ROCKWELL MEDICAL, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview and Recent Developments Rockwell Medical is a commercial-stage, biopharmaceutical company developing and commercializing our next-generation parenteral iron technology platform, ferric pyrophosphate citrate (“FPC”), which we believe has significant potential to lead to transformative treatments for iron deficiency in multiple disease states, that we believe could reduce healthcare costs and improve patients’ lives. We are also one of the two major suppliers of life saving hemodialysis concentrate products to kidney dialysis clinics in the United States. Rockwell Medical has evolved its strategy over the past year to develop into a more medically-, scientifically- and data-driven company. We believe future clinical, regulatory and commercial success requires us to generate compelling clinical data in each of our programs. Our strategy is to accelerate Rockwell’s growth by creating and developing pharmaceutical products based on our FPC technology for disease states where patients can benefit the most from an effective treatment for iron deficiency, while concurrently refining our dialysis business to drive incremental growth and efficiencies. We plan to leverage and build on the foundation provided by our current dialysis business serving kidney dialysis centers by developing a pipeline of additional potential drug therapies in multiple disease states. We have two novel, FDA approved therapies, Triferic and Triferic AVNU, which are the first two products developed from our FPC platform. We are marketing both products to kidney dialysis centers for their patients receiving dialysis. In 2021, we intend to advance our FPC platform strategy by starting a Phase II trial for the treatment of iron deficiency anemia in patients outside of dialysis, who are receiving intravenous medications in the home infusion setting. In our R&D pipeline, we 52 Table of Contents are also exploring FPC’s impact in the treatment of hospitalized patients with acute heart failure, with the potential to begin another Phase II program in these patients in 2022. Results of Operations The following table summarizes our operating results for the periods presented below (dollars in thousands): For the Year Ended December 31, 2020 % of Revenue 2019 % of Revenue % Change Net Sales $ 62,197 $ 61,303 1.5 % Cost of Sales 59,472 95.6 % 58,464 95.4 % 1.7 Gross Profit 2,725 4.4 2,839 4.6 (4.0) Research and Product Development 7,092 11.4 6,886 11.2 3.0 Selling and Marketing 7,871 12.7 9,050 14.8 (13.0) General and Administrative 16,182 26.0 20,998 34.3 (22.9) Settlement Expense, net of Reimbursement — — 430 0.7 (100.0) Operating Loss $ (28,420) (45.7) % $ (34,525) (56.3) % (17.7) % Net Sales During the year ended December 31, 2020, our net sales were $62.2 million compared to net sales of $61.3 million during the year ended December 31, 2019. Net sales of hemodialysis concentrates to dialysis providers and distributors in the United States and abroad were $61.1 million for the year ended December 31, 2020 compared to $60.8 million for the year ended December 31, 2019. The increase of $0.3 million was primarily due to increase in sales to our domestic customers offset by a decrease in international sales. Net sales of Triferic (dialysate) were approximately $1.1 million for the year ended December 31, 2020 compared to $0.5 million for the year ended December 31, 2019. For each year ended December 31, 2020 and 2019, Triferic net sales included approximately $0.2 million of deferred revenue recognized under the Company’s license in the People’s Republic of China with Wanbang. Cost of Sales and Gross Profit Cost of sales during the year ended December 31, 2020 was $59.5 million, resulting in gross profit of $2.7 million during the year ended December 31, 2020, compared to cost of sales of $58.5 million and a gross profit of $2.8 million during the year ended December 31, 2019. Gross profit decreased by $0.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, due primarily to an increase in labor and material costs of $0.3 million to address protocols put in place from the ongoing COVID-19 pandemic. Gross profits are primarily related to our concentrates business at this time. The Company anticipates that potential future sales of Triferic will positively impact future gross profits. Research and Product Development Expense Research and product development expenses were $7.1 million for the year ended December 31, 2020 compared with $6.9 million during the year ended December 31, 2019. The increase of $0.2 million is related to clinical trials and other product development expenses for Triferic. The Company is continuing to invest in its medical and scientific programs to support the continued data and phase 4 clinical programs for Triferic in dialysis and the advancement of our FPC technology platform. Selling and Marketing Expense Selling and marketing expenses were $7.9 million during the year ended December 31, 2020 compared with $9.1 million during the year ended December 31, 2019. The decrease of $1.2 million is due primarily to the decrease in marketing costs of $2.3 million, partially offset by an increase in costs associated with hiring, training and educating new employees of 53 Table of Contents $1.1 million. The fluctuation in these costs are mainly due to the timing of the Triferic (dialysate) launch in the third quarter of 2019. We expect lower quarter-to-quarter fluctuations in sales and marketing costs going forward. General and Administrative Expense General and administrative expenses were $16.2 million during the year ended December 31, 2020 compared with $21.0 million during the year ended December 31, 2019. The $4.8 million decrease was driven primarily by decreases to stock compensation, legal, recruiting and consulting fees, partially offset by an increase in labor costs. The decrease in stock compensation primarily relate to the resignation of our former President and Chief Executive Officer, Stuart Paul, in April 2020 and former Chief Financial Officer effective July 2020. Settlement Expense Settlement expense was $0 for the year ended December 31, 2020, compared to $0.4 million in for the year ended December 31, 2019. Settlement expense for the year ended December 31, 2019 reflected the terms of the confidential settlement agreement and mutual release entered into in August 2018 relating to the Company’s former Chief Executive Officer, and Director, Robert Chioini, former Chief Financial Officer, Thomas Klema, and a former and then current director. Other Income (Expense) Other income for the year ended December 31, 2020 was $246,000, consisting of interest income of $238,000 and $8,000 of realized gains on investments. Other income for the year ended December 31, 2019 was $422,000, consisting of $392,000 of interest income and $30,000 of realized gains on investments. Other expense for the year ended December 31, 2020 was $2.7 million, consisting of warrant modification expense of $0.8 million and interest expense of $1.9 million related to our debt facility (see Note 15 for more information on our debt facility). Other expense for the year ended December 31, 2019 was $25,000 of interest expense. Liquidity and Capital Resources Since inception, we have incurred significant net losses and have funded our operations primarily through revenue from commercial products, proceeds from the issuance of debt and equity securities and payments from partnerships. At December 31, 2020, we had an accumulated deficit of approximately $337.4 million and shareholders’ equity of $34.2 million. As of December 31, 2020, we had approximately $58.7 million of cash, cash equivalents and investments available-for-sale, and working capital of $56.7 million. Net cash used in operating activities for the year ended December 31, 2020 was approximately $29.6 million. Based on the currently available working capital, capital raise and debt financing noted above, management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months from the date of the filing of this report. In February 2020, the Company sold 3,670,212 shares of its common stock for proceeds of $8 million, net of issuance costs. On March 16, 2020, the Company closed a debt financing transaction with net proceeds at closing of approximately $21.2 million, net of fees and expenses (See Note 15 for further detail). On September 23, 2020, the Company sold 23,178,809 shares of its common stock for proceeds of $32.7 million, net of issuance costs (see Note 11 for further detail). During the year ended December 31, 2020, the Company sold 1,128,608 shares of its common stock as part of its sales agreement with Cantor Fitzgerald & Co. for proceeds of $2.3 million, net of issuance costs. Approximately $32.3 million remains available for sale under this facility. See Note 11 for further detail. The Company expects it will require additional capital to sustain its operations and make the investments it needs to execute its strategic plan, including the commercialization of Triferic (dialysate) and Triferic AVNU in dialysis, generating additional data for Triferic in dialysis, developing FPC for iron deficiency anemia in patients undergoing home infusion and for progressing our pipeline development program of new indications for our FPC platform. If the Company is unable to generate sufficient revenue from sales of its commercial products and from partnerships, the Company will need to obtain additional equity or debt financing. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available on favorable terms, if at all. In addition, the Company is subject to certain covenants and cure provisions under our Loan Agreement with Innovatus. As of the date of this report, the Company believes that it will either be able to satisfy such covenants or, in the event of a breached covenant, exercise cure provisions to avoid an event of default. If we are unable to avoid an event of default, any required repayments could have an adverse effect on our liquidity (See Note 16 for further detail). 54 Table of Contents The COVID-19 pandemic and resulting domestic and global disruptions have adversely affected our business and operations, including, but not limited to, our sales and marketing efforts and our research and development activities, and the operations of third parties upon whom we rely. Quarantines, shelter-in-place, executive and similar government orders and the recent surge in infections domestically have negatively impact our sales and marketing activities, particularly as our sales representatives are unable to interact with current and potential customers to the same extent as before onset of the COVID-19 pandemic. Our international business development activities have also be negatively impacted by COVID-19, especially with the recent surge in infections and resulting quarantines or shelter-in-place orders. Depending on the severity of the impact on our sales and marketing efforts, the success of our commercial launch of Triferic AVNU could be delayed. The COVID-19 pandemic, the recent domestic and international surge in infections and resulting global disruptions have caused significant volatility in financial and credit markets. We have utilized a range of financing methods to fund our operations in the past; however, current conditions in the financial and credit markets may limit the availability of funding, refinancing or increase the cost of funding. Due to the rapidly evolving nature of the global situation, it is not possible to predict the extent to which these conditions could adversely affect our liquidity and capital resources in the future. General The actual amount of cash that we will need to execute our business strategy is subject to many factors, including, but not limited to, the expenses and revenue associated with the commercial operations in the United States and internationally (with partners); the timing and magnitude of cash received from drug product sales; the timing and expenditures associated with the development programs including our FPC technology for home infusion and potentially acute heart failure; and the costs associated with our manufacturing and transportation operations related to our concentrate business. We may elect to raise capital in the future through one or more of the following: (i) equity and debt raises through the equity and capital markets, though there can be no assurance that we will be able to secure additional capital or funding on acceptable terms, or if at all; and (ii) strategic transactions, including potential alliances and collaborations focused on markets outside the United States, as well as potential combinations (including by merger or acquisition) or other corporate transactions. In particular, our Baxter Agreement prohibits us from entering into a contract that would encumber the assets used in our concentrate business without the prior written consent of Baxter. Due to the fact that the assets used in our concentrate business currently constitute a substantial portion of the tangible assets we own other than our drug inventory, we may not be able to, or we may find it difficult, to obtain secured debt financing without the consent of Baxter. We believe that our ability to fund our activities in the long term will be highly dependent upon 1) our ability to execute on the development of the FPC platform for new therapies, and 2) our ability to commercialize and increase adaptation of Triferic (dialysate) and Triferic AVNU. Both of these strategies is subject to significant risks and uncertainties such that there can be no assurance that we will be successful is achieving approval of FPC in a new therapeutic area or that we will be able to have sustained commercial success with Triferic (dialysate) and Triferic AVNU. If our planned clinical program is delayed or fails or if our commercialization of Triferic (dialysate) and/or Triferic AVNU should fail to increase sales, we may be forced to implement cost-saving measures that may potentially have a negative impact on our activities and potentially the results of our research and development programs. Even though we began commercialization of Triferic (dialysate) and Triferic AVNU as planned, if the results are unsuccessful, we may be unable to secure the additional capital that we will require to continue our research and development activities and operations, which could have a material adverse effect on our business. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline. Cash Used in Operating Activities Net cash used in operating activities was $29.6 million for the year ended December 31, 2020. The net loss for this period was higher than net cash used in operating activities by $1.3 million, which was primarily attributable to non-cash expenses of $4.2 million, consisting primarily of $1.5 million of amortization of the right to use assets, $0.8 million of depreciation and amortization, $0.8 million of warrant modification expense, $0.5 million of stock-based compensation, $0.3 million of inventory reserves, $0.3 million of debt financing cost amortization and accretion of discount , and a $3.0 million net change in assets and liabilities. Net cash used in operating activities was $27.3 million for the year ended December 31, 2019. The net loss for this period was higher than net cash used in operating activities by $6.8 million, which was primarily attributable to non-cash 55 Table of Contents expenses of $8.8 million, consisting primarily of $5.0 million of stock-based compensation, $1.9 million of amortization of the right to use assets, $1.3 million of inventory reserves, $0.8 million of depreciation and amortization, and a $2.0 million net change in assets and liabilities. Cash Provided by (Used in) Investing Activities Net cash provided by investing activities was $3.2 million during the year ended December 31, 2020. The net cash provided was primarily due to the purchase of investments available-for-sale of $29.3 million, offset by $33.6 million sale of our available-for-sale investments and $1.0 million for the purchase of equipment. Net cash used in investing activities was $4.7 million during the year ended December 31, 2019. The net cash used was primarily due to the purchase of investments available-for-sale of $41.7 million, offset by $38.3 million sale of our available-for-sale investments, $0.6 million for the purchase of equipment and $0.8 million for the purchase of research and development licenses acquired from a related party. Cash Provided by Financing Activities Net cash provided by financing activities was $63.3 million during the year ended December 31, 2020. The net cash provided was primarily due to net proceeds of $40.7 million and $2.3 million from the sale of our common stock, related to our public offerings and our at-the market offerings, respectively, net proceeds of $21.2 million from the term loan, partially offset by payment of $0.8 million related to a short term note payable. Net cash provided by financing activities was $21.1 million during the year ended December 31, 2019. The net cash provided was primarily due to net proceeds of $17.3 million and $5.1 million from the sale of our common stock, related to our public offering and our at-the market offerings, respectively, partially offset by payment of $1.1 million related to a short term note payable. Off‑Balance Sheet Arrangements We do not have any off‑balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition. 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 (“U.S. GAAP”). 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 could 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, inventory reserves, share based compensation, 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 3 to our Consolidated Financial Statements. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: • Step 1: Identify the contract with the customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price 56 Table of Contents • Step 4: Allocate the transaction price to the performance obligations in the contract • Step 5: Recognize revenue when the company satisfies a performance obligation Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight related to contracts with customers are accounted for as a fulfillment cost and are included in cost of sales when control of the goods transfers to the customer. 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 accounts 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. Inventory that is not expected to be converted to cash over the next year is classified as non-current. Our policy is to reserve for our drug product inventory that we determine is unlikely to be sold to, or if sold, unlikely to be utilized by our customers on or before its expiration date. Property and Equipment Property and equipment are recorded at cost and are depreciated using the straight‑line method over the useful lives of the assets, which range from three to ten years. Expenditures for routine maintenance and repairs are expensed as incurred. Leasehold improvements are amortized using the straight‑line method over the shorter of the useful lives or the related lease term. Impairment of Long-lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. For the years ended December 31, 2020 and 2019, there were no impairments of long-lived assets. Goodwill and Intangible Assets Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. We review goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values. Intangible assets with definite lives are amortized 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. Definite-lived intangible assets consist of our license fees related to the technology, intellectual property and marketing rights for Triferic covered under certain issued patents have been capitalized and are being amortized over the life of the related patents which is generally 17 years. 57 Table of Contents Deferred Revenue In October of 2014, the Company entered into a 10-year distribution agreement with Baxter and received an upfront fee of $20 million. The upfront fee was recorded as deferred revenue and is being recognized based on the proportion of product shipments to Baxter in each period, compared with total expected sales volume over the term of the Distribution Agreement. The Company recognized revenue of approximately $2.0 million and $2.1 million related to the Baxter agreement for each of the years ended December 31, 2020 and 2019, respectively. In 2016, the Company entered into a distribution and license agreement with Wanbang (the "Wanbang Agreement") and received an upfront fee of $4.0 million. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of approximately $0.2 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively. Deferred revenue related to the Wanbang Agreement totaled $2.7 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively. On January 14, 2020, the Company entered into license and supply agreements with Sun Pharma (the "Sun Pharma Agreements"), for the rights to commercialize Triferic (dialysate) (ferric pyrophosphate citrate) in India. Under the terms of the Sun Pharma Agreements, Sun Pharma will be the exclusive development and commercialization partner for Triferic (dialysate) in India, and the Company will supply the product to Sun Pharma. In consideration for the license, the Company received an upfront fee of $0.1 million, and will be eligible for milestone payments and royalties on net sales. A Joint Alliance Committee, comprised of members from the Company and Sun Pharma, will guide the development and execution for Triferic (dialysate) in India. Sun Pharma will be responsible for all clinical and regulatory approval, as well as commercialization activities. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of approximately $10,000 during the year ended December 31, 2020. Deferred revenue related to the Sun Pharma Agreement totaled $90,000 as of December 31, 2020. On September 7, 2020, the Company entered into a license and supply agreements with Jeil Pharma (the "Jeil Pharma Agreements"), for the rights to commercialize Triferic (dialysate) (ferric pyrophosphate citrate) in South Korea. Under the terms of the Jeil Pharma Agreements, Jeil Pharma will be the exclusive development and commercialization partner for Triferic (dialysate) in South Korea, and the Company will supply the product to Jeil Pharma. In consideration for the license, the Company received an upfront fee of $0.2 million, and will be eligible for milestone payments and royalties on net sales. A Joint Alliance Committee, comprised of members from the Company and Jeil Pharma, will guide the development and execution for Triferic (dialysate) in South Korea. Jeil Pharma will be responsible for all clinical and regulatory approval, as well as commercialization activities. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of $2,500 during the year ended December 31, 2020. Deferred revenue related to the Jeil Pharma Agreement totaled $197,500 as of December 31, 2020. Stock-Based Compensation The Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards. For stock-based compensation awards to non-employees, the Company re-measures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards are recognized as compensation expense in the period of change. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. For the years ended December 31, 2020 and 2019, the Company recorded stock-based compensation expense on its options granted under the Company’s equity compensation plans to its directors and officers, and its employees. 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. 58 Table of Contents New Accounting Pronouncements New accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. For further discussion on recent accounting pronouncements, please see Note 3, “ New Accounting Pronouncements ,” to our consolidated financial statements included in this Annual Report on Form 10‑K for additional information. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Per §229.305 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is not required to provide the disclosure required by this Item. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements of the Registrant and other information required by this item are set forth beginning on page F‑1 immediately following the signature page hereof and incorporated herein by reference. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None.