do business in the state in which the Building is located.
a. Landlords Insurance. Throughout the term of this Lease, Landlord covenants and agrees to carry
Property Insurance Special Form (formerly known as All-Risk insurance) on the Premises providing
insurance protection against damage or destruction by fire and other casualties, and rent abatement
and liability insurance, insured under a standard extended coverage endorsement and other items
required to be covered by Landlord pursuant to Article X. Said insurance shall be in the amount
equal to the full replacement value of the permanent improvements thereon under a policy or
policies issued by solvent and responsible insurance companies authorized to do business in the
State of South Carolina. Landlord and Tenant hereby grant to each other, on behalf of any insurer
providing insurance to either Landlord or Tenant as required by this Lease covering the Premises,
improvements thereon or contents thereof, a
-4-
waiver of any right of subrogation by any such insurer that each may acquire against the other by
virtue of payment of any loss under such insurance. The parties hereby mutually and on behalf of
their insurers, waive their respective rights of subrogation to the extent covered by insurance.
Such waivers shall stand mutually terminated as of the date either Landlord or Tenant ceases to be
empowered to grant same.
b. Tenants Insurance. Liability insurance in the Commercial General Liability form (or reasonable
equivalent thereto) covering the Demised Premises and Tenants use thereof against claims for
personal injury or death, property damage and product liability occurring upon, in or about the
Demised Premises, such insurance to be written on an occurrence basis (not a claims made basis), to
be in combined single limits amounts not less than $1,000,000.00 and to have general aggregate
limits of not less than $1,000,000.00 for each policy year. The insurance coverage required under
this Paragraph 5.01 (b) shall, if available, extend to any liability of Tenant arising out of the
indemnities provided for in Article VI and, if necessary, the policy shall contain a contractual
endorsement to that effect. The general aggregate limits under the Commercial General Liability
insurance policy or policies must apply separately to the Demised Premises and to Tenants use
thereof (and not to any other location or use of Tenant) and such policy shall contain an
endorsement to that effect. Notwithstanding the foregoing, Tenant shall have the right to carry the
liability insurance provided above in the form of a blanket insurance policy, covering additional
items or locations or insureds, provided, however, that: (i) Landlord, and any other patties in
interest designated by Landlord to Tenant, from time to time, shall be named as additional insureds
thereunder as its interests may appear; (ii) the coverage afforded Landlord and such other parties
designated by Landlord will not be reduced or diminished by reason of use of such blanket policy of
insurance; and (iii) any such policy shall provide, at a minimum, for the minimum liability
limitations hereinabove provided in this Article VI with respect to Tenants interests in and to
the Demised Premises.
c. Tenant shall also carry insurance covering all of the items included in Tenants leasehold
improvements, if any, trade fixtures, merchandise and personal property from time to time in, on or
upon the Demised Premises, in an amount not less than one hundred percent (100%) of their full
replacement value from time to time during the term, providing protection against perils included
within the standard specialty property form fire and casualty insurance policy, together with
insurance against sprinkler damage, vandalism and malicious mischief.
d. Each insurance policy required above shall: (i) name the other party, as well as any mortgagee
of Landlord, as an additional insured; (ii) provide that a certificate evidencing such insurance
shall be delivered to the. other party prior to possession of the Demised Premises by Tenant and
thereafter within thirty (30) days prior to the expiration of each such policy, and, as often as
any such policy shall expire or terminate; (iii) contain a provision that the insurer will give to
the other parties in interest at least thirty (30) days notice in writing in advance of any
material change, cancellation, termination or lapse, or the effective date of any reduction in the
amounts of insurance; ,and (iv) be written as a primary policy which does not contribute to and is
not in excess of coverage which the other party may carry. Notwithstanding the provisions of
subparagraph (iii) of the preceding sentence, each party shall be responsible for providing the
other with at least twenty-five (25) days notice in advance of any material change, cancellation,
termination or lapse, or the effective date of any reduction in the amount of insurance.
ARTICLE VI
INDEMNIFICATION
Tenant shall defend, indemnify and hold harmless the Landlord from and against any and all claims,
losses, liabilities, causes of action, damages, or expenses, whether due to damage to the Demised
Premises, claims for injuries to persons or property, or administration or criminal action by a
governmental authority, where such claims arise out of or from or related to the use or occupancy
of the Demised Premises by Tenant, its agents, employees, invitee, visitors, customers, or
licensees, including costs and reasonable attorney fees incurred by Landlord to defend itself
against any such claims, damages or expenses.
-5-
Landlord shall not be liable to Tenant for any damages, losses or injuries to the persons or
property of Tenant which may be caused by the acts, neglect, omissions or faults of any persons,
firms or corporations, except when such injury, loss or damage results from the negligence or the
unlawful or willful acts of Landlord, his agents or employees or contractors. All personal property
placed or moved into the Premises or building shall be at the risk of Tenant or the owner thereof,
and Landlord shall not be liable to Tenant for any damage to said personal property except for
damage which is covered by insurance required to be carried by Landlord hereunder and except for
damage resulting from the negligence or the unlawful or willful acts of Landlord, its employees,
agents, or contractors. Each party shall maintain at all times during the Base Term of this Lease
or any Renewal Terms thereof, an insurance policy or policies in any amount or amounts sufficient
to indemnify the other or pay the others damages, if any, resulting from any matters set forth
hereinbefore.
In case Landlord or Tenant shall be made a party to any litigation commenced against the other
party, then the other party shall protect and hold Landlord or Tenant, as applicable, harmless and
shall promptly pay all costs, expenses and reasonable attorney fees incurred or paid by Landlord or
Tenant, as applicable, in connection with such litigation.
Notwithstanding any contrary provision (of this Lease, Tenant will look solely (to the extent
insurance coverage is not applicable or available) to the interest of Landlord (or its successor as
Landlord hereunder) in the Premises for the satisfaction of any judgment or other judicial process
requiring the payment of money as a result of any negligence or breach of this Lease by Landlord or
its successor or of Landlords managing agent (including any beneficial owners, partners,
corporations and/or others affiliated or in any way related to Landlord or such successor or
managing agent).
ARTICLE VII
MAINTENANCE OF PREMISES
7.01 Repairs by Landlord. The Landlord shall, at its sole cost and expense, keep and maintain the
foundations, roof, and structural portions of the exterior walls of the Premises (except any walls,
whether temporary or permanent, installed by Tenant), in good condition and repair, except for
repairs or replacements occasioned or required by reason of the acts of the Tenant, its employees,
agents, invitees, licensees, or contractors. The Tenant agrees to give the Landlord written notice
of the necessity for repairs or replacements coming to the attention of the Tenant. The Landlord
shall not be obligated to make any repair or replacement required of it until notice in writing
from Tenant of the need for same. The Landlord shall have a reasonable time after Tenants written
notice in which to make such repair or replacement. In addition, the Landlord shall be responsible
for the cost of replacing the heating, air-conditioning and ventilation system and units (HVAC);
provided however, Tenant shall be responsible for the replacement of any HVAC unit installed or
replaced in or on the Premises since January 15, 2007. The provisions of this Article shall not
apply in the event of damage or destruction by fire or other casualty or taking under a power of
eminent domain, in which event the obligations of the Landlord shall be controlled by the terms of
Article XIII and Article XIV. The Landlord shall not be liable for any damage done to the personal
property or leasehold improvements of Tenant occasioned by or from the electrical system, the
heating or cooling system, the plumbing and sewer systems, nor for damage occasioned by snow or ice
being upon or coming through the roof, walls, windows, doors or otherwise, in, upon or about the
Premises, except to the extent resulting from the negligence or unlawful or willful acts of
Landlord, its agents, employees, and contractors, or resulting from the failure of Landlord to
perform its obligations hereunder; nor for any damage arising from acts or negligence of other
occupants of the property of which the Premises is a part. The Landlord shall not be liable for any
damage occasioned for failure to keep the Premises in repair, unless the Landlord is obligated to
make such repairs under the terms hereof and unless
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notice of the need for repairs has been given the Landlord and a reasonable time has elapsed and
the Landlord has failed to make such repairs. Landlord shall not be liable to Tenant for any
damages to person or property resulting from fire or other hazards, except to the extent resulting
from the negligence or unlawful or willful acts of Landlord, its agents, employees, and
contractors, or resulting from the failure of Landlord to perform its obligations hereunder,
regardless of the cause thereof, and the Tenant hereby releases the Landlord from all liability for
such damage.
7.02
Repairs by Tenant. Subject only to the obligations of the Landlord set forth in Section
7.01 hereof, the Tenant shall keep and maintain the Demised Premises and every part thereof and any
fixtures, facilities or equipment contained therein, in good condition and repair, including, but
not limited to floors, the heating, air-conditioning, ventilating, fire protection, electrical,
plumbing and sewer systems, the exterior door, security grilles, window frames and all portions of
the store front area. Tenant shall (a) make any routine and regularly scheduled repairs thereof,
and (b) any non-routine and non-regularly scheduled repairs, maintenance or any replacements
thereof. The Tenant shall at its expense contract with a reputable firm for periodic servicing of
the heating, air-conditioning, and ventilation systems as recommended by the manufacturer of such
equipment. The Tenant shall also at its expense maintain pest (including termite) control,
inspection, and treatment of the Demised Premises. If the Tenant refuses or neglects to commence or
complete any of the obligations above set forth promptly and adequately, the Landlord may, but
shall not be required to do so, make or complete any maintenance or repairs and the Tenant shall
pay the cost thereof to the Landlord upon demand as additional rent hereunder. Alterations to the
Demised Premises by Tenant, after the Rent Commencement Date hereof shall be made only with prior
written consent of the Landlord and under Landlords control and supervision. However, the
Landlords consent shall not be unreasonably withheld or delayed in case of minor alterations to
conform the Demised Premises to the use of Tenants business. Regardless of any obligations
otherwise imposed upon Landlord, Tenant shall pay for the cost of any repairs or damage resulting
from the negligence or the unlawful or willful acts of its employees, agents or invitees, except to
the extent covered by insurance required to be carried by Landlord hereunder. Further permission is
hereby granted by Landlord to Tenant to upfit the Demised Premises by painting, redecorating or
carpet replacement all at the expense of Tenant, it being understood and agreed that the Tenant
takes and accepts the Demised Premises in their present condition as is, where is after
inspection by Tenant and without representation or warranty by Landlord or any agent of Landlord.
7.03 Maintenance of Grounds and Parking, Driveways. In the outdoor areas depicted on Exhibit
C, the Tenant shall either use its own personnel or employ a grounds maintenance service to
periodically keep the grass and weeds mowed, the shrubs pruned and the driveways, sidewalk and
parking areas swept in a neat, clean and sightly condition, with any expenses attendant thereto to
be paid by Tenant. In the event that the Landlord in his discretion should reasonably conclude that
such grounds and parking area maintenance is not being adequately carried out by said Tenant, then
Landlord is hereby authorized to employ a grounds maintenance service at what the Landlord
reasonably considers to be a market price for similar services and to bill Tenant the cost thereof
on a quarterly or more frequently periodic basis, which the Tenant agrees to pay upon receipt.
Tenant shall be responsible for repairs to the parking areas and driveways for any damage caused by
excessive wear and tear by Tenant or Tenants invitees.
7.04 Alterations and Remodeling. With the permission and prior written consent of the Landlord,
which shall not be unreasonably withheld, Tenant may make such alterations, additions, decorations
and changes to the interior of the building, parking lot and exterior lighting of the Premises as
it deems necessary for its purposes provided that the value of the buildings and improvements are
not thereby diminished subject to the following conditions:
a. That if any such work increases any insurance premiums, taxes, or other costs or expenses
relating to the Premises, Tenant shall timely and fully pay and satisfy same.
b. That no casualty or mechanics or materialmens claims or liens shall be created, and not bonded
over by Tenant, upon the Premises or elsewhere by reasons of or with respect to the
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work or a condition of the Premises thereafter resulting from said work; and
c. That upon expiration or any earlier termination of the Lease, Tenant shall, upon the election of
Landlord, promptly remove the alterations and repair and restore the Demised Premises at its cost
and expense to the condition existing next prior to installation of the same. Any and all
alterations, additions and improvements to the Premises (other than inventory and trade fixtures
and equipment) installed by or on behalf of Tenant shall immediately, at Landlords option, become
part of the Premises .and at the expiration or other termination of this Lease shall be surrendered
to the Landlord.
7.05 Compliance with Regulations. Tenant shall comply with all laws, ordinances, orders, rules,
regulations and requirements of all federal, state and municipal governments and appropriate
departments, commissions boards and officers thereof, which may be applicable to any Tenant
improvements. Tenant will likewise observe and comply with the requirements of all policies of
public liability, fire and all other types of insurance and all other instruments of record at any
time in force with respect to the Demised Premises.
7.06 Tenants Right to Contest Regulations. Tenant shall have the right, after notice to Landlord
to contest by appropriate legal proceedings, without cost or expense to Landlord, the validity of
any law, ordinance, order, rule, and regulation or requirement of the nature herein referred to and
to postpone Tenants compliance with the same, provided such contest shall be promptly and
diligently prosecuted by and at. the expense of Tenant so that Landlord shall not thereby suffer
any civil, or be subjected to any criminal, penalties or sanctions and that Tenant shall properly
protect and save harmless Landlord against any liability and claims for any such non-compliance or
postponement of compliance.
7.07 Satellite Dish. Tenant has the right to install a satellite dish or other electronic
transmitter (collectively the Antenna) on the roof of the Demised Premises in compliance with all
applicable laws. The cost of installation and maintenance thereof and the cost of any repairs to
the roof which are necessitated by the installation or repair of the Antenna shall be borne solely
by Tenant. Upon the termination of this Lease, Tenant has the right to remove any Antenna, and
Tenant shall repair any material damage to the roof occasioned by such removal.
7.08 Utilities. Landlord represents that the Demised Premises are served with heat, water, gas,
electricity and other utilities sufficient for Tenants use and that all such utilities are
separately metered to the Demised Premises. Tenant shall be solely responsible for and shall
promptly pay all charges for heat, water, gas electricity or any other utilities used or consumed
by Tenant on the Demised Premises.
ARTICLE IX
USE AND CONDUCT OF BUSINESS
9.01 Use of the Premises. At the commencement of the Initial Term of this Lease, the Demised
Premises may be used by the Tenant for office space and warehousing, or other lawful purposes
provided such uses shall not affect the insurability of the Demised Premises. The Demised Premises
shall not be used for any illegal purposes, or in violation of any valid regulation of any
governmental body, nor in any manner to create any nuisance or trespass.
9.02 Nuisance. Tenant agrees not to create or allow any nuisance to exist on the Demised Premises,
and to abate any nuisance that may arise, promptly and free of expense to Landlord.
ARTICLE X
QUIET ENJOYMENT
10.01 It is a condition of this Lease is that Landlord has a good and marketable title to the
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Premises free and clear of all liens and encumbrances except those to which Tenant has specifically
consented in writing; that Landlord has the right to lease the same; that Landlord warrants and
will defend Premises unto Tenant against the lawful claims of all persons whomsoever; that so long
as the rents are being paid in the manner herein provided and the covenants, conditions and
agreements herein being all and singularly kept, fulfilled and performed by Tenant, Tenant shall
lawfully, peacefully and quietly hold, occupy and enjoy the Premises during the term herein granted
without any let, hindrance, ejection or molestation by Landlord or any person claiming under
Landlord.
ARTICLE XI
ENVIRONMENTAL
11.01 Landlords Environmental Warranty. To the best of Landlords knowledge, neither Landlord nor
any persons with whom Landlord has contracted (a) have caused any violation of any federal, state
or local law, ordinance, or regulation enacted related to environmental conditions on or about the
Premises, including, but not limited to soil and groundwater conditions. The term Hazardous
Substance as used herein shall include, without limitation, flammable, explosives, radioactive
materials, asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause cancer or
reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic products, and substances
declared to be hazardous or toxic under any law or regulation promulgated by any governmental
authority. Landlord agrees to indemnify and hold Tenant harmless for the demised premises as a
result of the demised premises use prior to January 15, 2007 entry upon same by the Tenant.
11.02 Hazardous Waste. Tenant covenants and warrants that it will not cause or permit to be brought
upon the Demised Premises or installed Improvements thereon any asbestos in any form, urea
formaldehyde insulation, transformers or any other equipment which contain dielectric fluid
containing levels of polychlorinated biphenyl in excess of fifty parts per million of any other
chemical material or substance which is regulated as toxic or hazardous or exposure to which is
prohibited, limited or regulated by any federal or state authority with the exception of Landlords
permission to allow Tenant to receive, store, distribute and transport such regulated hazardous
material/hazardous substances as are deemed normal and customary stock in Tenants industry. The
Tenant shall not install, store use, treat, transport or dispose of on the Demised Premises any
regulated hazardous or toxic materials or waste, and in the event of any such installation,
storage, use, treatment, presence, transportation or disposal during the term of this Lease the
Tenant shall remove any such hazardous materials or waste and comply with the regulations and
orders of any authority having jurisdiction of the same all at the expense of the Tenant, including
necessary removal, cleanup or other remediation, and if Tenant shall fail to proceed with such
removal or comply with such regulations or orders the Landlord may declare this Lease in default.
Tenant shall indemnify Landlord and hold Landlord harmless from any and all losses, damages or
expenses which may be incurred by Landlord for the presence or removal from the Demised Premises of
any such hazardous materials or waste related to any activity of Tenant on the Demised Premises and
the liability of the Tenant to Landlord under the covenants hereof shall survive termination of
this Lease or any transfer of the leasehold estate or the fee estate by either Landlord or Tenant.
11.03 Other. Under no circumstance shall Tenant install or have installed any environmental
monitoring wells on the Demised Premises unless so required by an appropriate local, state or
federal governmental unit and with full knowledge of Landlord prior to installation of any
monitoring wells.
ARTICLE XII
SIGNAGE
Tenant may furnish and install a storefront sign reasonably acceptable to the Landlord. The
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Tenant shall not place, erect nor maintain on any exterior surface of the Demised Premises, or
anywhere outside of the Demised Premises, any sign, lettering decoration, or advertising, except
such signs as may be permitted by the Landlord such approval not to be unreasonably withheld. The
Tenant shall, at its expense, maintain such permitted or required signs in a good state of repair
and upon vacating the Demised Premises, the Tenant agrees to remove all signs and to repair all
damage caused by such removal.
ARTICLE XIII
DESTRUCTION
If, during the Base Term of this Lease or any extension thereof, the Demised Premises is:
(a) destroyed by fire or any other casualty whatsoever, or;
(b) partially destroyed so as to render the Demised Premises unfit for occupancy or Tenants
reasonable beneficial use and enjoyment or conduct of Tenants usual business therein, or;
(c) destroyed by a casualty which is not covered by the insurance required to be carried by
Landlord hereunder;
then Landlord shall make its reasonable determination as to the length of time to complete such
repairs within thirty (30) days of the casualty and shall notify Tenant of same as provided herein.
In the event restoration is reasonably estimated by Landlord to take more than one hundred fifty
(150) days from the date of notice to Tenant of such repairs then Tenant may terminate the lease.
In case of the total or partial damage or destruction to the Premises, Landlord shall reenter and
repossess the same or any part thereof for the purpose of removing or repairing the loss or damage
and shall proceed with due diligence to the repair of same unless, under the foregoing provisions
of this Article XIII, the Lease shall have been terminated. The rent during the period of such
repairs shall be wholly abated if Tenant is not able to conduct its usual business in any portion
of the Demised Premises in the normal course; and if only a portion of the Demised Premises is
unavailable to Tenant for Tenants reasonable beneficial use and enjoyment or Tenants conduct of
Tenants usual business therein, the rent shall be abated for such dispossession or unavailability
pro rata, based on the portion of the Demised Premises in which Tenant is able to conduct its
business in the normal course. Any rent abatement under this Article XIII shall commence as of the
date of the destruction. If more than twenty percent (20%) of the demised premises is not useable,
then the rent shall be wholly abated.
Landlord shall not be required to rebuild, repair, or replace any part of the personal property,
furniture, equipment, fixtures, and other improvements which may have been placed by Tenant within
the Demised Premises, unless the damage thereto is caused by the sole negligence or willful act or
omission or default hereunder of Landlord or Landlords agents, employees, subtenants, assignees,
or independent contractors. Any insurance which may be carried by Landlord or Tenant for damage to
the Demised Premises or to any personal property, fixtures, and related items therein shall be for
the sole benefit of the party carrying such insurance and under its sole control; provided,
however, Landlord shall carry insurance for the benefit of Landlord and Tenant sufficient to cover
the full replacement cost of the shell of the Demised Premises and an amount equal to the initial
Tenant improvements and related allowances set forth in this Lease as well as insurance sufficient
to cover Tenants furniture, equipment, fixtures, personal property, and other improvements that
Landlord shall have liability therefore under this Lease.
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Should the Demised Premises be destroyed or damaged by fire or other casualty that is due to the
direct negligence or willful or wanton conduct of Tenant or Tenants agents, employees, subtenants,
assignees or independent contractors, Landlord may repair such damage, and there shall be no
apportionment or abatement of rent.
ARTICLE XIV
CONDEMNATION
Landlord, within five (5) days of Landlords receipt of any notice of the institution of
condemnation proceedings or threat thereof with respect to all or any part of the Demised Premises,
shall give written notice to Tenant of the same. Tenant shall have the right and option, to
terminate this Lease within sixty (60) days after receipt of said notice from the Landlord should
such condemnation. effect twenty percent (20%) or more of the Demised Premises, or result in the
reduction of twenty percent (20%) or more of those parking spaces shown on Exhibit C, or
adversely affect any point of access or any driveway that is critical to the conduct of Tenants
business operations at the Demised Premises, and Tenant determines that such condemnation will
interfere with Tenants ability to continue its business operations in substantially the same
manner or space as existed prior to the condemnation or deed in lieu thereof. Tenants obligation
under this Lease including but not limited to Tenants obligation to pay rent hereunder, shall
cease upon Tenants termination of this Lease pursuant to the terms of this Article; however, the
Tenant shall be obligated to pay all rent due on or before the date of termination down through the
date Tenant surrenders possession of the Premises to the Landlord.
ARTICLE XV
DEFAULT
15.01 Default by Tenant. The occurrence of any of the following events shall constitute a default
under this Lease:
a. Tenant fails to pay any installment of rent within ten (10) business days after such installment
is due, and fails to cure such delinquency within five (5) business days after actual receipt of
written notice thereof by Tenant from Landlord:
b. Tenant fails to pay any additional item or any other charge or sum required to be paid by Tenant
hereunder within thirty (30) days after actual receipt of written notice thereof by Tenant from
Landlord; or
c. Tenant fails to perform or commence in good faith and proceed with reasonable diligence to
perform any of its covenants under this Lease within thirty (30) days after actual receipt of
written notice thereof by Tenant from Landlord; provided, however, that if such default is of a
nature that it cannot reasonably. be cured in thirty (30) days, then such period shall be extended
for the amount of time reasonably required to cure such default but only if, within such thirty
(30) day period, Tenant commences to cure such default and, thereafter, diligently pursues such
cure to completion.
15.02 Landlords Remedies. In the event Tenant is in default pursuant to the conditions set forth
in Section 15.01 above, Landlord, during the continuation of such default, shall have the option of
pursuing either of the following remedies:
a. Landlord may terminate this Lease, in which event Tenant immediately shall surrender possession
of the Premises. All obligations of Tenant under the Lease, including Tenants obligation to pay
rent under the Lease, shall cease upon the date of termination except for Tenants obligation to
pay rent due and outstanding as of the date of termination.
b. Landlord, without terminating the Lease, may require Tenant to remove all property from
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the Premises within thirty (30) days so that Landlord may re-enter and relet the Premises to
minimize Landlords damages. In the event Tenant shall fail to remove all property within thirty
(30) days after said demand, Landlord shall be entitled to remove Tenants property to a storage
facility, and all reasonable costs of such removal and storage shall be deemed additional rent
under the Lease for which Tenant is responsible for payment. Landlord may enforce all of its rights
and remedies under this Lease, including the right to recover the rent as it becomes due hereunder,
provided that Landlord shall have an affirmative obligation to use Landlords best efforts to reIet
the Premises and to mitigate its damages under the Lease.
c. Landlord may accelerate and declare the entire remaining unpaid rent for the balance of this
Lease to be immediately due and payable forthwith and may, at once, take legal action to recover
and collect the same, such amount being discounted to present value using the prime rate published
by a national bank acceptable to Tenant and Landlord and such amount reduced by the amount of rent
Landlord will receive by reletting the Premises for the remainder of the term or portion thereof.
d. If this Lease is terminated as set forth, Landlord may relet the Premises (or any portion
thereof) for such rent and upon such terms as Landlord is able to obtain (which may be for lower or
higher rent, and for a shorter or longer term), and Tenant shall be liable for all damages
sustained by Landlord, including but not limited to any deficiency in rent for the duration of the
Base Term or then current Renewal Term (or for the period of time which would have remained in the
Base Term or then current Renewal Term in the absence of any termination, leasing fees, attorneys
fees, other marketing and collection costs and all repairs required as a result of Tenants
occupancy of the Demised Premises.
e. Nothing contained herein diminishes any right Landlord may have under South Carolina law to sue
Tenant for damages in the event of any default by Tenant under this Lease, or from pursuing any
other remedy available to Landlord at law or in equity.
15.03 Waiver of Lien. If the laws of the State in which the Demised Premises are located provide
Landlord with a lien, a right of distraint, or any other priority (such rights being referred to
herein as Landlords Rights) with respect to the tangible personal property and trade fixtures
(Collateral) Tenant now or hereafter locates in the Demised Premises, then Landlord waives, and
shall not hereafter assert or enforce, Landlords Rights with respect to the Collateral.
15.04 Landlords Default. If Landlord either fails to perform any obligation specified in this
Lease, or breaches or fails to satisfy any representation, .warranty or covenant specified in this
Lease, then, in addition to any other remedies to which Tenant may be entitled under this Lease, at
law or in equity, Tenant may, after the continuance of any such default for ten (10) days (for
monetary default or failure to maintain the Demised Premises in a dry and watertight condition) or,
except in the case of an emergency, for thirty (30) days (for any other nonmonetary default) after
notice thereof by Tenant to Landlord, cure such default or breach, or otherwise take such
preventative or protective action respecting the Demised Premises and Tenants operations therein
as Tenant in good faith reasonably determines to be necessary, appropriate, or expedient, all on
behalf and at the expense of Landlord, and do all necessary work and make all necessary payments in
connection therewith. Landlord shall pay Tenant the cost so paid by Tenant within ten (10) days
after notice from Tenant that such cost has been incurred. If Landlord fails to pay the amount
requested by Tenant within such ten (10) day period, then Tenant may recoup from rent thereafter
due to Landlord the amount necessary to satisfy the payment of such indebtedness.
ARTICLE XVI
BANKRUPTCY OR INSOLVENCY
In the event that Tenant shall be adjudged bankrupt or insolvent or if any receiver shall be
appointed for the business and property of Tenant and not discharged in ninety (90) days, or if any
assignment shall be made of Tenants property for the benefit of creditors, then Landlord may
terminate this Lease forthwith.
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ARTICLE XVII
TENANTS RIGHT TO SUBLEASE AND ASSIGN
17.01 Tenant may not sublet the Premises or assign this Lease without the prior written consent of
the Landlord, which shall not be unreasonably withheld and if such consent is granted, Tenant shall
remain liable to Landlord for the faithful performance of all of the covenants and conditions,
including rental payment, required to be kept and performed under the terms of this lease.
Notwithstanding the foregoing, without Landlords prior written consent, but with at least fifteen
(15) days prior written notice to Landlord, Tenant may assign or sublet all or any part of Tenants
interest in this lease to any entity which acquires all or a majority of Tenant or Tenants
business, assets or stock (excluding any stock owned or retained by officers or employees of
Tenant) either through purchase or by any merger or consolidation, or any assignment by operation
of law, regardless of whether any such occurrence would be characterized by law or otherwise to
constitute an assignment or sublet; provided, however, that Tenant shall remain liable and
responsible for Tenants obligations under this Lease.
17.02 Violation. Any violation of any provision of this Lease, whether by act or omission, by any
assignee or subtenant of Tenant, shall be deemed a violation of such provision by the Tenant, it
being the intention and meaning of the parties hereto that the Tenant shall assume and be liable to
the Landlord for any and all acts and omissions of any and all assignees or subtenants of Tenant.
If the Premises or any part thereof is sublet or occupied by any person other than the Tenant,
Landlord, in the event of Tenants default, may and is hereby empowered to collect rent from the
subtenant or occupant; the Landlord may apply the net amount received by it to the rent herein
reserved and no such collection shall be deemed a release of the Tenant from the further
performance of the covenants herein contained.
ARTICLE XVIII
LANDLORDS RIGHT TO MORTGAGE AND SELL
18.01 Estoppel Certificate. Within five business (5) days after written request therefor by either
Landlord or Tenant to the other, or in the event that upon any sale, assignment, hypothecation of
the Premises, and/or the land thereunder, or a leasehold loan by Tenant of its leasehold estate
herein, an Estoppel statement shall be required from Landlord or Tenant, Landlord and Tenant agree
to deliver to each other, in recordable form, a certificate to any proposed mortgagee or purchaser,
certifying that this Lease is in full force and effect, that there are no defenses thereto, or
stating those claimed by Landlord or Tenant, and as to such other matters as may be reasonably
requested.
18.02 Subordination and Attornment. Upon Landlords request, during the term of this Lease, Tenant
shall execute a subordination agreement in recordable form wherein Tenant shall agree that this
Lease is and shall be subordinate to the lien of any mortgages in any amount or amounts on all or
any part of the land or buildings comprising the Premises, or on or against Landlords interest or
estate therein; provided that such subordination agreement shall recite that the subordination of
Tenants interests pursuant thereto are subject to the agreement by the mortgagee named in any such
mortgage to recognize the Lease of Tenant in the event of foreclosure of any such mortgage if
Tenant is not in default under the Lease. Tenant covenants and agrees to execute and deliver upon
demand such further instruments evidencing such
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subordination of this Lease to the lien of any such mortgage as may be required by the Landlord
within ten (10) days of demand therefor. Notwithstanding anything hereinabove contained, in the
event the holder of any such mortgage shall at any time elect to have this Lease constitute a prior
or superior lien to its mortgage, then and in such event upon any such mortgage holder notifying
Tenant to that effect, this Lease shall be deemed prior and superior in lien to such mortgage
irrespective of whether this Lease is dated prior to or subsequent to the date of such mortgage or
lease.
If Landlord enters into one or more mortgages and Tenant is advised in writing of the name and
address of the mortgagee under such mortgage, then this Lease shall not be terminated or canceled
on account of any default by the Landlord in the performance of any of the terms, covenants or
conditions hereof on its part contained, until Tenant shall have given written notice of such
default to such mortgagee, specifying the default, in which event such mortgagee shall have the
right to cure Landlords default as otherwise provided herein and which cure shall be accepted by
Tenant.
Tenant shall, in the event any proceedings are brought for the foreclosure of or in the event of
sale under any mortgage made by the Landlord covering the Premises, attorn to the purchaser upon
any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease.
18.03 Transfer of Landlords Interest. Landlord shall have the right to convey, transfer or assign,
by sale or otherwise, all or any part of its interest in this Lease or the Premises at any time and
from time to time and to any person, subject to the terms and conditions of this Lease. All
covenants and obligations of Landlord under this Lease shall not cease upon the execution of such
conveyance, transfer or assignment, but such covenants and obligations shall run with the land and
shall be binding upon any subsequent owner thereof.
ARTICLE XIX
SURRENDER OF PREMISES
19.01 Trade Fixtures. All store fixtures, equipment, and every other item of property not
permanently attached to the Premises and not paid for by Landlord, and .any of such items leased by
Tenant under bona fide leases from .third party owners, are to remain and be the property of Tenant
and Tenant is to have the right and privilege of removing any and all such property and equipment
at any time during the continuance of this Lease or any extensions hereof and within thirty (30)
days thereafter. In the event the aforesaid equipment is not removed by Tenant within said thirty
(30) day period, Tenant shall relinquish its rights to said property/equipment. If said equipment
is removed, Tenant shall restore the Premises to their condition prior to the removal of such
property. It is further understood and agreed that the buildings and structures installed on the
Premises by Landlord, may not be removed by Tenant at the termination of this Lease.
19.02 Surrender. The Tenant shall on the expiration or the sooner termination of the Lease term
surrender to Landlord the Premises, including all buildings, replacements, changes, additions, and
Improvements constructed or placed by the Tenant thereon, except for all moveable trade fixtures,
equipment, and personal property belonging to the Tenant, broom clean, free of sub-tenancies, and
in good condition and repair, reasonable wear and tear and casualty excepted.
ARTICLE XX
SECURITY DEPOSIT
20.01 Tenant has presently paid to Landlord the sum of Seventeen Thousand Eight Hundred Twelve and
50/100 Dollars ($17,812.50). (the Present Security Deposit) as security for the full and faithful
performance by Tenant of each and every term, covenant and condition of the current
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Lease. Tenant will pay to Landlord an additional sum of Five Thousand One Hundred Fifty-Six and
50/100 Dollars ($5,156.50) which will represent the New Security Deposit of Twenty Two Thousand
Nine Hundred Sixty-Nine and 00/100 Dollars ($22,969.00) as security for the full and faithful
performance by Tenant of each and every term, covenant and condition of this Lease. Landlord will
deposit the Security Deposit with a banking institution having federally insured deposits and all
interest, if any, will accrue to Landlords benefit. Landlord may combine the Security Deposit with
other funds of Landlord as long as permitted by the laws of South Carolina. Upon an Event of
Default by Tenant under this Lease, or if Tenant fails to perform any of the terms, provision and
conditions of this Lease as and when required, Landlord may use, apply, or retain the whole or any
part of the Security Deposit for the payment of any sum due Landlord or which Landlord may expend
or be required to expend by reasons of the Event of Default or failure to perform including, but
not limited to, any damages or deficiency in the reletting of the Premises, and Tenant will
forthwith upon demand restore the Security Deposit to the original sum deposited; provided,
however, that any such use, applications or retention by Landlord of the whole or any part of the
Security Deposit will not be or be deemed to be an election of remedies by Landlord or viewed as
liquidated damages, it being expressly understood and agreed that, notwithstanding such use,
application or retention, Landlord will have the right to pursue any and all other remedies
available to it under the terms of this Lease or otherwise. In the event Tenant complies with all
of the terms, covenants and conditions of this Lease, the Security Deposit, without interest and
less amounts due from Tenant to Landlord, will be returned to Tenant within thirty (30) days after
Tenant has vacated and surrendered the Premises in accordance with the terms hereof, so long as no
event of Default by Tenant will then be existing under the terms of this Lease, which such
obligation will survive the termination of this Lease. In the event of a sale of the Building or
the project, Landlord will have the right to transfer the Security Deposit and its rights and
liabilities associated with same to the purchaser, and in the event of such transfer Landlord will
thereupon be released for all liability for the return of the Security Deposit. In such event,
Tenant will look solely to the new landlord for the return of the Security Deposit.
ARTICLE XXI
MISCELLANEOUS
21.01 Landlords Entry. The Landlord shall have the right, upon prior reasonable notice, to enter
upon the Premises at all reasonable times during the term of this Lease for the purposes of
inspection, maintenance, repair and alteration and to show the same to prospective Tenants or
purchasers.
21.02 Nature and Extent of Agreement. This instrument contains the complete agreement of the
parties regarding the terms and conditions of the Lease of the Premises, and there are no oral or
written conditions, terms, understandings or other agreements pertaining thereto which have not
been incorporated herein. This instrument may be amended from time to time by written addendum
signed by both parties. This instrument creates only the relationship of Landlord and Tenant
between the parties hereto as to the Premises; and nothing herein shall in any way be construed to
impose upon either party hereto any obligations or restrictions not herein expressly set forth. The
laws of the State of South Carolina shall govern the validity, interpretation, performance and
enforcement of this Lease.
21.03 Partial Invalidity. If any term, covenant or condition of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the
remainder to this Lease, or the application of such term, covenant or condition to persons or
circumstances other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Lease shall be valid and be
enforceable to the fullest extend permitted by law.
21.04 Recording. This Lease shall not be recorded; however, upon the request of either party hereto
the other party shall join in the execution of a memorandum or so-called short form of this Lease
for the purpose of recordation. Said memorandum or short form of this Lease shall
-15-
describe the parties, the Premises and the term of this Lease and shall incorporate this Lease by
reference.
21.05 Calculation of Time. Unless specifically stated otherwise, any reference to a specific period
of days shall be interpreted as a reference to calendar days; provided however, that if such period
would otherwise end on a Saturday, Sunday or generally recognized holiday, then the period shall be
deemed to end on the next business day.
21.06 Landlords Right to Perform Tenants Covenants. Tenant covenants and agrees that if it shall
at any time fail to pay any Taxes or other charges to be paid by Tenant in accordance with the
provision of Article IV, or to take out, pay for, maintain or deliver any of the insurance policies
required by Tenant in Article V, or shall fail, within the time limits after the notice therein
specified of any event of default has been given to make any other payment or perform any other act
on its part to be made or performed, then Landlord may, but shall not be obligated so to do, and
without further notice to or demand upon Tenant and without waiving or releasing Tenant from any
obligations of Tenant in this lease contained,
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a. |
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pay any taxes or other charges payable by Tenant pursuant to the provisions of
Article IV, or |
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b. |
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take out, pay for and maintain any of the insurance policies required by Tenant |
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c. |
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make any other payment or perform any other act on Tenants part to be made or
performed as in this Lease provided. |
21.07 Statement of Lease Commencement Date. Tenant at Landlords request, shall from time to time
execute and deliver a written statement confirming the commencement and termination dates of the
Lease Term.
21.08 Waiver. No delay or omission by Landlord or Tenant in exercising any right or power accruing
upon any non-compliance or default by Tenant or Landlord, as the case may be, shall impair any such
right or power or be construed to be a waiver of such non-compliance or default, except as
otherwise provided to the contrary in this Lease. A waiver by Landlord or Tenant of any of the
covenants of this Lease shall not be construed to be a waiver of any succeeding breach of such
covenant, or of any other covenant, condition or agreement contained in this Lease. The failure of
either party to seek redress for violation of, or to insist on the strict performance of, any
covenant of this Lease, whether by express waiver or otherwise, shall not prevent a subsequent
action that would have originally constituted a violation, from having all the force and effect of
any original violation.
21.09 Reasonable Consent Provisions. To the extent any provision of this Lease may call for the
reasonable consent of either party to be given, and where written notice is given requesting
such consent as provided in Section 21.11, such consent shall be deemed given unless a written
refusal to consent is sent to the requesting party within ten (10) business days after the mailing
of the written request for consent.
21.10 Applicable Law. Any controversy or claim arising out of or relating to this Lease shall be
governed by the substantive law of the State of South Carolina without consideration of the
conflicts of law rules of said state.
21.11 Notices. Any notice allowed or required by this Lease Agreement shall be in writing, and (i)
shall be deemed effective three (3) business days following deposit, with proper postage attached
or fee paid when sent by either certified mail or registered mail, return receipt requested, with
proper postage prepaid, or (ii) the next business day following deposit with nationally recognized
overnight courier (for example, Federal Express). Notices shall be addressed as follows:
-16-
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By Tenant to Landlord: |
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EZE Management Properties Limited Partners |
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P.O. Box 6648 |
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Greenville, SC 29606 |
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Attn: J. Carroll Rushing |
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By Landlord to Tenant: |
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Rockwell Medical Technologies, Inc. |
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30142 Wixom Road |
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Wixom, MI 48393 |
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Attn: Thomas Klema |
21.12 Captions. The captions or headings at the beginning of articles and sections of this Lease
are included for convenience only and in no way define, limit or describe the scope of any
provision hereof.
21.13 Binding Effect. This Lease shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
21.14 Duplicate Counterparts. This Lease may be executed in one or more counterparts, each of which
shall be an original and all of which shall constitute one and the same instrument.
21.15 Brokers Representation. Each party represents that it dealt with no broker or brokers in
connection with the negotiation, execution and delivery of this Lease. Landlord and Tenant shall,
and do hereby indemnify, defend, and save the other harmless from and against any losses, damages,
penalties, claims or demands of whatsoever nature arising from a breach of its foregoing
representation including, without limitation, reasonable attorneys fees and expenses. The
representations and indemnifications set forth in this Section 21.15 shall survive the cancellation
or termination of this Lease.
21.16 Force Majeure. Landlord and Tenant shall be excused for the period of any delay in performing
any obligations under this Lease by reason of the wrongful or negligent acts or omissions of the
other party, their agents, employees, or contractors, or by reason of labor disputes, civil
disturbance, war, war-like operations, invasions, rebellion, hostilities, military or usurped
power, sabotage, governmental regulations or controls, fires or other casualty, or acts of God
(referred to collectively herein as Force Majeure). Notwithstanding the foregoing, nothing
contained in this Section 21.16 shall excuse either party from paying in a timely fashion any
payments due under the terms of this Lease.
21.17 Additional Documents. Each party shall, at the request of the other, execute, acknowledge,
(if appropriate) and deliver such additional documents and instruments, and do such other acts as
may be necessary or convenient to call out the purposes and intent of this Lease and to permit the
Tenant to record this Lease and grant security interests therein. This Lease may be signed in
triplicate originals by the parties.
21.18 Improvements by Landlord. In consideration of the execution of this Lease Landlord has
agreed to make certain improvements to the Leased Premises at its own expense and at no expense to
Tenant. Attached as Exhibit F is a summary of the improvements to be made by Landlord,
which summary has been approved by Tenant. The work necessary to accomplish the improvements will
commence as soon as practicable upon execution of this Lease. Landlord will coordinate the
performance of the work with Tenant so as to minimize any disruption to Tenants use of the Leased
Premises.
-17-
ARTICLE XXII
OPTIONS TO PURCHASE
22.01 Options. Landlord does hereby grant to Tenant the exclusive and irrevocable Options to
purchase both the land and Leased Premises and the first right of refusal to purchase the land and
20,362 square foot office building (Office Building) as shown on Exhibit E, together with
all rights, members and appurtenances thereto and all improvements, fixtures, equipment and
appliances located thereon. The option to purchase the Office Building may be exercised only if
the option to purchase the Leased Premises is exercised. These Options may be exercised by Tenant
paying to Landlord, as Earnest Money, the amount of Twenty-Five Thousand and No/100 Dollars
($25,000.00) for each property it desires to purchase and simultaneously providing written notice
to Landlord given in the manner provided in Section 21.11 hereof at any time after the Lease
Commencement Date but not less than 180 days prior to the end of the original or the extended Lease
Term. If either Option is exercised, this Section 22 of the Lease shall become a binding contract
for the sale of the specific property under the terms set forth herein. Landlord agrees not to
sell or enter into an agreement to sell Leased Premises during the base term without permission of
the Tenant.
22.02 Purchase Price. The purchase price of the Leased Premises shall be One Million Eight Hundred
Fifty Thousand and No/100 Dollars ($1,850,000). The purchase price of the Office Building shall be
Nine Hundred Twenty Five Thousand and No/100 Dollars ($925,000).
22.03 Costs and Prorations. Landlord shall pay the transfer tax or documentary stamp tax
applicable to the transaction contemplated hereby. Tenant shall pay the costs of recording all
documents to be recorded. Each party shall pay its own attorneys fees. Rent payable under this
Lease, if applicable to the property being purchased, shall be prorated as of the date of Closing.
There shall be no proration of taxes or utility bills in the event the Leased Premises is being
purchased. In the event the Office Building is being purchased the taxes and utility bills will be
prorated as of the date of Closing.
22.04 Closing. The closing of the Option transaction contemplated by this Section shall be held
within one hundred eighty (180) days of Tenants notice of exercise of the Option at a location
mutually acceptable to Landlord and Tenant.
22.05 Destruction of Improvements. If the improvements within the Leased Premises or the Office
Building are destroyed or materially damaged after the date Tenant exercises the Option, the
acquisition transaction contemplated hereby shall close in the manner described in this Section
without a reduction in the purchase price and Landlord shall assign to Tenant Landlords right in
any insurance proceeds paid or to be paid in connection with such damage or destruction.
22.06 Option Remedies. In the event the acquisition transaction contemplated by this Section
fails to close by reason of Tenants failure to perform its obligations under the Option provisions
of this Lease, all Earnest Money paid by Tenant to Landlord shall be retained by Landlord as full
liquidated damages, the party herby acknowledging and agreeing the difficulty of ascertaining
Landlords damages in such circumstances. In the event that Landlord fails to perform its
obligations under the Option provisions of this Lease then, and in any such event, Tenant shall
have the right to receive a refund of any Earnest Money paid.
-18-
ARTICLE XXIII
OPTION TO LEASE OFFICE BUILDING
23.01 Option. Landlord does hereby grant to Tenant the exclusive and irrevocable Option to lease
the Office Building, pursuant to terms and conditions essentially identical to those contained
herein. The Option may be exercised by Tenant paying to Landlord, as a Security Deposit, the
amount of Ten Thousand One Hundred Eighty and No/100 Dollars ($10,180.00) and simultaneously
providing written notice to Landlord given in the manner provided in Section 21.11 hereof at any
time after the Lease Commencement Date but not less than 120 days before Tenant desires to occupy
the Office Building. If the Option is exercised Landlord will submit to Tenant a separate Lease
Agreement.
23.02 Term. The Term of the Lease shall be no longer than the length of time remaining on this
Lease including any extension thereto.
23.03 Base Rent. The annual Base Rent during the Term shall be One Hundred Twenty Two Thousand
One Hundred Sixty and No/100 Dollars ($122,160.00) payable in equal monthly installments of Ten
Thousand One Hundred Eighty and No/100 Dollars ($10,180.00).
23.04 Additional Rent. Tenant shall also be responsible for the payment of certain costs
relating to real estate taxes and insurance premiums. Those amounts will be calculated when Tenant
exercises this Lease Option.
-19-
IN WITNESS WHEREOF, signed and executed this 19th day of March, 2008 to be effective as
of the date of the above-referenced lease.
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LANDLORD: EZE
Management Properties Limited Partners |
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By: |
/s/ J. Carroll Rushing
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J. Carroll Rushing |
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Its: Chairman |
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Date of Execution: March 19, 2008 |
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TENANT: Rockwell Medical Technologies, Inc.
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By: |
/s/ Thomas E. Klema
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Thomas E. Klema |
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Its: Chief Financial Officer |
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Date of Execution: March 19, 2008 |
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-20-
EXHIBIT B
FLOOR PLAN
-22-
EXHIBIT C
BUILDING SITE PLAN
-23-
EXHIBIT
D
604 HIGH TECH COURT
ESTIMATED SUMMARY OF RENT FOR YEAR 1
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ANNUAL |
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MONTHLY |
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BASE RENT |
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Year 1 |
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$ |
275,628.00 |
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$ |
22,969.00 |
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ADDITIONAL RENT |
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Real estate taxes ($0.637/sf) |
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$ |
36,348.00 |
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$ |
3,029.00 |
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Insurance |
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$ |
8,244.00 |
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$ |
687.00 |
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TOTAL ESTIMATED RENT FOR YEAR 1 |
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$ |
320,220.00 |
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$ |
26,685.00 |
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-24-
EXHIBIT E
OFFICE SITE PLAN
-25-
EXHIBIT F
IMPROVEMENTS, APPROVED BY TENANT,
TO BE MADE BY LANDLORD
Rockwell Medical Technologies, Inc.
604 High Tech Court, Greer, SC 29650
Plant Upgrades
Construction of new liquid filling and powder filling area as designed,
along with first truck entrance curb improvements.
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Item
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Item Cost |
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Concrete, Curb, Trench, Demo |
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$ |
10,150.00 |
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Metal Framing, Drywall, Ceiling |
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42,000.00 |
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Plumbing |
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8,385.00 |
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HVAC |
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31,690.00 |
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Electrical |
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11,100.00 |
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Overhead Doors |
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4,500.00 |
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Sump Drain Covers |
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700.00 |
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Personnel Doors, Materials, Labor |
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3,900.00 |
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Urethane Floor |
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3,600.00 |
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Sprinkler |
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3,750.00 |
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Paint |
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9,000.00 |
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Windows |
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600.00 |
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Bollards |
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1,800.00 |
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Project Overhead, Supervision, Project Management |
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36,446.00 |
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167,621.00 |
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Architect Fees |
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1,917.00 |
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$ |
169,538.00 |
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-26-
exv23w1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements on Forms S-3 (Registration
No.s. 333-135872 and 333-148601) and Forms S-8 (Registration No.s 333-66791, 333-126627,
333-135896, and 333-146817) of Rockwell Medical Technologies, Inc. of our report dated March 20,
2008 on the consolidated financial statements of Rockwell Medical Technologies, Inc. as of and for
the years ended December 31, 2007 and 2006, appearing in the Annual Report on Form 10-K of Rockwell
Medical Technologies, Inc. for the year ended December 31, 2007.
/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
March 21, 2008
exv31w1
Exhibit 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a)
I, Robert L. Chioini, certify that:
1. I have reviewed this annual report on Form 10-K of Rockwell Medical Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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Date:
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March 21, 2008
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/s/ Robert L. Chioini
Robert L. Chioini
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Chairman, CEO and President |
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exv31w2
Exhibit 31.2
CERTIFICATION
PURSUANT TO RULE 13a-14(a)
I, Thomas E. Klema, certify that:
1. I have reviewed this annual report on Form 10-K of Rockwell Medical Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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Date:
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March 21, 2008
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/s/ Thomas E. Klema
Thomas E. Klema
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Vice President & Chief Financial Officer |
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exv32w1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Rockwell Medical Technologies, Inc. (the Company) on
Form 10-K for the year ending December 31, 2007 as filed with the Securities and Exchange
Commission on the date hereof (the Periodic Report), I, Robert L. Chioini, Chief Executive
Officer of the Company, and I, Thomas E. Klema, Chief Financial Officer of the Company, each
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of
2002, that:
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1. |
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the Periodic Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and |
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2. |
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the information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the Company. |
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Dated:
March 21, 2008
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/s/ Robert L. Chioini
Robert L. Chioini
Chief Executive Officer
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Dated:
March 21, 2008
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/s/ Thomas E. Klema
Thomas E. Klema
Chief Financial Officer
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