Item 9A. Controls and Procedures
Item 9A. 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 SEC’s 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. Management necessarily was required to apply its judgment in evaluating the cost‑benefit relationship of possible controls and procedures.
Under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020. Additionally, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Annual Report are fairly stated, in all material respects, in accordance with generally accepting accounting principles in the United States for each of the periods presented herein.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. We maintain internal control over financial reporting designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, internal control over financial reporting determined to be effective provides only reasonable assurance regarding the
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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, our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020. In making their assessment of internal control over financial reporting, our management used the criteria described in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included documenting, evaluating and testing of the design and operating effectiveness of our internal control over financial reporting. Based on this evaluation, and the remediation of all the material weaknesses as described in our Annual Report filed on Form 10-K for the year ended December 31, 2019 relating to change management and third-party management controls, user access security and segregation of duties as it relates to user access controls in our Information Technology General Controls ("ITGC"), and the pervasive effect on other ITGC dependent business activity level internal control cycles, we concluded that we maintained effective control over financial reporting at a reasonable assurance level as of December 31, 2020.
Changes in Internal Controls
During the quarter ended June 30, 2020, the Company remediated the ITGC control deficiencies in connection with change management and third-party management and enhanced evidentiary review and documentation of key ITGC controls and implemented new programs and policies to provide improved control over change management and third-party management controls to the ERP system. During the quarter ended September 30, 2020, we continued our improvements by remediating the ITGC control deficiencies in connection with user access security and segregation of duties as it relates to user access controls. During the quarter ended December 31, 2020, we finalized our remediation efforts by evaluating and testing the design, implementation and operating effectiveness of the pervasive effect from the ITGC material weakness on other ITGC dependent business activity level internal control cycles. As of December 31, 2020, our management has remediated all material weaknesses described in our Annual Report filed on Form 10-K for the year ended December 31, 2019 and has deemed internal controls over financial reporting, our disclosure controls and procedures were effective as of December 31, 2020.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 is incorporated herein by reference to information in our proxy statement for our 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”), which we expect to be filed with the SEC within 120 days of the end of our fiscal year ended December 31, 2020, including under headings “Election of Directors,” “Executive Officers,” “Corporate Governance” and, as applicable, "Delinquent Section 16(a) Reports."
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, employees and officers, including our principal executive officer, our principal financial officer and persons performing similar functions. Our Code of Business Conduct and Ethics is available on our website at www.rockwellmed.com . To the extent required, future material amendments or waivers relating to the Code of Business Conduct and Ethics will be disclosed on our web site referenced in this paragraph with four business days following the date of such amendment or waiver.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to information in our 2021 Proxy Statement, including under headings “Compensation of Executive Officers” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to information in our 2021 Proxy Statement, including under heading “Voting Securities and Principal Holders.”
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance as of December 31, 2020:
Plan Category Number of securities
to be issued upon
exercise of
outstanding options and
restricted stock units Weighted‑average
exercise price of
outstanding options Number of securities
remaining available for
future issuance under
(excluding securities
reflected in column (a))
(a) (b) (c)
Equity compensation plans approved by security holders (1) 5,621,500 $ 4.80 1,894,496
Equity compensation plans not approved by security holders (2) 1,258,750 $ 2.13 —
Total 6,880,250 $ 4.02 1,894,496
(1) Consists of 5,209,206 stock options with a weighted average exercise price of $4.80, 265,494 restricted stock units and 146,800 restricted stock awards.
(2) Consists of 1,258,750 stock options with a weighted average exercise price of $2.13.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this Item 13 is incorporated herein by reference to information in our 2021 Proxy Statement, including under headings “Independence” and “Related Party Transactions.”
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated herein by reference to information in our 2021 Proxy Statement, including under heading “Independent Accountants.”
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Item 15. Exhibits, Financial Statement Schedules.
(a) The financial statements and schedule filed herewith are set forth on the Index to Financial Statements and Schedule of the separate financial section of this annual report, which is incorporated herein by reference.
(b) Exhibits
The following documents are filed as part of this report or were previously filed and incorporated herein by reference to the filing indicated.
3.1 Restated Articles of Incorporation, as amended as of August 28, 2019 (Company’s Form 8-K filed August 30, 2019).
3.2 Amended and Restated Bylaws (Company’s Form 8-K filed November 5, 2020).
4.1 Form of Common Stock Warrant, dated October 17, 2018 (Company’s Form 8-K filed October 19, 2018).
4.2 Description of Securities. (Company's Form 10-K filed March 17, 20 20)
4.3 Form of Warrant (Company's Form 8-K filed on September 25, 2020).
4.4 Form of Pre-Funded Warrant (Company's Form 8-K filed on September 25, 2020).
4.5 For of Warrant to Purchase Common Stock for Innovatus (Company's Form 8-K filed March 20, 2020).
10.1 Licensing Agreement, dated January 7, 2002, by and among the Company, Charak LLC and Dr. Ajay Gupta (with certain portions of the exhibit redacted pursuant to a confidential treatment order) (Company’s Form 10‑KSB filed April 1, 2002).
10.2 Amending Agreement, dated January 16, 2006, by and among the Company, Charak LLC and Dr. Ajay Gupta (Company’s Form 10‑KSB filed March 21, 2006).
10.3 Exclusive Distribution Agreement, dated October 2, 2014, by and between the Company and Baxter Healthcare Corporation (with certain portions redacted pursuant to a confidential treatment order) (Company’s Form 10‑K filed March 3, 2015).
10.4 Investment Agreement, dated October 2, 2014, by and between the Company and Baxter Healthcare Corporation (Company’s Form 10‑K filed March 3, 2015).
*10.5 Amendment to October 1, 2014 Stock Option Agreement with Robert L. Chioini (Company’s Form 10‑K filed March 3, 2015).
*10.6 Rockwell Medical, Inc. Amended and Restated 2007 Long Term Incentive Plan, as amended effective May 21, 2015 (Company’s Proxy Statement for the 2015 Annual Meeting of Shareholders filed on April 13, 2015).
*10.7 Rockwell Medical, Inc. 2018 Long Term Incentive Plan (Company’s Proxy Statement for the 2018 Annual Meeting of Shareholders filed on April 30, 2018).
*10.8 Form of Nonqualified Stock Option Agreement (2007 Long Term Incentive Plan) (Director Version) (Company’s Form 8‑K filed December 20, 2007).
*10.9 Form of Nonqualified Stock Option Agreement (2007 Long Term Incentive Plan) (Employee Version) (Company’s Form 8-K filed December 20, 2007).
*10.10 Form of Restricted Stock Award Agreement (2007 Long Term Incentive Plan) (Director Version) (Company’s Form 10 K filed February 29, 2016).
*10.11 Form of Restricted Stock Award Agreement (2007 Long Term Incentive Plan) (Executive Version) (Company’s Form 10‑Q filed May 12, 2014).
*10.12 Form of Performance Share Award Agreement March 2017 (Executive Version) (Company’s Form 10-Q filed May 9, 2017).
*10.13 Form of Performance Share Award Agreement March 2017 (Director Version) (Company’s Form 10-Q filed May 9, 2017).
*10.14 Form of Stock Option Agreement (2018 Long Term Incentive Plan) (Employee Version) (Company’s Form 8-K filed March 21, 2018).
*10.15 Form of Contingent Option Agreement for Directors (2018 Long Term Incentive Plan) (Company’s Form 8-K filed March 21, 2018).
*10.16 Amendment to October 2, 2015 Stock Option Agreement with Robert L. Chioini (Company’s Form 10 K filed February 29, 2016).
10.17 First Amendment to Exclusive Distribution Agreement, dated June 23, 2017, by and between the Company and Baxter Healthcare Corporation (with certain portions redacted pursuant to a confidential treatment request) (Company’s form 10-Q filed August 9, 2017).
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*10.18 Form of Indemnification Agreement (Company’s Form 8-K filed August 30, 2019).
10.19 Stock Appreciation Right Agreement, dated September 5, 2017, by and between the Company and John G. Cooper (Company’s Form 10-Q filed November 8, 2017).
*10.20 Approval of Independent Director Compensation (Company’s Form 8-K filed March 21, 2018).
*10.21 Ajay Gupta Employment Agreement, dated October 7, 2018 (Company’s Form 8-K filed October 12, 2018).
10.22 Registration Rights Agreement, dated October 17, 2018 (Company’s Form 8-K filed October 19, 2018).
*10.23 Angus Smith Employment Agreement, dated October 26, 2018 (Company’s Form 8-K filed November 2, 2018).
10.24 Confidential Settlement Agreement and Release, dated August 7, 2018, by and among the Company, Robert Chioini, Thomas Klema, Patrick Bagley and Ronald Boyd (Company’s Form 10-Q filed November 9, 2018).
10.25 Master Services and IP Agreement, dated October 7, 2018, by and among the Company, Charak, LLC and Dr. Ajay Gupta (Company's Form 10-K filed on March 18, 2019).
10.26 Amendment to License Agreement, dated October 7, 2018, by and among the Company, Charak, LLC and Dr. Ajay Gupta (Company's Form 10-K filed on March 18, 2019).
10.27 Commercialization and Technology License Agreement IV Triferic, dated October 7, 2018, by and among the Company, Charak, LLC and Dr. Ajay Gupta (Company's Form 10-K filed on March 18, 2019).
10.28 Technology License Agreement TPN Triferic, dated October 7, 2018, by and among the Company, Charak, LLC and Dr. Ajay Gupta (Company's Form 10-K filed on March 18, 2019).
10.29 Sales Agreement dated March 22, 2019, between Rockwell Medical, Inc. and Cantor Fitzgerald & Co. (Company’s Form 8-K filed March 22, 2019).
10.30+ Products Purchase Agreement, dated July 1, 2019, by and between the Company and DaVita Inc. (f/k/a DaVita Healthcare Partners Inc.) (Company’s Form 10-Q filed November 12, 2019).
*10.31 Russell Skibsted Employment Agreement, dated September 15, 2020 (Company’s Form 8-K filed on September 16, 2020).
10.32 Securities Purchase Agreement dated September 23, 2020 (Company’s Form 8-K filed on September 25, 2020).
*10.33 Russell Ellison Employment Agreement, dated April 17, 2020 (Company’s Form 8-K filed on April 20, 2020).
*10.34 Rockwell Medical, Inc. Amended and Restated 2018 Long Term Incentive plan (Company’s Form 8-K filed on May 21, 2020).
10.35 Loan and Security Agreement, dated March 16, 2020, by and among the Company, Innovatus Life Sciences Lending Fund I, LP and the lenders party thereto (Company’s Form 10-Q filed on May 11, 2020).
21.1 List of Subsidiaries.
23.1 Consent of Marcum LLP.
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.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Database
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included as Exhibit 101)
* Indicates management contracts or compensatory plans or arrangements.
+ Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROCKWELL MEDICAL, INC. (Registrant)
By: /s/ Russell Ellison
Russell Ellison
President and Chief Executive Officer
Date: March 31, 2021
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Russell Ellison and Russell Skibsted, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all documents in connection therewith, with the Securities and Exchange commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Russell Ellison President, Chief Executive Officer and Director (Principal Executive Officer) March 31, 2021
Russell Ellison
/s/ Russell Skibsted Chief Financial Officer (Principal Financial Officer) March 31, 2021
Russell Skibsted
/s/ Paul E. McGarry Principal Accounting Officer March 31, 2021
Paul E. McGarry
/s/ John P. McLaughlin Director March 31, 2021
John P. McLaughlin
/s/ John G. Cooper Director March 31, 2021
John G. Cooper
/s/ Robert S. Radie Director March 31, 2021
Robert S. Radie
/s/ Allen Nissenson Director March 31, 2021
Allen Nissenson
/s/ Andrea Heslin Smiley Director March 31, 2021
Andrea Heslin Smiley
/s/ Mark H. Ravich Director March 31, 2021
Mark H. Ravich
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm
F- 2
Consolidated Balance Sheets at December 31, 2020 and 2019
F- 3
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
F- 4
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019
F- 5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 20 20 and 201 9
F- 6
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
F- 7
Notes to the Consolidated Financial Statements
F- 9 – F- 31
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Rockwell Medical Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet s of Rockwell Medical Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2018.
Chicago, IL
March 31, 2021
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
2020 December 31,
2019
ASSETS
Cash and Cash Equivalents $ 48,682 $ 11,795
Investments Available-for -Sale 9,997 14,250
Accounts Receivable, net of a reserve of $ 9 for both 2020 and 2019
4,171 4,203
Inventory 3,913 3,647
Prepaid and Other Current Assets 2,706 2,979
Total Current Assets 69,469 36,874
Property and Equipment, net 2,642 2,433
Inventory, Non-Current 1,176 441
Right of Use Assets, net 2,911 3,213
Goodwill 921 921
Other Non-current Assets 629 435
Total Assets $ 77,748 $ 44,317
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts Payable $ 4,155 $ 3,018
Accrued Liabilities 5,013 4,518
Settlement Payable — 104
Lease Liability - Current 1,167 1,493
Deferred License Revenue 2,175 2,234
Insurance Financing Note Payable — 763
Customer Deposits 152 55
Other Current Liability - Related Party 131 189
Total Current Liabilities 12,793 12,374
Lease Liability - Long-Term 1,821 1,781
Term Loan, Net of Issuance Costs 20,949 —
Deferred License Revenue - Long-Term 8,015 9,842
Total Liabilities 43,578 23,997
Commitments and Contingencies (See Note 14)
Stockholders’ Equity:
Preferred Stock, $ 0.0001 par value, 2,000,000 shares authorized, no shares issued and outstanding at December 31, 2020 and 2019
— —
Common Stock, $ 0.0001 par value, 170,000,000 shares authorized, 93,573,165 and 65,378,890 shares issued and outstanding at December 31, 2020 and 2019, respectively
9 7
Additional Paid-in Capital 371,510 326,777
Accumulated Deficit ( 337,406 ) ( 306,516 )
Accumulated Other Comprehensive Income 57 52
Total Stockholders’ Equity 34,170 20,320
Total Liabilities And Stockholders’ Equity $ 77,748 $ 44,317
The accompanying notes are an integral part of the consolidated financial statements.
F-3
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2020 and 2019
(Dollars in thousands, except per share amounts)
2020 2019
Net Sales $ 62,197 $ 61,303
Cost of Sales 59,472 58,464
Gross Profit 2,725 2,839
Research and Product Development 7,092 6,886
Selling and Marketing 7,871 9,050
General and Administrative 16,182 20,998
Settlement Expense, net of Reimbursement — 430
Operating Loss ( 28,420 ) ( 34,525 )
Other Income (Expense)
Realized Gain (Loss) on Investments 8 30
Warrant Modification Expense ( 837 ) —
Interest Expense ( 1,879 ) ( 25 )
Interest Income 238 392
Total Other Income (Expense) ( 2,470 ) 397
Net Loss $ ( 30,890 ) $ ( 34,128 )
Basic and Diluted Net Loss per Share $ ( 0.41 ) $ ( 0.56 )
Basic and Diluted Weighted Average Shares Outstanding 75,621,674 60,918,544
The accompanying notes are an integral part of the consolidated financial statements.
F-4
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For The Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
2020 2019
Net Loss $ ( 30,890 ) $ ( 34,128 )
Unrealized Loss on Available-for-Sale Investments ( 3 ) ( 10 )
Foreign Currency Translation Adjustments 8 ( 1 )
Comprehensive Loss $ ( 30,885 ) $ ( 34,139 )
The accompanying notes are an integral part of the consolidated financial statements.
F-5
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For The Years Ended December 31, 2020 and 2019
(Dollars in Thousand)
COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED
DEFICIT ACCUMULATED
OTHER
COMPREHENSIVE
INCOME / (LOSS) TOTAL
STOCKHOLDERS'
EQUITY
SHARES AMOUNT
Balance as of January 1, 2019 57,034,154 $ 6 $ 299,596 $ ( 272,388 ) $ 63 $ 27,277
Net Loss — — — ( 34,128 ) — ( 34,128 )
Unrealized Loss on Available-for-Sale Investments — — — — ( 10 ) ( 10 )
Foreign Currency Translation Adjustments — — — — ( 1 ) ( 1 )
Issuance of Common Stock 30,000 — 148 — — 148
Vesting of Restricted Stock Units Issued, net of taxes withheld 215,079 — ( 279 ) — — ( 279 )
Issuance of Common Stock, net of Issuance Costs/Public offering 6,259,214 1 17,287 — — 17,288
Issuance of Common Stock, net of Issuance Costs / At-the-market 1,840,443 — 5,073 — — 5,073
Stock-based Compensation — — 4,952 — — 4,952
Balance as of December 31, 2019 65,378,890 $ 7 $ 326,777 $ ( 306,516 ) $ 52 $ 20,320
Net Loss — — — ( 30,890 ) — ( 30,890 )
Unrealized Loss on Available-for-Sale Investments — — — — ( 3 ) ( 3 )
Foreign Currency Translation Adjustments — — — — 8 8
Vesting of Restricted Stock Units Issued, net of taxes withheld 216,646 — ( 19 ) — — ( 19 )
Issuance of Common Stock, net of Issuance Costs / Public offering 26,849,021 2 40,677 — — 40,679
Issuance of Common Stock, net of Issuance Costs / At-the-market offerings 1,128,608 — 2,262 — — 2,262
Issuance of Warrants related to Debt Financing — — 501 — — 501
Warrant Modification Expense — — 837 — — 837
Stock-based Compensation — — 475 — — 475
Balance as of December 31, 2020 93,573,165 $ 9 $ 371,510 $ ( 337,406 ) $ 57 $ 34,170
The accompanying notes are an integral part of the consolidated financial statements.
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2020 and 2019
(Dollars in Thousands)
2020 2019
Cash Flows From Operating Activities:
Net Loss $ ( 30,890 ) $ ( 34,128 )
Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities:
Depreciation and Amortization 834 788
Stock-based Compensation 475 4,952
Warrant Modification Expense 837 —
Increase in Inventory Reserves 305 1,271
Amortization of Right of Use Asset 1,455 1,865
Amortization of Debt Financing Costs and Accretion of Debt Discount 294 —
Loss on Disposal of Assets 7 5
Realized Loss on Sale of Investments Available-for-Sale ( 8 ) ( 30 )
Foreign Currency Translation Adjustment 8 ( 1 )
Changes in Assets and Liabilities:
Decrease in Insurance Receivable — 371
Decrease in Accounts Receivable, net 32 2,777
(Increase) Decrease in Inventory ( 1,306 ) 317
Decrease in Other Assets 76 934
Increase (Decrease) in Accounts Payable 1,136 ( 1,474 )
Decrease in Settlement Payable ( 104 ) ( 313 )
Decrease in Lease Liability ( 1,439 ) ( 1,803 )
Increase (Decrease) in Other Liabilities 534 ( 532 )
Decrease in Deferred License Revenue ( 1,887 ) ( 2,253 )
Changes in Assets and Liabilities ( 2,958 ) ( 1,976 )
Cash Used In Operating Activities ( 29,641 ) ( 27,254 )
Cash Flows From Investing Activities:
Purchase of Investments Available-for-Sale ( 29,307 ) ( 41,678 )
Sale of Investments Available-for-Sale 33,565 38,266
Purchase of Equipment ( 1,046 ) ( 588 )
Purchase of Research and Development Licenses (Related Party) — ( 750 )
Cash Provided By (Used in) Provided By Investing Activities 3,212 ( 4,750 )
Cash Flows From Financing Activities:
Proceeds from Term Loan 22,500 —
Debt Issuance Costs ( 1,343 ) —
Payments on Short Term Note Payable ( 763 ) ( 1,145 )
Proceeds from the Issuance of Common Stock / Public Offering 43,148 18,778
Offering Costs from the Issuance of Common Stock / Public Offering ( 2,469 ) ( 1,490 )
Proceeds from the Issuance of Common Stock / At-the Market Offerings 2,325 5,383
Offering Costs from the Issuance of Common Stock / At-the Market Offerings ( 63 ) ( 310 )
Proceeds from the Exercise of Employee Stock Options, Net of Tax — 148
Repurchase of Common Stock to Pay Employee Withholding Taxes ( 19 ) ( 279 )
Cash Provided By Financing Activities 63,316 21,085
Increase (Decrease) In Cash and Cash Equivalents 36,887 ( 10,919 )
Cash and Cash Equivalents At Beginning Of Period 11,795 22,714
Cash and Cash Equivalents At End Of Period $ 48,682 $ 11,795
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 1,558 $ —
Supplemental Disclosure of Noncash Investing Activities:
Change in Unrealized Loss on Marketable Securities Available-for-Sale $ ( 3 ) $ ( 10 )
Insurance Financing Note Payable $ — $ 763
Fair Value of Warrants issued related to Debt Financing $ 501 $ —
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The accompanying notes are an integral part of the consolidated financial statements.
F-8
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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Rockwell Medical, Inc. ("Rockwell Medical," "Rockwell" or the "Company") 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.
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 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.
We are the second largest supplier of hemodialysis concentrates in the United States, with a reputation for excellent service, quality, and reliability. We believe that this reputation, which is based on over 25 years of service to the kidney dialysis centers, combined with about $ 60 million in annual revenue, approximately 300 dedicated employees, expertise in manufacturing and logistics and the added expertise in pharmaceutical development and commercialization brought to the Company by recent additions to our management team, gives us a solid foundation on which to grow.
Note 2. Liquidity and Capital Resources
Since inception, Rockwell has incurred significant net losses and have funded its operations primarily through revenue from commercial products, proceeds from the issuance of debt and equity securities and payments from partnerships. At December 31, 2020, Rockwell had an accumulated deficit of approximately $ 337.4 million and stockholders' equity of $ 34.2 million. As of December 31, 2020, Rockwell 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 $ 8.0 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 At-the-Market ("ATM") 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 its 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 its 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 Rockwell is unable to avoid an event of default, any required repayments could have an adverse effect on its liquidity (See Note 15 for further detail).
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The COVID-19 pandemic and resulting domestic and global disruptions have adversely affected Rockwell's business and operations, including, but not limited to, its sales and marketing efforts and our research and development activities, and the operations of third parties upon whom the Company relies. Quarantines, shelter-in-place, executive and similar government orders and the recent surge in infections domestically may negatively impact Rockwell's sales and marketing activities, particularly if its sales representatives are unable to interact with current and potential customers to the same extent as before onset of the COVID-19 pandemic. The Company's international business development activities may also be negatively impacted by COVID-19, especially with the recent surge in infections and resulting quarantines or shelter-in-place orders.
The COVID-19 pandemic, the domestic and international surge in infections and resulting global disruptions have caused significant volatility in financial and credit markets. Rockwell has utilized a range of financing methods to fund its 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 the Company's liquidity and capital resources in the future.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited. Rockwell Medical India Private Limited was formed in 2017 for the purpose of conducting certain commercial activities in India. All intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 2019 financial statements and notes to conform to the 2020 presentation.
Revenue Recognition
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The core principle of the 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
• 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.
Nature of goods and services
The following is a description of principal activities from which the Company generates its revenue.
Product sales – The Company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. The stand-alone selling prices are determined based on the cost plus margin approach.
Drug and dialysis concentrate products are sold directly to dialysis clinics and to wholesale distributors in both domestic and international markets. Distribution and license agreements for which upfront fees are received are evaluated upon execution or modification of the agreement to determine if the agreement creates a separate performance obligation from the
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underlying product sales. For all existing distribution and license agreements, the distribution and license agreement is not a distinct performance obligation from the product sales. In instances where regulatory approval of the product has not been established and the Company does not have sufficient experience with the foreign regulatory body to conclude that regulatory approval is probable, the revenue for the performance obligation is recognized over the term of the license agreement (over time recognition). Conversely, when regulatory approval already exists or is probable, revenue is recognized at the point in time that control of the product transfers to the customer.
The Company received upfront fees under four distribution and license agreements that have been deferred as a contract liability. The amounts received from Wanbang Biopharmaceuticals Co., Ltd. (“Wanbang”), Sun Pharmaceutical Industries Ltd. ("Sun Pharma") and Jeil Pharmaceutical Co., Ltd. ("Jeil Pharma") are recognized as revenue over the estimated term of the applicable distribution and license agreement as regulatory approval was not received and the Company did not have sufficient experience in China, India and South Korea, respectively, to determine that regulatory approval was probable as of the execution of the agreement. The amounts received from Baxter Healthcare Corporation (“Baxter”) are recognized as revenue at the point in time that the estimated product sales under the agreement occur.
For the business under the Company’s distribution agreement with Baxter (the “Baxter Agreement”) and for the majority of the Company’s international customers, the Company recognizes revenue at the shipping point, which is generally the Company’s plant or warehouse. For other business, the Company recognizes revenue based on when the customer takes control of the product. The amount of revenue recognized is based on the purchase order less returns and adjusted for any rebates, discounts, chargebacks or other amounts paid to customers. There were no such adjustments for the periods reported. Customers typically pay for the product based on customary business practices with payment terms averaging 30 days, while distributor payment terms average 45 days.
Disaggregation of revenue
Revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.
In thousands of US dollars ($) Year Ended December 31, 2020
Products By Geographic Area Total U.S. Rest of World
Drug Revenues
Product Sales - Point-in-time $ 910 $ 910 $ —
License Fee – Over time 226 — 226
Total Drug Products 1,136 910 226
Concentrate Products
Product Sales – Point-in-time 59,100 53,707 5,393
License Fee – Point-in-time 1,961 1,961 —
Total Concentrate Products 61,061 55,668 5,393
Net Revenue $ 62,197 $ 56,578 $ 5,619
In thousands of US dollars ($) Year Ended December 31, 2019
Products By Geographic Area Total U.S. Rest of World
Drug Revenues
Product Sales - Point-in-time $ 272 $ 272 $ —
License Fee – Over time 273 — 273
Total Drug Products 545 272 273
Concentrate Products
Product Sales – Point-in-time 58,778 52,540 6,238
License Fee – Point-in-time 1,980 1,980 —
Total Concentrate Products 60,758 54,520 6,238
Net Revenue $ 61,303 $ 54,792 $ 6,511
For the years ended December 31, 2020 and 2019, license fee revenue was $ 2.2 million and $ 2.3 million, respectively. For the years ended December 31, 2020 and 2019, product sales revenue was $ 60.0 million and $ 59.0 million, respectively.
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Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
In thousands of US dollars ($) December 31, 2020 December 31, 2019
Receivables, which are included in "Trade and other receivables" $ 4,171 $ 4,203
Contract liabilities $ 10,190 $ 12,076
There were no impairment losses recognized related to any receivables arising from the Company’s contracts with customers for the years ended December 31, 2020 and 2019.
For the years ended December 31, 2020 and 2019, the Company did no t recognize material bad-debt expense and there were no material contract assets recorded on the consolidated balance sheets as of December 31, 2020 and 2019. The Company does not generally accept returns of its concentrate products and no reserve for returns of concentrate products was established as of December 31, 2020 or December 31, 2019.
The contract liabilities primarily relate to upfront payments and consideration received from customers that are received in advance of the customer assuming control of the related products.
Transaction price allocated to remaining performance obligations
For the year ended December 31, 2020, revenue recognized from performance obligations related to prior periods was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, totaled $ 10.2 million and $ 12.1 million as of December 31, 2020 and 2019, respectively. The amount relates primarily to upfront payments and consideration received from customers that are received in advance of the customer assuming control of the related products. The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The Baxter Agreement includes minimum commitments of product sales over the duration of the agreement. As of December 31, 2020 unfulfilled performance obligations related to the Baxter Agreement are product sales totaling $ 7.2 million, which will be amortized through expiration of the agreement on October 2, 2024.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with fair value and classification of warrants, revenue recognition, allowance for doubtful accounts, inventory reserves, accrued expenses, deferred license revenue, stock-based compensation, impairments of long-lived assets, and accounting for income taxes.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents excluding items held in Investments - Available for Sale as noted below. Cash and cash equivalents include cash held in banks, money market mutual funds and unrestricted certificates of deposit. The Company’s cash and cash equivalents exceeds the Federal Deposit Insurance Corporation insured limits. The Company has not experienced any credit losses for amounts in excess of insured limits. Currently the Company does not reasonably believe a significant risk of credit loss exists.
Fair Value Measurement
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The Company applies the guidance issued with ASC 820, Fair Value Measurements , which provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity ad values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
Investments – Available for Sale
The Company has designated its short term investments as of each balance sheet date as available-for-sale securities and accounts for them at their respective fair values. Available-for-sale securities are measured at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders' equity until their disposition. We review all available-for-sale securities at each period end to determine if they remain available-for-sale based on our then current intent and ability to sell the security if required to do so. The cost of securities sold is based on the specific identification method.
All of our investments available-for-sale are subject to periodic impairment review. We recognize an impairment charge when a decline in the fair value of our investments below the cost basis is judged to be other than temporary.
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 is 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
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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.
Rockwell reviews 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.
Deferred Revenue
In October 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 for the years ended December 31, 2020 and 2019, respectively. Deferred revenue related to the Baxter agreement totaled $ 7.2 million and $ 9.1 million as of December 31, 2020 and 2019, respectively.
If a “Refund Trigger Event” occurs prior to December 31, 2021, Rockwell would be obligated to repay 25 % of the upfront fee.
During the year ended December 31, 2016, the Company entered into a distribution agreement with Wanbang 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 during the years ended December 31, 2020 and 2019, respectively. Deferred revenue related to the Wanbang agreement totaled $ 2.7 million and $ 2.9 million as of 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
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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 $ 0.2 million as of December 31, 2020.
Income Taxes
We account for income taxes in accordance with the provisions of ASC 740‑10, Income Taxes. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting and operating loss and tax credit carryforwards. A valuation allowance is established for deferred tax assets if we determine it to be more likely than not that the deferred tax asset will not be realized.
The effects of tax positions are generally recognized in the financial statements consistent with amounts reflected in returns filed, or expected to be filed, with taxing authorities. For tax positions that the Company considers to be uncertain, current and deferred tax liabilities are recognized, or assets derecognized, when it is probable that an income tax liability has been incurred and the amount of the liability is reasonably estimable, or when it is probable that a tax benefit, such as a tax credit or loss carryforward, will be disallowed by a taxing authority. The amount of unrecognized tax benefits related to current tax positions is insignificant. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense.
Research and Product Development
The Company recognizes research and product development expenses as incurred. The Company incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products aggregating approximately $ 7.1 million and $ 6.9 million for the years ended December 31, 2020 and 2019, respectively.
Stock-Based Compensation
Service-Based Stock Unit Awards
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 (See Note 13).
Market and Performance-Based Stock Unit Awards
In addition to awards with service-based vesting conditions, the Company has granted performance share units with market and performance conditions, to certain of its executives. The fair value of awards with performance conditions are based on the fair value of the Company’s common stock on the date of grant. The fair value of awards with market conditions are based on a Monte Carlo simulation model. Assumptions and estimates utilized in the calculation of the fair value of the market awards include the risk-free interest rate, dividend yield, average closing price, expected volatility based on the historical volatility of the Company, and the remaining period of the award.
The awards with performance conditions vest and result in issuance, at settlement, of common stock for each recipient based upon the recipient’s continued employment with the Company through the settlement date of the award and the Company’s achievement of specified milestones. The requisite service period of the awards with performance conditions is generally 1 - 2 years. In the case of awards with performance conditions, the Company recognizes stock-based compensation expense based on the grant date fair value of the award when achievement of the underlying performance-based targets become probable.
The awards with market conditions vest and result in the issuance of common stock based upon the recipient’s continuing employment with the Company through the settlement date of the award related to the market capitalization criteria.
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The fair value related to the awards with market conditions is recorded as stock-based compensation expense over the period from date of grant to the settlement date regardless of whether the market capitalization is achieved.
Commitments and Contingencies
In the normal course of business, the Company may become subject to loss contingencies, such as legal proceedings and claims arising out of its business, including government investigations. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated. The Company expenses legal costs associated with loss contingencies as they are incurred.
Loss Per Share
ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”), with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issued common stock were exercised or converted into common stock or resulted in the issuance of common stock that are then shared in the earnings of the entity.
Basic net loss per share of common stock excludes dilution and is computed by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that are then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. The Company has only incurred losses, therefore, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share for the years ended December 31, 2020 and 2019 were as follows:
As of December 31,
2020 2019
Options to purchase common stock 6,467,956 8,598,149
Unvested restricted stock awards 146,800 146,800
Unvested restricted stock units 265,494 1,452,744
Warrants to purchase common stock 26,426,863 2,770,781
33,307,113 12,968,474
Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Accumulated other comprehensive income refers to revenues, expenses, gains and losses that are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity. Accumulated other comprehensive income consists of unrealized gains and losses on available‑for‑sale investment securities and foreign currency translation adjustments.
Adoption of Recent Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.
Note 4. Investments - Available-for-Sale
Investments available-for-sale consisted of the following as of December 31, 2020 and 2019 (table in thousands):
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December 31, 2020
Amortized Cost Unrealized Gain Unrealized Loss Accrued Interest Income Fair Value
Available-for-Sale Securities
Bonds $ 9,987 $ 3 $ — $ 7 $ 9,997
December 31, 2019
Amortized Cost Unrealized Gain Unrealized Loss Accrued Interest Income Fair Value
Available-for-Sale Securities
Bonds $ 14,238 $ 13 $ ( 1 ) $ — $ 14,250
The fair value of investments available-for-sale are determined using quoted market prices from daily exchange-traded markets based on the closing price as of the balance sheet date and are classified as Level 1, as described in Note 3, Fair Value Measurement to our consolidated financial statements.
As of December 31, 2020 and 2019, the amortized cost and estimated fair value of our available-for-sale securities were due in one year or less.
Note 5. Significant Market Segments and Customers
We operate in one market segment, the hemodialysis market, which involves the manufacture, sale and distribution of hemodialysis products to hemodialysis clinics, including pharmaceutical, dialysis concentrates, dialysis kits and other ancillary products used in the dialysis process.
One customer, DaVita, Inc. ("DaVita"), accounted for 50 % of our sales in 2020 and 49 % of our sales in 2019. Our accounts receivable from this customer were $ 1.1 million and $ 1.2 million as of December 31, 2020 and 2019, respectively.
In October 2014, we entered into the Distribution Agreement with Baxter, which was amended in June 2017 and March 2020, pursuant to which Baxter received exclusive distribution rights for our concentrate products in the United States, a commitment by Rockwell to maintain a specified manufacturing capacity for Baxter, a cap upon the net amount of reimbursable transportation expenses and modified extension terms. Our domestic customer contracts for the supply of dialysis concentrate products that permitted assignment to Baxter without consent have been assigned to Baxter. As a result, for 2020 and 2019, our direct sales to Baxter aggregated approximately 25 % and 27 % of sales, respectively, and we had a receivable from Baxter of $ 1.6 million and $ 2.0 million as of December 31, 2020 and 2019, respectively.
DaVita and Baxter and the accounts administered by Baxter are important to our business, financial condition and results of operations. The loss of any significant accounts could have a material adverse effect on our business, financial condition and results of operations. No other domestic customers accounted for more than 10% of our sales in any of the last two years.
The majority of our international sales in each of the last two years were sales to domestic distributors that were resold to end users outside the United States. Our sales to foreign customers and distributors accounted for approximately 9 % and 11 % of our total sales in 2020 and 2019, respectively. One international customer, Nipro Medical Corporation, accounted for 7 % and 9 % of our sales for 2020 and 2019, respectively.
Note 6. Distribution Agreement
In October 2014, we entered into the Distribution Agreement with Baxter, pursuant to which Baxter became our exclusive agent for commercializing our hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years ending October 2, 2024. We retain sales, marketing and distribution rights for our hemodialysis concentrate products for our international customers and in those countries in which we have an established commercial presence. During the term of the Distribution Agreement, Baxter has agreed not to manufacture or sell any competitive concentrate products in the United States hemodialysis market, other than specified products. The Distribution Agreement does not include any of the Company’s drug products. In June 2017, we entered into the First Amendment to Exclusive Distribution Agreement with Baxter (the “Amendment”). The Amendment provides for, among other things, reduced pricing on certain accounts and incentives to Baxter to pursue new customers and increase future sales. In March 2020, we entered into the Second Amendment to the Exclusive Distribution Agreement with Baxter (the “Second Amendment”). The
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Second Amendment provides for, among other things, a commitment by Rockwell to maintain a specified manufacturing capacity for Baxter, a cap upon the net amount of reimbursable transportation expenses and modified extension terms.
Under the Distribution Agreement, Baxter purchases concentrate-related products from us at pre-determined gross margin-based prices per unit adjusted each year during the term and subject to an annual true up. The Distribution Agreement also requires Baxter to meet minimum annual purchase levels, subject to a cure period and certain other relief, in order to maintain its exclusive distribution rights. The minimum purchase levels increase each year over the term of the Distribution Agreement. Purchases in any calendar year that exceed the minimum may be carried forward and applied to future years’ minimum requirements. The Distribution Agreement, as amended by the Second Amendment, also contains provisions regarding our obligations to maintain specified manufacturing capacity and quality levels. We continue to manage customer service, transportation and certain other functions for our current customers. For customer service, Baxter pays us an amount equal to our related costs plus a slight mark-up for these services. For transportation costs, Baxter pays us an amount equal to our related costs, subject to the defined caps contained within the Second Amendment, which are based upon defined percentages of liquid concentrate product being shipped.
The Distribution Agreement also provides that, upon the mutual determination of us and Baxter, Baxter will pay us up to $ 10 million to build a new manufacturing facility in the Pacific time-zone that would serve customers in the western United States. The fee payable in connection with construction of the facility will be reduced to the extent that the facility is not operational within 12 months after the start of construction. Except for any leased components, we will own and operate the facility when completed.
Either party may terminate the Distribution Agreement upon the insolvency or material breach of the other party or in the event of a force majeure. In addition, Baxter may also terminate the Distribution Agreement at any time upon 270 days’ prior written notice to us or if (i) prices increase beyond certain thresholds and notice is provided within 45 days after the true up payment is due for the year in which the price threshold is exceeded, (ii) a change of control of the Company occurs and 270 days’ notice is provided, or (iii) upon written notice that Baxter has been enjoined by a court of competent jurisdiction from selling in the United States any product covered by the Distribution Agreement due to a claim of intellectual property infringement or misappropriation relating to such product. If Baxter terminates the Distribution Agreement under the discretionary termination or the price increase provisions, it would be subject to a limited non-compete obligation in the United States with respect to certain products for a period of two years .
Pursuant to the Distribution Agreement, we received an upfront fee of $ 20 million in October 2014. If a “Refund Trigger Event” occurs prior to December 31, 2021, we would be obligated to repay 25 % of the upfront fee and any paid portion of the facility fee. A “Refund Trigger Event” means any of the following: (i) a change of control of the Company involving any of certain specified companies; (ii) a termination by Baxter due to the Company’s bankruptcy or breach, or due to price increases that exceed the stated thresholds; (iii) a termination by either party due to a force majeure; (iv) settlement or adjudication of any claim, action or litigation relating to a covered product that materially and adversely affects Baxter’s commercialization of the product; and (v) any regulatory action or ruling relating to a covered product that materially and adversely affects Baxter’s commercialization of the product. The Upfront Fee has been deferred and is being recognized as revenue based on the proportion of product shipments to Baxter in each period to total expected sales volume over the term of the Distribution Agreement. We recognized revenue associated with the Upfront Fee totaling $ 2.0 million and $ 2.1 million for the years ended December 31, 2020, and 2019, respectively.
The Distribution Agreement may be extended for an additional five years by Baxter if Baxter achieves a specified sales target and pays an extension fee of $ 7.5 million. If the first extension occurs, the Distribution Agreement term may later be extended an additional five years at Baxter’s option at no additional cost.
Note 7. Inventory
Components of inventory, net of reserves as of December 31, 2020 and 2019 are as follows (table in thousands):
December 31,
2020 December 31,
2019
Raw Materials $ 3,112 $ 2,471
Work in Process 172 185
Finished Goods 1,805 1,432
Total $ 5,089 $ 4,088
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As of December 31, 2020 and 2019, we classified $ 1.2 million and $ 0.4 million, respectively, of inventory as non-current all of which was related to Triferic or the active pharmaceutical ingredient for Triferic. As of December 31, 2020 and 2019, we had total Triferic inventory aggregating $ 3.9 million and $ 3.5 million respectively, against which we had reserved $ 2.6 million and $ 2.8 million, respectively.
For the year ended December 31, 2020, the Company’s inventory reserves and write-offs decreased overall by $ 0.1 million, which consisted primarily of an increase in inventory reserve of $ 0.3 million offset by a reduction to inventory reserve of $ 0.4 million related to destruction of Triferic inventory. For the year ended December 31, 2019, inventory reserves and write-offs increased by $ 1.3 million.
The $ 1.3 million net value of Triferic inventory consisted of $ 0.1 million of Triferic (dialysate) finished goods with expiration dates ranging from May 2021 to September 2021, $ 0.3 million of Triferic API with estimated useful lives extending through 2023, and $ 890,000 of Triferic raw material with an estimated useful live of 25 years.
Note 8. Property and Equipment
As of December 31, 2020 and 2019, the Company’s property and equipment consisted of the following (table in thousands):
2020 2019
Leasehold Improvements $ 1,196 $ 1,162
Machinery and Equipment 5,475 4,673
Information Technology & Office Equipment 1,831 1,810
Laboratory Equipment 676 653
9,178 8,298
Accumulated Depreciation ( 6,536 ) ( 5,865 )
Net Property and Equipment $ 2,642 $ 2,433
Depreciation expense during the years ended December 31, 2020 and 2019 is as follows (table in thousands):
2020 2019
Depreciation expense $ 834 $ 788
Note 9. Goodwill and Intangible Assets
Total goodwill was $ 0.9 million at December 31, 2020 and 2019. We completed our annual impairment tests as of December 31, 2020 and 2019, and determined that no adjustment for impairment of goodwill was required during the years ended December 31, 2020 and 2019.
Note 10. Accrued Liabilities
Accrued liabilities as of December 31, 2020 and 2019 consisted of the following (table in thousands):
2020 2019
Accrued Research & Development Expense $ 232 $ 283
Accrued Compensation and Benefits 2,500 1,108
Accrued Unvouchered Receipts 755 1,901
Accrued Workers Compensation 395 195
Other Accrued Liabilities 1,131 1,031
Total Accrued Liabilities $ 5,013 $ 4,518
Note 11. Stockholders’ Equity
Preferred Stock
As of December 31, 2020 and 2019, there were 2,000,000 shares of preferred stock, $ 0.0001 par value per share, authorized and no shares of preferred stock issued or outstanding.
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Common Stock
As of December 31, 2020 and 2019, there were 170,000,000 shares of common stock, $ 0.0001 par value per share, authorized and 93,573,165 and 65,378,890 shares issued and outstanding, respectively.
During the year ended December 31, 2019, 30,000 vested employee stock options were exercised for net cash proceeds of $ 147,900 at a weighted average exercise price of $ 4.93 per share.
During the year ended December 31, 2020, no vested employee stock options were exercised.
Controlled Equity Offering
On March 22, 2019, the Company entered into a sales agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the Company may offer and sell from time to time shares of the Company’s common stock through the Agent. The offering and sale of up to $ 40.0 million of the shares has been registered under the Securities Act of 1933, as amended, pursuant to the Company’s registration statement on Form S-3 (File No. 333-227363), which was originally filed with the SEC on September 14, 2018 and declared effective by the SEC on October 1, 2018. The base prospectus contained within the registration statement, and a prospectus supplement was filed with the SEC on March 22, 2019.
Sales of the shares, if any, pursuant to the Sales Agreement, may be made in sales deemed to be a “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through The Nasdaq Global Market or on any other existing trading market for the Company’s common stock. The Company intends to use the proceeds from the offering for working capital and other general corporate purposes. The Company may suspend or terminate the Sales Agreement at any time.
During the year ended December 31, 2019, the Company sold 1,840,443 shares of its common stock pursuant to the Sales Agreement for gross proceeds of $ 5,383,079 , at a weighted average selling price of approximately $ 2.92 . The Company paid $ 309,479 in commissions and offering fees related to the sale of the common stock. For the year ended December 31, 2020, the Company sold 1,128,608 of shares of its common stock pursuant to the Sales Agreement for gross proceeds of $ 2,325,478 , at a weighted average selling price of approximately $ 2.06 . The Company paid $ 63,000 in commissions and offering fees related to the sale of common stock. As of December 31, 2020, approximately $ 32.3 million remains available for sale under this facility.
We are not required to sell any shares at any time during the term of the facility. Our ability to sell common stock under the facility may be limited by several factors including, among other things, the trading volume of our common stock and certain black-out periods that we may impose upon the facility, among other things.
Public Offerings of Common Stock
On February 4, 2020, the Company entered into an underwriting agreement with Cantor Fitzgerald & Co., as underwriter, pursuant to which the Company agreed to issue and sell an aggregate of up to 3,670,212 shares of its common stock, which included 478,723 optional shares that may be sold pursuant to an over-allotment option granted to the underwriters. On February 6, 2020, the Company closed the sale of 3,191,489 shares of its common stock at the public offering price of $ 2.22 per share (the "Offering").
On February 19, 2020, the underwriter exercised its over-allotment option to purchase an additional 478,723 shares at a price of $ 2.22 per share, which closed on February 21, 2020. The Company raised a total of $ 8.0 million, net of issuance costs of $ 0.1 million, relating to the sale of the common stock in the Offering. The Offering was made pursuant to the Company’s effective Registration Statement on Form S-3 (File No. 333-227363), which was previously filed with the SEC.
On September 23, 2020, the Company entered into a Securities Purchase Agreement (the “2020 Purchase Agreement”) with certain purchasers named therein, pursuant to which the Company agreed to issue and sell to several institutional and accredited investors in a registered direct offering, 21,818,544 shares of common stock and warrants to purchase up to 23,178,809 shares of common stock (the “Warrants”) at a combined purchase price equal to $ 1.51 per share. Each Warrant is exercisable for one share of common stock at an exercise price of $ 1.80 per share. The Warrants are immediately exercisable and will expire on September 25, 2022.
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The Company also offered to certain purchasers pre-funded warrants to purchase up to an aggregate of 1,360,265 shares of common stock (the “Pre-Funded Warrants”), in lieu of shares of common stock. The purchase price of each Pre-Funded Warrant is equal to the price at which a share of common stock is sold to the public in the offering, minus $ 0.001 , and the exercise price of each Pre-Funded Warrant is $ 0.001 per share. The Pre-Funded Warrants were exercised in conjunction with the issuance of common stock under the Securities Purchase Agreement. The Company received gross proceeds of approximately $ 35.0 million in connection with the offering, before deducting placement agent fees and related offering expenses of approximately $ 2.3 million.
A holder (together with its affiliates) may not exercise any portion of the Warrant to the extent that the holder would own more than 9.99 % (or, at the holder’s option upon issuance, 4.99 %) of the Company’s outstanding common stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant or Pre-Funded Warrant.
The Company agreed to pay H.C. Wainwright & Co., LLC (the "Placement Agent") a cash fee of 6 % of the aggregate gross proceeds raised in the offering, minus $ 0.4 million payable by the Company to a financial advisory firm for services related to the offering.
In addition, the Company agreed to pay the Placement Agent (i) 6 % of the aggregate gross proceeds to be received, if any, from the cash exercise of any Warrants through December 25, 2021 and (ii) 4.0 % of the aggregate gross proceeds to be received, if any, from the cash exercise of any Warrants subsequent to December 25, 2021. The Company also agreed to pay the Placement Agent non-accountable expenses of $ 50,000 as well as $ 12,900 for the clearing fees of the Placement Agent in connection with the offering.
The Company has accounted for the common stock for the 2020 Purchase Agreement as equity on the accompanying consolidated balance sheets as of December 31, 2020. The amount allocated to common stock was $ 26.1 million. This allocation is equal to the total proceeds of $ 35.0 million less the amount allocated to Warrants of $ 8.9 million and is also net of the direct and incremental costs associated with the 2020 Purchase Agreement of $ 2.3 million. The Black-Scholes pricing model was used to calculate the value of Warrants relating to the 2020 Purchase Agreement.
Restricted Common Stock
During the year ended December 31, 2020, 988,958 shares of performance-based restricted stock and 152,097 shares of time-based restricted stock were forfeited. Forfeitures of the performance-based and time-based restricted stock were related to the resignation of Stuart Paul, former CEO, and Angus Smith, former CFO.
During the year ended December 31, 2020, 224,994 shares of common stock related to fully vested restricted stock units were delivered to officers and employees of the Company. The Company withheld 8,348 of these shares of common stock at a fair value of $ 18,950 to cover the employees and officer’s withholding taxes related to the vesting of restricted stock units.
Note 12. Stock-Based Compensation
The Board of Directors adopted the Rockwell Medical, Inc., 2007 Long Term Incentive Plan (“2007 LTIP”) on April 11, 2007. The 2007 LTIP expired on April 11, 2017 and no equity awards were granted under the 2007 LTIP following its expiration. There were 11,500,000 shares of common stock reserved for issuance under the 2007 LTIP. The Board of Directors adopted the 2018 Long-Term Incentive Plan (“2018 LTIP”) on January 29, 2018 as a replacement for the 2007 LTIP. Initially there were 3,300,000 shares of common stock reserved for issuance under the 2018 LTIP. On May 18, 2020, at the Annual Meeting, the Company’s stockholders approved the amendment and restatement of the Rockwell Medical, Inc. 2018 Long Term Incentive Plan to increase the number of shares of common stock issuable thereunder by 2,900,000 shares bringing common stock reserve for issuance up to 6,200,000 under the 2018 LTIP. The Compensation Committee of the Board of Directors (the “Committee”) is responsible for the administration of the 2007 LTIP and 2018 LTIP, including the grant of stock based awards and other financial incentives including performance based incentives to employees, non‑employee directors and consultants.
Our standard stock option agreement under the 2007 LTIP and 2018 LTIP 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 for at least six months in exchange for our newly issued shares. The 2007 LTIP and 2018 LTIP also allow for the retention of shares in payment of the exercise price and income tax withholding. The latter
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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.
The Company recognized total stock-based compensation expense during the years ended December 31, 2020 and 2019 as follows (table in thousands):
Year Ended
2020 2019
Service based awards:
Restricted stock awards $ — $ ( 33 )
Restricted stock units 372 1,600
Stock option awards 1,491 2,300
$ 1,863 $ 3,867
Performance based awards:
Restricted stock units $ ( 1,148 ) $ 642
Stock option awards ( 240 ) 443
( 1,388 ) 1,085
Total $ 475 $ 4,952
Restricted Stock Awards
A summary of the Company’s restricted stock awards during the years ended December 31, 2020 and 2019 is as follows:
Number of Shares Weighted Average
Grant-Date
Fair Value
Unvested at January 1, 2019 146,800 $ 5.70
Unvested at December 31, 2019 146,800 $ 5.70
Unvested at December 31, 2020 146,800 $ 5.70
The fair value of restricted stock awards are measured based on their fair value on the date of grant and amortized over the vesting period of 20 months. As of December 31, 2020, unvested restricted stock awards of 146,800 were related to performance based awards. Stock-based compensation expense of nil was recognized for both the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there is no unrecognized stock-based compensation expense related to restricted stock awards.
Service Based Restricted Stock Units
A summary of the Company’s service based restricted stock units during the year ended December 31, 2020 and 2019 is as follows:
Number of Shares Weighted Average
Grant-Date
Fair Value
Unvested at January 1, 2019 472,959 $ 4.32
Granted 244,063 4.09
Forfeited ( 28,916 ) 4.32
Vested ( 224,320 ) 4.19
Unvested at December 31, 2019 463,786 4.26
Granted 208,993 2.00
Forfeited ( 159,724 ) 4.26
Vested ( 247,561 ) 4.30
Unvested at December 31, 2020 265,494 $ 2.60
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The fair value of service based restricted stock units are measured based on their fair value on the date of grant and amortized over the vesting period. The vesting periods range from 1 - 3 years. Stock-based compensation expense of 0.4 million and $ 1.6 million was recognized during the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the unrecognized stock-based compensation expense was $ 0.2 million over the next 12 months.
Performance Based Restricted Stock Units
A summary of the Company’s performance based restricted stock units during the year ended December 31, 2020 and 2019 is as follows:
Number of Shares Weighted Average
Grant-Date
Fair Value
Unvested at January 1, 2020 988,958 $ 4.48
Forfeited ( 988,958 ) $ 4.48
Unvested at December 31, 2020 — $ —
Number of Shares Weighted Average
Grant-Date
Fair Value
Unvested at January 1, 2019 988,958 $ 4.48
Unvested at December 31, 2019 988,958 $ 4.48
Stock-based compensation expense recognized for performance based restricted stock units was $( 1.1 ) million and $ 0.6 million for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was no unrecognized stock-based compensation expense related to performance-based restricted stock units. The forfeited performance-based restricted stock awards of 988,958 is due to the resignation of the Company's former President and Chief Executive Officer, Stuart Paul, on April 17, 2020 and the resignation of the Company's former Chief Financial Officer, Angus Smith, effective July 3, 2020. These forfeited awards reduced stock-based compensation expense for the year ended December 31, 2020 by $ 1.4 million.
Service Based Stock Options
The fair value of the service based stock options granted for the years ended December 31, 2020 and 2019 were based on the following assumptions:
December 31,
2020 2019
Exercise price $ 0.92 - $ 2.90
$ 1.91 - $ 6.55
Expected stock price volatility 68.2 % - 75.8 %
67.5 % - 70.3 %
Risk-free interest rate 0.31 % - 1.70 %
1.40 % - 2.60 %
Term (years) 5.5 - 6.0
3.4 - 6.5
A summary of the Company’s service based stock option activity for the years ended December 31, 2020 and 2019 is as follows:
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Shares
Underlying
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Term Aggregate
Intrinsic
Value
(in $1,000's)
Outstanding at January 1, 2019 7,856,480 $ 7.50 5.2 $ —
Granted 1,103,938 $ 3.37 9.0 107
Exercised ( 30,000 ) $ 4.93 —
Forfeited ( 720,394 ) $ ( 6.24 ) —
Outstanding at December 31, 2019 8,210,024 $ 7.06 5.1 $ 107
Granted 2,288,386 $ 1.94 9.0 —
Exercised — $ — —
Expired ( 4,249,596 ) $ ( 8.07 ) —
Forfeited ( 530,858 ) $ ( 3.88 ) —
Outstanding at December 31, 2020 5,717,956 $ 4.55 6.6 $ —
Exercisable at December 31, 2020 2,898,104 $ 6.85 3.9 $ —
The aggregate intrinsic value in the table above is calculated as the difference between the closing price of our common stock and the exercise price of the stock options that had strike prices below the closing price.
During the year ended December 31, 2020 and 2019, the service based stock options granted consisted of 2,288,386 and 1,103,938 options granted to employees, respectively. As of December 31, 2020, 2,898,104 vested options were exercisable at a weighted average price of 6.85 per share.
During the year ended December 31, 2020 and 2019, stock-based compensation expense of $ 1.5 million and $ 2.3 million was recognized, respectively. As of December 31, 2020, total stock-based compensation expense related to 2,819,582 unvested options not yet recognized totaled approximately $ 2.2 million over the next 2.2 years.
Performance Based Stock Options
A summary of the performance based stock options granted for the year ended December 31, 2020, is as follows:
Number of Shares Weighted Average
Exercise
Price
Outstanding at January 1, 2019 388,125 $ 4.70
Outstanding at December 31, 2019 388,125 $ 4.70
Granted 750,000 $ 2.20
Forfeited ( 388,125 ) $ ( 4.70 )
Outstanding at December 31, 2020 750,000 $ 2.20
Exercisable at December 31, 2020 — $ —
Stock-based compensation expense recognized for performance-based stock options was $( 0.2 ) million and $ 0.4 million for the year ended December 31, 2020 and 2019. As of December 31, 2020, the unrecognized stock-based compensation expense related to unvested performance-based stock options was $ 0.2 million. The forfeited unvested performance-based stock options of 388,125 is due to the resignation of the Company's former President and Chief Executive Officer, Stuart Paul, on April 17, 2020. These forfeited options reduced stock-based compensation expense by $ 0.7 million.
A performance option may be comprised of either a performance based award or a market-based award. Performance based awards start vesting on the grant date through the probability date of the measured performance, and the fair value is the market price of one common share on the grant date. Evaluation of the expected vesting period is reviewed quarterly. Market-based awards vest upon the achievement of the market-based performance goal, provided the continued employment of the
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Company’s employee. The fair value of each market-based stock option was determined through the use of the Monte Carlo simulation method. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.
The fair value of the performance-based stock options granted for the year ended December 31, 2020 were based on the following assumptions:
Expected stock price volatility 74.4 %
Risk-free interest rate 0.4 %
Dividend yield rate —
Term (years) 5.7
Note 13. Related Party Transactions
Product License Agreements
The Company is a party to a Licensing Agreement between the Company and Charak, LLC (“Charak”) dated January 7, 2002 (the “2002 Agreement”) that grants the Company exclusive worldwide rights to certain patents and information related to our Triferic® product. On October 7, 2018, the Company entered into a Master Services and IP Agreement (the “Charak MSA”) with Charak and Dr. Ajay Gupta, a former Officer of the Company (see Note 18). Pursuant to the MSA, the parties entered into three additional agreements described below related to the license of certain soluble ferric pyrophosphate (“SFP”) intellectual property owned by Charak, as well as the Employment Agreement (defined below). The Charak MSA provides for a payment of $ 1.0 million to Dr. Gupta, payable in four quarterly installments of $ 250,000 each on October 15, 2018, January 15, 2019, April 15, 2019 and July 15, 2019, and reimbursement for certain legal fees incurred in connection with the Charak MSA. The Company paid all four of the quarterly installments totaling $ 1.0 million and accrued $ 0.1 million for the reimbursement of certain legal expenses during the year ended December 31, 2019. As of December 31, 2020, the Company has fulfilled its reimbursement obligation of certain legal expenses and accrued $ 0.1 million relating to certain IP reimbursement expenses and certain sublicense royalty fees as a related party payable on the condensed consolidated balance sheet.
Pursuant to the Charak MSA, the aforementioned parties entered into an Amendment, dated as of October 7, 2018 (the “Charak Amendment”), to the 2002 Agreement, under which Charak granted the Company an exclusive, worldwide, non-transferable license to commercialize SFP for the treatment of patients with renal failure. The Charak Amendment amends the royalty payments due to Charak under the 2002 Agreement such that the Company is liable to pay Charak royalties on net sales by the Company of products developed under the license, which includes the Company’s Triferic® product, at a specified rate until December 31, 2021 and thereafter at a reduced rate from January 1, 2022 until February 1, 2034. Additionally, the Company shall pay Charak a percentage of any sublicense income during the term of the agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and be no less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Commercialization and Technology License Agreement IV Triferic®, dated as of October 7, 2018 (the “IV Agreement”), under which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing certain intravenous-delivered products incorporating SFP for the treatment of iron disorders worldwide for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. The Company is liable to pay Charak royalties on net sales by the Company of products developed under the license at a specified rate until December 31, 2021. From January 1, 2022 until February 1, 2034, the Company is liable to pay Charak a base royalty at a reduced rate on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the IV Agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Technology License Agreement TPN Triferic®, dated as of October 7, 2018 (the “TPN Agreement”), pursuant to which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing worldwide certain TPN products
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incorporating SFP. The license grant under the TPN Agreement continues for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. During the term of the TPN Agreement, the Company is liable to pay Charak a base royalty on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the TPN Agreement, which amount shall not be less than a minimum royalty on net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
The potential milestone payments are not yet considered probable, and no milestone payments have been accrued at December 31, 2020.
Director Compensation
In 2019, the Company compensated non-employee directors with a cash retainer, which was approved by the Board of Directors, to serve on a special Advisory Committee of the Board, which committee was delegated to provide Board-level oversight of senior management and not have any management authority within the Company. Independent directors Lisa Colleran and John Cooper were appointed to the Advisory Committee. The aggregate compensation paid to the members of the advisory Committee for the year ended December 31, 2020 and 2019 was $ 225,000 and $ 202,500 , respectively. The Advisory Committee disbanded in May 2020.
Note 14. Commitments and Contingencies
Leases
We lease our production facilities and administrative offices as well as certain equipment used in our operations including leases on transportation equipment used in the delivery of our products. The lease terms range from monthly to seven years . We occupy a 51,000 square foot facility and a 17,500 square foot facility in Wixom, Michigan under a lease expiring in August 2021. We also occupy two other manufacturing facilities, a 51,000 square foot facility in Grapevine, Texas under a lease expiring in December 2025, and a 57,000 square foot facility in Greer, South Carolina under a lease expiring February 2023. In addition, we occupy 4,100 square feet of office space in Hackensack, New Jersey under a lease expiring on July 1, 2024. This lease is currently being offered for sublease.
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The following summarizes quantitative information about the Company’s operating leases (dollars in thousands):
For the year ended December 31, For the year ended December 31,
2020 2019
Operating leases
Operating lease cost $ 1,609 $ 2,076
Variable lease cost 488 318
Operating lease expense 2,097 2,394
Finance leases
Amortization of right-of-use assets 18 —
Interest on lease obligations 5 —
Finance lease expense 23 —
Short-term lease rent expense 17 17
Total rent expense $ 2,137 $ 2,411
Other information
Operating cash flows from operating leases $ 1,648 $ 2,015
Operating cash flows from finance leases $ 5 $ —
Financing cash flows from finance leases $ 17 $ —
Right of use assets exchanged for operating lease liabilities $ 268 $ 5,077
Right of use assets exchanged for finance lease liabilities $ 930 $ —
Weighted-average remaining lease term - operating leases 2.3 1.9
Weighted-average remaining lease term – finance leases 5.8 0
Weighted-average discount rate - operating leases 6.4 % 6.8 %
Weighted-average discount rate – finance leases 5.1 % — %
Future minimum rental payments under operating lease agreements are as follows (table in thousands):
Operating Finance
Year ending December 31, 2021 $ 1,131 $ 176
Year ending December 31, 2022 668 179
Year ending December 31, 2023 314 181
Year ending December 31, 2024 118 178
Year Ended December 31, 2025 6 176
Year Ended December 31, 2026 — 163
Total 2,237 1,053
Less present value discount $ ( 162 ) $ ( 140 )
Operating and Finance lease liabilities. $ 2,075 $ 913
Insurance
We evaluate various kinds of risk that we are exposed to in our business. In our evaluation of risk, we evaluate options and alternatives to mitigating such risks. For certain insurable risks, we may acquire insurance policies to protect against potential losses or to partially insure against certain risks. For our subsidiary, Rockwell Transportation, Inc., we maintain a partially self-insured workers' compensation policy. Under the policy, our self‑insurance retention is $ 350,000 per occurrence and $ 602,354 in aggregate coverage for the policy year ending July 1, 2021. The total amount at December 31, 2020 by which retention limits exceed the claims paid and accrued is approximately $ 479,000 for the policy year ending July 1, 2020. Estimated loss and additional future claims of approximately $ 395,000 have been reserved and accrued for the year ended December 31, 2020.
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As of December 31, 2020, approximately $ 0.3 million was held in cash collateral and escrow by the insurance carrier for workers’ compensation insurance. At December 31, 2020, amounts held in cash collateral and escrow are included in prepaid expenses and other non-current assets in the consolidated financial statements.
Purchase Obligations
We have contracts for anticipated future obligations through December 31, 2021 of approximately $ 25.5 million, which include $ 23.8 million for concentrate manufacturing and $ 1.7 million in ancillary supplies.
Demand Notice
In February 2020, the Company received a letter from a supplier relating to a supply agreement entered into with the Company in 2015. The supplier alleged the Company did not meet certain annual minimums under the supply agreement, and has requested $ 3.0 million in penalties, plus payment of the cost for certain raw materials. While the Company believed it had several defenses to the supplier's claim, the Company and the supplier negotiated an amicable resolution of the dispute. On July 31, 2020, the Company and the supplier entered into a settlement agreement, which released the Company from any penalties relating to annual minimums under the 2015 agreement, established new minimums under an amended supply agreement and required the Company to pay for certain raw materials with 50 % of the cost to be paid upon execution of the settlement agreement and the remaining 50 % to be paid no later than December 31, 2020. As of December 31, 2020, the Company has performed all required obligations under the settlement agreement.
Litigation
SEC Investigation
As a follow up to certain prior inquiries, the Company received a subpoena from the SEC during the Company’s quarter ended September 30, 2018 requesting, among other things, certain information and documents relating to the status of the Company’s request to the Centers for Medicare & Medicaid Services (the "CMS") for separate reimbursement status for Triferic (dialysate), the Company’s reserving methodology for expiring Triferic inventory, and the basis for the Board’s termination of the former Chief Executive Officer, Robert Chioini, and former Chief Financial Officer, Thomas Klema, in 2018. The Company is cooperating with the SEC and is responding to the SEC’s requests for documents and information.
Shareholder Class Action Lawsuits
On July 27, 2018, Plaintiff Ah Kit Too filed a putative class action lawsuit in the United States District Court in the Eastern District of New York against the Company and former officers, Robert Chioini and Thomas Klema (the "Too Complaint"). The Too Complaint is a federal securities class action purportedly brought on behalf of a class consisting of all persons and entities, other than Defendants, who purchased or otherwise acquired the publicly traded securities of the Company between March 16, 2018 and June 26, 2018. The Too Complaint alleges that the Company and Messrs. Chioini and Klema violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, the Too Complaint alleges that defendants filed reports with the SEC that contained purported inaccurate and misleading statements regarding the potential for the Company’s drug, Triferic, to quality for separate reimbursement status by the CMS.
On September 4, 2018, Plaintiff Robert Spock filed a similar putative class action lawsuit in the United States District Court in the Eastern District of New York against the Company and Messrs. Chioini and Klema (the "Spock Complaint"). The Spock Complaint is a federal securities class action purportedly brought on behalf of a class consisting of persons who purchased the Company’s securities between November 8, 2017 and June 26, 2018. This complaint alleges that the Company and Messrs. Chioini and Klema violated the Exchange Act in that the Company was aware the CMS would not pursue the Company’s proposal for separate reimbursement for Triferic; misstated reserves in the Company’s quarterly report for the first quarter of 2018; had a material weakness its internal controls over financial reporting, which rendered those controls ineffective; Mr. Chioini withheld material information regarding Triferic from the Company’s auditor, corporate counsel, and independent directors of the Board; and, as a result of these alleged issues, statements about the Company’s business were materially false and misleading.
On September 25, 2018, four Company stockholders filed motions to appoint lead plaintiffs, lead counsel, and to consolidate the Ah Kit Too v. Rockwell securities class action with the Spock v. Rockwell securities class action. On October 10, 2018, the court issued an order consolidating the two actions, appointing co-lead plaintiffs and co-lead counsel. On December 10, 2018, lead Plaintiffs filed a consolidated amended complaint, which included the same allegations as the initial complaints and asserted claims on behalf of a putative class consisting of person who purchased the Company’s securities
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between November 8, 2017 and June 26, 2018. On February 18, 2019, the Company answered the consolidated amended complaint.
On August 7, 2019, all parties to the class action entered into a settlement of the consolidated class action. Pursuant to the terms and conditions of the settlement agreement, the Company will pay the Plaintiffs $ 3.7 million (the “Settlement Amount") in exchange for a full release of all liability as to all defendants. This resulted in a settlement expense of approximately $ 0.4 million for the year ended December 31, 2019. Of the Settlement Amount, the Company contributed approximately $ 0.1 million, which represented the remaining retention amount under the Company’s director and officer liability insurance policy as of December 31, 2020. The remainder of the settlement amount was funded by the Company’s director and officer insurance carrier. The settlement was approved by the court on February 26, 2020.
Shareholder Derivative Actions
Plaintiff Bill Le Clair filed a Verified Stockholder Derivative Complaint on April 23, 2019 in Case No. 1:19-cv-02373, and Plaintiff John Post filed a Verified Stockholder Derivative Complaint on May 10, 2019 in Case No. 1:19-cv-02774 (the “Derivative Complaints”) in the United States District Court in the Eastern District of New York, purportedly on behalf of the Company (as nominal defendant) and against certain of the Company’s current and former directors (the “Individual Defendants”). The Derivative Complaints assert causes of actions against the Individual Defendants for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The Derivative Complaints allege the Individual Defendants breached duties by, among other things, permitting alleged misstatements to be made in public filings regarding the status of separate reimbursement for Triferic from CMS, the adequacy of the Company's reserves and internal controls. The Derivative Complaints demand a jury trial, seeking monetary damages, corporate governance and internal procedure reform, injunctive relief on the Individual Directors’ trading activities, restitution, and attorneys’ fees. The cases were consolidated.
The Company tendered the above shareholder derivative actions to its director and officer insurance carrier(s) for defense and indemnity under its applicable insurance policies. On May 18, 2020, the Company, the Individual Defendants and the Plaintiffs (the "Settling Parties") entered into a formal Stipulation of Settlement, which memorializes the terms of the Settling Parties' settlement of the Derivative Complaints. A hearing occurred before the court on August 10, 2020 and the court issued a final order approving the settlement. The Company's director and officer insurance carrier has funded the settlement on behalf of the Company.
Note 15. Loan and Security Agreement
On March 16, 2020, Rockwell Medical, Inc. and Rockwell Transportation, Inc., as Borrowers, entered into a Loan and Security Agreement (the "Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP ("Innovatus"), as collateral agent and the lenders party thereto, pursuant to which Innovatus, as a lender, agreed to make certain term loans to the Company in the aggregate principal amount of up to $ 35.0 million (the "Term Loans"). Funding of the first $ 22.5 million tranche was completed on March 16, 2020. The Company is no longer eligible to draw on a second tranche of $ 5.0 million, which was tied to the achievement of certain milestones by a specific date. The Company may be eligible to draw on a third tranche of $ 7.5 million upon the achievement of certain additional milestones, including the achievement of certain Triferic sales thresholds. Net draw down proceeds were $ 21.2 million with closing costs of $ 1.3 million.
The Company is entitled to make interest-only payments for thirty months , or up to thirty-six months if certain conditions are met. The Term Loans will mature on March 16, 2025, and will bear interest at the greater of (i) Prime Rate (as defined in the Loan Agreement) and (ii) 4.75 %, plus 4.00 % with an initial interest rate of 8.75 % per annum and an effective interest rate of 10.90 %. The Company has the option, under certain circumstances, to add 1.00 % of such interest rate amount to the then outstanding principal balance in lieu of paying such amount in cash. For the year ended December 31, 2020, interest expense amounted to $ 1.6 million.
The Loan Agreement is secured by all assets of the Company and Rockwell Transportation, Inc. Proceeds will be used for working capital purposes. The Loan Agreement contains customary representations and warranties and covenants, subject to customary carve outs, and includes financial covenants related to liquidity and trailing twelve months sales of Triferic, with the latter beginning with the period ending December 31, 2020. We cannot assure you that we can maintain compliance with the covenants under our Loan Agreement, which may result in an event of default. Our ability to comply with these covenants may be adversely affected by events beyond our control. For example, the Loan Agreement contains certain financial covenants relating to sales and, as a result of the ongoing COVID-19 pandemic and its effect on our sales activities, among other factors, we may not be able to satisfy such covenants in the future. Based on our Triferic sales for the year ended December 31, 2020, we did not satisfy this covenant as of December 31, 2020. The Company utilized the cure provision to regain compliance,
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which Innovatus accepted. As of December 31, 2020, the Company is in compliance with all the reporting and financial covenants.
In connection with each funding of the Term Loans, the Company is required to issue to Innovatus a warrant (the “Warrants”) to purchase a number of shares of the Company’s common stock equal to 3.5 % of the principal amount of the relevant Term Loan funded divided by the exercise price, which will be based on the lower of (i) the volume weighted average closing price of the Company’s stock for the 5 -trading day period ending on the last trading day immediately preceding the execution of the Loan Agreement or (ii) the closing price on the last trading day immediately preceding the execution of the Loan Agreement (or for the second and third tranches only at the lower of (i) $ 1.65 per share or (ii) the volume weighted average closing price of the Company’s stock for the 5 -trading day period ending on the last trading day immediately preceding the relevant Term Loan funding). The Warrants may be exercised on a cashless basis and are immediately exercisable through the seventh anniversary of the applicable funding date. The number of shares of common stock for which each Warrant is exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in such Warrant. In connection with the first tranche of the Term Loans, the Company issued a Warrant to Innovatus, exercisable for an aggregate of 477,273 shares of the Company’s common stock at an exercise price of $ 1.65 per share. The Company evaluated the warrant under ASC 470, Debt, and recognized an additional debt discount of approximately $ 0.5 million based on the relative fair value of the base instruments and warrants. The Company calculated the fair value of the warrant using the Black-Scholes model.
As of December 31, 2020, the outstanding balance of the Term Loan was $ 20.9 million, net of unamortized issuance costs and unaccreted discount of $ 1.6 million.
The following table reflects the schedule of principal payments on the Term Loan as of December 31, 2020 (in thousands):
Year Principal Payments
2021 $ —
2022 2,250
2023 9,000
2024 9,000
2025 2,250
$ 22,500
Note 16. Income Taxes
A reconciliation of income tax expense at the statutory rate to income tax expense at our effective tax rate is as follows (dollars in thousands):
2020 2019
Tax Expense (Benefit) Computed at 22.67 % and 22.79 % of Pretax Income (Loss)
$ ( 6,373 ) $ ( 7,780 )
Changes in Tax Laws — —
Foreign Income Tax Expense — —
Effect of Change in Valuation Allowance 6,373 7,780
Total Income Tax Expense $ — $ —
The details of the net deferred tax asset are as follows (dollars in thousands):
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December 31,
2020 2019
Deferred tax assets:
Net Operating Loss Carryforward $ 59,586 $ 52,935
Stock Based Compensation 7,582 7,514
Deferred Revenue 2,310 2,752
General Business Credit 6,872 6,872
Accrued Expenses 185 280
Inventories 666 866
Book over Tax Depreciation 25 18
Other Deferred Tax Assets 387 22
Total Deferred Tax Assets 77,613 71,259
Deferred Tax Liabilities:
Goodwill & Intangible Assets 155 136
Prepaid Expenses 294 332
Total Deferred Tax Liabilities 449 468
Subtotal 77,164 70,791
Valuation Allowance ( 77,164 ) ( 70,791 )
Net Deferred Tax Asset $ — $ —
The Tax Cuts and Jobs Act of 2017 ("TCJA") impacted how net operating losses are utilized. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") temporarily suspends the TCJA limitation, allowing a net operating loss carryforward to fully offset taxable income in tax years beginning before January 1, 2021. The CARES Act also temporarily reinstated a carryback period for all net operating losses generated in years beginning after December 31, 2017 and before January 1, 2021. The carryback period for those years is five years under the CARES Act.
Deferred tax assets result primarily from net operating loss carryforwards. For federal tax purposes, we have net operating loss carryforwards of approximately $ 262.9 million that expire between 2021 and 2037.
In assessing the potential for realization 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. We recognized no income tax expense or benefit for the years ended December 31, 2020, and 2019. While we anticipate generating income within the next year or two, we expect to incur operating losses until our drug products are marketed and generating sufficient profits to offset our operating expenses. Considered together with our limited history of operating income and our net losses in 2020 and 2019, management has placed a full valuation allowance against the net deferred tax assets as of December 31, 2020 and 2019. The portion of the valuation allowance resulting from excess tax benefits on share based compensation that would be credited directly to contributed capital if recognized in subsequent periods is $ 4.2 million.
We account for our uncertain tax positions in accordance with ASC 740‑10, Income Taxes and the amount of unrecognized tax benefits related to tax positions is not significant at December 31, 2020 and 2019. We have not been under tax examination in any jurisdiction for the years ended December 31, 2020 and 2019. Tax examination years of 2016 to 2019 remain open.
Note 17. Subsequent Events
Effective January 19, 2021, as authorized by the Board of Directors of Rockwell Medical, Inc., the Company terminated the employment of Ajay Gupta, M.D. as the Company’s Chief Scientific Officer.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.