ROCKWELL MEDICAL, INC. 10-Q

Item 1A. Risk Factors We are subject to various risks and uncertainties that could have a material impact on our business, financial condition, results of operations and cash flows. The discussion of these risk factors is included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 under “Item 1A — Risk Factors,” except for the following: The ongoing COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions to our concentrates business operations, which could have a material adverse effect on our business. Our business and its operations have been and are expected to continue to be adversely affected by the COVID-19 pandemic. To date, our manufacturing has been viewed as an essential activity and we have not been required to pause operations based upon executive or similar governmental directives. However, we have had, and anticipate continuing to have, 33 instances where, notwithstanding the existence of a vaccine, employees of our manufacturing plants test positive for COVID-19, resulting in a disruption to our manufacturing operations. In addition, the imposition of vaccine or testing mandates on vaccine hesitant workers could result in certain workers opting to resign. These disruptions in our operations have had and could continue to have a negative impact our business, operating results and financial condition. Furthermore, it is possible that the outbreak of COVID-19 could be significant enough to force us to close the entirety of the manufacturing plant or transportation services for an extended period of time, which could result in a failure to deliver product. Such a closure or failure to deliver product could cause us to be in breach of requirements to maintain safety stock and maintain transportation and other services under our Exclusive Distribution Agreement with Baxter and/or our Products Purchase Agreement with DaVita, which would allow them to exercise various remedies under those agreements. In addition, we may face decreased demand for our concentrates portfolio if dialysis patients are unable to travel to dialysis clinics or if dialysis patients are found to be disproportionally affected by COVID-19 due to their heightened risk associated with their disease. We have had an increase in costs associated with COVID-19 including costs associated with hazard pay, costs for PPE and costs for cleaning and increased labor costs due to the reluctance of workers to return to work. These increased costs have impacted the profitability of our concentrates portfolio. Given the uncertainty surrounding COVID-19, we may continue to incur these additional costs which in turn may have an impact upon our profitability. The COVID-19 pandemic continues to evolve rapidly. The ultimate impact of the COVID-19 pandemic or a similar public health emergency is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems, or the global economy as a whole. However, any one or a combination of these events could have an adverse effect on the operation of and results from our clinical trials and on our other business operations, which could negatively impact our business, operating results and financial condition. The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable. Our inability to obtain regulatory approval for our future FPC pipeline product candidates would substantially harm our business. The time required to obtain approval from the FDA and comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s development and may vary among jurisdictions. For example, although we have filed an IND for FPC in the home infusion setting and we have an FPC product that has been approved in other settings, if the FDA were to impose additional requirements in the home infusion setting that would result in significant additional expense or a significant administrative burden, we may have to forgo our pursuit of that indication. It is possible that none of our FPC pipeline product candidates will ever obtain regulatory approval. Our future product candidates could fail to receive regulatory approval from the FDA or comparable foreign regulatory authorities for many reasons. If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of the product candidate. We may be affected materially and adversely by increases in raw material and transportation costs. A significant portion of our costs relates to chemicals and other raw materials, which are subject to price volatility based on demand and are highly influenced by the overall level of economic activity in the United States and abroad. These costs have tended to rise from year to year and are likely to continue to rise in the future. Under the Distribution Agreement with Baxter, such cost inflation may result in increases in the prices we charge Baxter. If these increases exceed levels specified in the Distribution Agreement, Baxter has the option to terminate the Distribution Agreement and obtain a refund of a portion of the fees (as a Refund Trigger Event) we received from Baxter. Any such termination or refund could have a material adverse effect on our business, results of operations, financial position and cash flows. Additionally, the Second Amendment to our Distribution Agreement with Baxter, established a cap on the percentage amount that we receive in reimbursement for transportation expenses. This reimbursement cap could result in Rockwell not being able to obtain the full amount of our transportation costs. We have also been adversely affected by a general shortage in commercial truckers in the United States and significant increases in fuel costs, both of which are subject to the cap on transportation costs. This has negatively impacted and may continue to negatively impact our profit margins as we pay higher costs to ship products to our customers. Continued increases in shipping costs, the costs of raw materials, or increases in 34 transportation costs that are not reimbursed due to the cap on expenses with Baxter has and could continue to negatively impact our profit margins, as we may be limited in our ability to pass these costs along to our customers. In addition, one of the most expensive components of our dialysis solutions is pharmacopeia grade salt. Pharmacopeia grade salt is primarily manufactured domestically by two suppliers. It was announced in September 2020 that our primary supplier of pharmacopeia, one of our largest suppliers of pharmacopeia grade salt, is merging with the other primary manufacturer of pharmacopeia grade salt which could have an effect of our costs of raw material. Our Loan Agreement with Innovatus contains certain covenants that could adversely affect our operations and, if an event of default were to occur, we could be forced to repay the outstanding indebtedness sooner than planned and possibly at a time when we do not have sufficient capital to meet this obligation. The occurrence of any of these events could cause a significant adverse impact on our business, prospects and share price. Pursuant to the Loan Agreement, we have pledged substantially all of our assets and the assets of our subsidiary, Rockwell Transportation, Inc., and have agreed that we may not sell or assign rights to our patents and other intellectual property without the prior consent of Innovatus. Additionally, the Loan Agreement contains affirmative, including financial covenants related to liquidity and trailing twelve months sales of Triferic, and negative covenants that, among other things, restrict our ability to: • incur additional indebtedness; • grant liens; • make distributions, including dividends; • enter into a merger or consolidation; • alter the business of the Company; or • sell all or a portion of the Company’s property, business or assets. These terms of the Loan Agreement could prevent us from taking certain actions without the consent of our lenders, which may limit our flexibility in operating our business and our ability to take actions that might be advantageous to us and our stockholders, placing us at a competitive disadvantage compared to our competitors who have less leverage and who therefore may be able to take advantage of opportunities that our leverage prevents us from exploiting. These covenants could also limit our ability to make needed capital expenditures or otherwise conduct necessary or desirable business activities. 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. Because our Triferic sales would not have met the threshold required at the September 30, 2021 measurement date, we entered into an amendment to our Loan Agreement through which we were able to cure the potential default in exchange for our payment of an aggregate principal amount of $7.5 million in ten consecutive equal monthly installments commencing on December 31, 2021. The Loan Agreement also includes customary events of default, including, among other things, a change of control or a failure to comply with certain of the covenants in the Loan Agreement. Upon the occurrence and continuation of an event of default, all amounts due under the Loan Agreement become (in the case of a bankruptcy event), or may become (in the case of all other events of default and at the option of Innovatus), immediately due and payable. If an event of default under the Loan Agreement should occur, we could be required to immediately repay the outstanding indebtedness. If we are unable to repay this debt, the lenders would be able to foreclose on the secured collateral, including our cash accounts, and take other remedies permitted under the Loan Agreement. Even if we are able to repay the indebtedness on an event of default, the repayment of these sums may significantly reduce our working capital and impair our ability to operate as planned. The occurrence of any of these events could cause a significant adverse impact on our business and financial condition. We may fail to qualify for continued listing on Nasdaq, which could make it more difficult for our stockholders to sell their shares. 35 Our common stock, par value $0.0001 per share (the “Common Stock”) is listed on The Nasdaq Global Market and therefore we are required to satisfy the continued listing requirements of Nasdaq for inclusion in the Global Market to maintain such listing, including, among other things, the maintenance of a minimum closing bid price of $1.00 per share and either (i) a market value of listed securities of at least $50 million, (ii) stockholders’ equity of at least $10 million or (iii) total assets and total revenue in the most recent fiscal year (or two of the three most recent fiscal years) of at least $50 million. On June 11, 2021, we received a notice from Nasdaq that we were not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global Market. Nasdaq Listing Rule 5450(a)(1) requires listed securities maintain a minimum closing bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum closing bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. The notification of noncompliance had no immediate effect on the listing or trading of our Common Stock on the Global Market and we have 180 days, or until December 8, 2021, to achieve compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days at any time prior to December 8, 2021. In the event that we do not regain compliance with the Nasdaq’s Listing Rules prior to the expiration of the grace period or fail to obtain an extension of time to regain compliance, we expect to receive written notification that our Common Stock is subject to delisting. If we receive such a delisting notification, we may either apply for listing on The Nasdaq Capital Market, provided we meet the continued listing requirements of that market, or appeal the decision to a Nasdaq Hearings Panel. In the event of an appeal, our Common Stock would remain listed on The Nasdaq Global Market pending a decision by the panel following the hearing. There can be no assurance that we will be able to regain compliance with the continued listing requirements. If our Common Stock is delisted by Nasdaq, we could face significant material adverse consequences, including: • a limited availability of market quotations for our Common Stock; • reduced liquidity with respect to our Common Stock; • a determination that our shares are “penny stock,” which will require brokers trading in our shares to adhere to more stringent shares, and which may limit demand for our Common Stock among certain investors; • a limited amount of news and analyst coverage for our company; and • a decreased ability to issue additional securities or obtain additional financing in the future. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable.