ROCKWELL MEDICAL, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview and Recent Developments Rockwell Medical is a commercial-stage, biopharmaceutical company developing and commercializing our next-generation parenteral iron technology platform, Ferric Pyrophosphate Citrate ("FPC"), which we believe has the potential to lead to transformative treatments for iron deficiency in multiple disease states, 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 market both products to kidney dialysis centers for their patients receiving dialysis. In late 2021, we filed an IND with the United Stated Food and Drug Administration ("FDA") with the goal to advance our FPC platform strategy by starting a Phase II trial in the second half of 2022 for the treatment of iron deficiency anemia in patients outside of dialysis, who are receiving intravenous ("IV") medications in the home infusion setting. The trend toward providing medical care, including the delivery of infused medications, at home make the home infusion market a rapidly growing area of healthcare. We believe that the home infusion setting is a natural path for expansion of our platform as many of the patients suffer from diseases that are associated with iron deficiency and anemia. In our R&D pipeline, we are also investigating FPC’s impact in the treatment of hospitalized patients with acute heart failure. At Rockwell Medical, we are dedicated to enhancing the currently sub-optimal standard of care for treatment of iron deficiency in acute and chronic disease by leveraging our proprietary FPC platform technology. Our proprietary drug platform, FPC, is a next-generation parenteral iron therapeutic. We believe our FPC platform has several advantages over other parenteral iron therapies. Importantly, it provides iron that is immediately bioavailable for critical body processes once it is administered. It has been demonstrated to be safe and well-tolerated, with a safety profile similar to placebo in clinical trials. Results of Operations The following table summarizes our operating results for the periods presented below (dollars in thousands): 49 Table of Contents For the Year Ended December 31, 2021 % of Revenue 2020 % of Revenue % Change Net Sales $ 61,931 $ 62,197 (0.4) % Cost of Sales 64,351 103.9 % 59,472 95.6 % 8.2 Gross (Loss) Profit (2,420) (3.9) 2,725 4.4 (188.8) Research and Product Development 6,835 11.0 7,092 11.4 (3.6) Selling and Marketing 5,733 9.3 7,871 12.7 (27.2) General and Administrative 15,348 24.8 16,182 26.0 (5.2) Operating Loss $ (30,336) (49.0) % $ (28,420) (45.7) % 6.7 % Net Sales During the year ended December 31, 2021, our net sales were $61.9 million compared to net sales of $62.2 million during the year ended December 31, 2020 . Net sales of hemodialysis concentrates to dialysis providers and distributors in the United States and abroad were $60.8 million for the year ended December 31, 2021 comp ared to $61.1 million f or the year ended December 31, 2020. Net sales of Triferic (dialysate) remained flat at approximately $1.1 million for the years ended December 31, 2021 and 2020. On April 6, 2022, the Company and DaVita entered into an amendment (the "DaVita Amendment") to the Products Purchase Agreement, dated July 1, 2019 under which the Company supplies DaVita with certain dialysis concentrates. Under the DaVita Amendment, the Company and DaVita agreed to a price increase, effective May 1, 2022. Based the DaVita Amendment and assuming steady sales volumes, the Company expects a double digit increase in concentrates revenue year-over-year. Cost of Sales and Gross Profit Cost of sales during the year ended December 31, 2021 was $64.4 million, resulting in gross loss of $2.4 million, compared to cost of sales of $59.5 million and a gross profit of $2.7 million during the year ended December 31, 2020. Gross profit decreased by $5.1 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 due to significant inflationary pressures related to the concentrates segment. The Company has sought to mitigate these inflationary pressures by increasing product costs and by renegotiating certain terms of its supply contract with DaVita in the DaVita Amendment, one of the Company's largest customers, to be able to pass through a significant portion of inflationary costs. As a result of these changes, the Company expects an improvement in margins in 2022 Research and Product Development Expense Research and product development expenses were $6.8 million for the year ended December 31, 2021 compared with $7.1 million during the year ended December 31, 2020. The decrease of $0.3 million is related to timing of costs for clinical trials and other product development expenses for our FPC platform. We are continuing to invest in our medical and scientific programs to support the advancement of our FPC technology platform. Selling and Marketing Expense Selling and marketing expenses were $5.7 million during the year ended December 31, 2021 compared with $7.9 million during the year ended December 31, 2020. The decrease of $2.1 million is du e a decrease in marketing spend for our Triferic products and a headcount reduction. General and Administrative Expense General and administrative expenses were $15.3 million during the year ended December 31, 2021 compared with $16.2 million during the year ended December 31, 2020. The $0.9 million decrease was driven primarily by a decrease in labor of $0.8 million, recruiting of $0.3 million and legal costs of $0.4 million, partially offset by increases to D&O insurance premiums of $0.3 million, FDA fees of $0.2 million, and investor relation costs of $0.1 million. 50 Table of Contents Other Income (Expense) Other income for the year ended December 31, 2021 consisted of $22,000 of interest income. Ot her income for the year ended December 31, 2020 was $246,000, consisting of interest income of $238,000 and $8,000 of realized gains on investments. Other expense for the year ended December 31, 2021 w as $2.4 million, consisting of interest expense related to our debt facility (see Note 15 to the financial statements for more information on our debt facility). Other expense for the year ended December 31, 2020 was $2.7 million, consisting of warrant modification expense of $0.8 million and i nterest expense of $1.9 million related to our debt facility (see Note 15 to the financial statements for more information on our debt facility). Liquidity and Capital Resources Since inception, we have incurred significant net losses and have funded our operations primarily through revenue from commercial products, proceeds from the issuance of debt and equity securities and payments from partnerships. At December 31, 2021, we had an accumulated deficit of approximately $370.1 million and shareholders’ equity of $2.5 million. As of December 31, 2021, we had approximately $22.4 million of cash, cash equivalents and investments available-for-sale, and working capital of $14.3 million. Net cash used in operating activities for the year ended December 31, 2021 was approximately $33.5 million. Prior to filing our Form 10-K for the year ended December 31, 2021, the Company had experienced significant inflationary pressures in its dialysis concentrates business, particularly in recent months, which has resulted in an accelerated operating loss associated with this business line. As a result of these inflationary pressures, and in light of the fact that the Company's concentrates business continued to operate at a loss in 2021, the Company sought to renegotiate certain terms of its supply contracts with the Company’s two largest customers in an effort to allow the Company to stabilize its concentrates business. These factors raised substantial doubt about the Company’s ability to continue as a going concern and depended, in part, on the degree of success in addressing inflationary pressures affecting the Company’s concentrates business, as well as the Company’s ability to contain costs, raise additional working capital and remain in compliance with financial and operating covenants under the Company’s secured loan. On April 6, 2022, the Company entered into the DaVita Amendment, which restructures the supply relationship with DaVita, which management expects to result in improved financial performance of the Company’s concentrates business. The Company also entered into a securities purchase agreement with DaVita, which provides for an investment of up to $15 million in two tranches of $7.5 million each. The first tranche of $7.5 million was funded on April 7, 2022. The second $7.5 million tranche to be funded subject to the Company raising $15 million in additional capital by June 30, 2022. The Company’s existing liquidity, taking into account the two executed agreements described above and implementing increases to product pricing, containing certain costs, and reducing expenses, management believes that the Company has sufficient capital to fund its operations and is sufficient to fund its operations and anticipated capital expenditures for the next 12 months. The Company expects it will require additional capital to sustain its operations and make the investments it needs to execute its strategic plan in developing FPC for iron deficiency anemia in patients undergoing home infusion and for progressing our pipeline development program of new indications for our FPC platform. If the Company is unable to generate sufficient cash flows from operations as described above, the Company will need to obtain additional equity or debt financing. In particular, the DaVita Amendment provides that the Company must raise an additional $15 million equity investment by June 30, 2022 and maintain a minimum cash balance of $10 million, or we will be in default under the Products Purchase Agreement. An event of default could result in termination of that agreement. The Company cannot assume that any additional equity or debt financing will be available on favorable terms, if at all. In addition, any debt financing is limited by the terms of our Securities Purchase Agreement with DaVita. Specifically, until DaVita owns less than 50% of its investment, the Company may only incur additional debt in the form of a purchase money loan, a working capital line of up to $5 million or to refinance existing debt, unless DaVita consents. In addition, the Company is subject to certain covenants and cure provisions under our Loan Agreement with Innovatus. As of the date of this report, the Company believes that it will either be able to satisfy such covenants or, in the event of a breached covenant, exercise cure provisions to avoid an event of default. If we are unable to avoid an event of default, any required repayments could have an adverse effect on our liquidity (See Note 16 to the financial statements for more information on our debt facility). The COVID-19 pandemic and resulting domestic and global disruptions have adversely affected our business and operations, including, but not limited to, our sales and marketing efforts and our research and development activities, and the 51 Table of Contents operations of third parties upon whom we rely. Quarantines, shelter-in-place, executive and similar government orders and the recent surge in infections domestically have negatively impact our sales and marketing activities. Our international business development activities have also be negatively impacted by COVID-19, especially with the recent surge in infections and resulting quarantines or shelter-in-place orders. The COVID-19 pandemic, the recent domestic and international surge in infections and resulting global disruptions have caused significant volatility in financial and credit markets. We have utilized a range of financing methods to fund our operations in the past; however, current conditions in the financial and credit markets may limit the availability of funding, refinancing or increase the cost of funding. Due to the rapidly evolving nature of the global situation, it is not possible to predict the extent to which these conditions could adversely affect our liquidity and capital resources in the future. General The actual amount of cash that we will need to execute our business strategy is subject to many factors, including, but not limited to, the expenses and revenue associated with the commercial operations in the United States and internationally (with partners); the timing and magnitude of cash received from drug product sales; the timing and expenditures associated with the development programs including our FPC technology for home infusion and potentially acute heart failure; and the costs associated with our manufacturing and transportation operations related to our concentrate business. We may elect to raise capital in the future through one or more of the following: (i) equity and debt raises through the equity and capital markets, though there can be no assurance that we will be able to secure additional capital or funding on acceptable terms, or if at all; and (ii) strategic transactions, including potential alliances and collaborations focused on markets outside the United States, as well as potential combinations (including by merger or acquisition) or other corporate transactions. We believe that our ability to fund our activities in the long term will be highly dependent upon 1) our ability to execute on the development of the FPC platform for new therapies, 2) our ability to restructure our other significant commercial contract within our concentrate business, and 3) our ability to find a commercial partner to commercialize and increase adaptation of Triferic (dialysate) and Triferic AVNU. All of these strategies are subject to significant risks and uncertainties such that there can be no assurance that we will be successful is achieving approval of FPC in a new therapeutic area, that we will be successful in restructuring our commercial agreements in our concentrate business or that we will be able to find a commercial partner and have sustained commercial success with Triferic (dialysate) and Triferic AVNU. If our planned clinical program is delayed or fails or our other significant commercial contract in the concentrate business cannot be restructured in way that is beneficial to Rockwell or our if ability to find a commercial partner for Triferic (dialysate) and/or Triferic AVNU should fail, we may be forced to implement cost-saving measures that may potentially have a negative impact on our activities and potentially the results of our research and development programs. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline. Cash Used in Operating Activities Net cash used in operating activities was $33.5 million for the year ended December 31, 2021. The net loss for this period was less than net cash used in operating activities by $0.9 million, which was primarily attributable to non-cash expenses of $4.0 million, consisting primarily of $1.8 million of amortization of the right to use assets, $0.7 million of depreciation and amortization, $0.9 million of stock-based compensation, $0.1 million of inventory reserves, $0.4 million of debt financing cost amortization and accretion of discount, and a $4.8 million net change in assets and liabilities. Net cash used in operating activities was $29.6 million for the year ended December 31, 2020. The net loss for this period was higher than net cash used in operating activities by $1.3 million, which was primarily attributable to non-cash expenses of $4.2 million, consisting primarily of $1.5 million of amortization of the right to use assets, $0.8 million of depreciation and amortization, $0.8 million of warrant modification expense, $0.5 million of stock-based compensation, $0.3 million of inventory reserves, $0.3 million of debt financing cost amortization and accretion of discount, and a $3.0 million net change in assets and liabilities. Cash Provided by (Used in) Investing Activities 52 Table of Contents Net cash provided by investing activities was $0.3 million during the year ended December 31, 2021 . The net cash provided was primarily due to the purchase of investments available-for-sale of $26.1 million, offset by $26.9 million sale of our available-for-sale investments and $0.5 million for the purchase of equipment. Net cash provided by investing activities was $3.2 million during the year ended December 31, 2020. The net cash provided was primarily due to the purchase of investments available-for-sale of $29.3 million, offset by $33.6 million sale of our available-for-sale investments and $1.0 million for the purchase of equipment. Cash (Used in) Provided by Financing Activities Net cash used in financing activities was $2.2 million during the year ended December 31, 2021. The net cash used in was primarily due to payments on the Company's debt and short term note payable. Net cash provided by financing activities was $63.3 million during the year ended December 31, 2020. The net cash provided was primarily due to net proceeds of $40.7 million and $2.3 million from the sale of our common stock in our public offerings and our at-the market offerings, respectively, net proceeds of $21.2 million from our term loan, partially offset by payment of $0.8 million related to a short term note payable. Critical Accounting Estimates and Judgments Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results could differ from these estimates. Changes in estimates are reflected in our financial statements in the period of change based upon on‑going actual experience, trends, or subsequent realization depending on the nature and predictability of the estimates and contingencies. Interim changes in estimates are generally applied prospectively within annual periods. Certain accounting estimates, including those concerning revenue recognition, allowance for doubtful accounts, inventory reserves, share based compensation, impairments of long‑lived assets, and accounting for income taxes, are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgments and estimates. These are described below. For further information on our accounting policies, see Note 3 to our Consolidated Financial Statements. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: • Step 1: Identify the contract with the customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price • Step 4: Allocate the transaction price to the performance obligations in the contract • Step 5: Recognize revenue when the company satisfies a performance obligation Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight related to contracts with customers are accounted for as a fulfillment cost and are included in cost of sales when control of the goods transfers to the customer. Accounts Receivable Accounts receivable are stated at invoice amounts. The carrying amount of trade accounts receivable is reduced by an allowance for doubtful accounts that reflects our best estimate of accounts that may not be collected. We review outstanding trade accounts receivable balances and based on our assessment of expected collections, we estimate the portion, if any, of the 53 Table of Contents balance that may not be collected as well as a general valuation allowance for other accounts receivable based primarily on historical experience. All accounts or portions thereof deemed to be uncollectible are written off to the allowance for doubtful accounts. Inventory Inventory is stated at the lower of cost or net realizable value. Cost is determined on the first‑in first‑out (FIFO) method. Inventory that is not expected to be converted to cash over the next year is classified as non-current. Our policy is to reserve for our drug product inventory that we determine is unlikely to be sold to, or if sold, unlikely to be utilized by our customers on or before its expiration date. Property and Equipment Property and equipment are recorded at cost and are depreciated using the straight‑line method over the useful lives of the assets, which range from three to ten years. Expenditures for routine maintenance and repairs are expensed as incurred. Leasehold improvements are amortized using the straight‑line method over the shorter of the useful lives or the related lease term. Impairment of Long-lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. For the years ended December 31, 2021 and 2020, there were no impairments of long-lived assets. Goodwill and Intangible Assets Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives. We review goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values. Intangible assets with definite lives are amortized over their estimated useful lives. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Definite-lived intangible assets consist of our license fees related to the technology, intellectual property and marketing rights for Triferic covered under certain issued patents have been capitalized and are being amortized over the life of the related patents which is generally 17 years. Deferred Revenue In October of 2014, the Company entered into a 10-year distribution agreement with Baxter and received an upfront fee of $20 million. The upfront fee was recorded as deferred revenue and is being recognized based on the proportion of product shipments to Baxter in each period, compared with total expected sales volume over the term of the Distribution Agreement. The Company recognized revenue of approximately $1.9 million and $2.0 million related to the Baxter agreement for each of the years ended December 31, 2021 and 2020, respectively. In 2016, the Company entered into a distribution and license agreement with Wanbang (the "Wanbang Agreement") and received an upfront fee of $4.0 million. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of approximately $0.2 million for both of the years ended December 31, 2021 and 2020. Deferred revenue related to the Wanbang Agreement totaled $2.5 million and $2.7 million for the years ended December 31, 2021 and 2020, respectively. 54 Table of Contents 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 for both of the years ended December 31, 2021 and 2020. Deferred revenue related to the Sun Pharma Agreement totaled $80,000 and $90,000 as of December 31, 2021 and 2020, respectively. On September 7, 2020, the Company entered into a license and supply agreements with Jeil Pharma (the "Jeil Pharma Agreements"), for the rights to commercialize Triferic (dialysate) (ferric pyrophosphate citrate) in South Korea. Under the terms of the Jeil Pharma Agreements, Jeil Pharma will be the exclusive development and commercialization partner for Triferic (dialysate) in South Korea, and the Company will supply the product to Jeil Pharma. In consideration for the license, the Company received an upfront fee of $0.2 million, and will be eligible for milestone payments and royalties on net sales. A Joint Alliance Committee, comprised of members from the Company and Jeil Pharma, will guide the development and execution for Triferic (dialysate) in South Korea. Jeil Pharma will be responsible for all clinical and regulatory approval, as well as commercialization activities. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of $10,000 and $2,500 during the year ended December 31, 2021 and 2020, respectively. Deferred revenue related to the Jeil Pharma Agreement totaled $187,500 and $197,500 as of December 31, 2021 and 2020, respectively. On June 2021, the Company entered into license and supply agreements with Drogsan Pharma (the "Drogsan Agreements"), for the rights to commercialize Triferic (dialysate) and Triferic AVNU in Turkey. Under the terms of the Drogsan Agreements, Drogsan Pharma will be the exclusive commercialization partner for Triferic (dialysate) and Triferic AVNU in Turkey. In consideration for the license, the Company received an upfront fee of $0.15 million, and will be eligible for milestone payment and royalties on net sales. A Joint Alliance Committee, comprised of members from the Company and Drogsan Pharma, will guide the execution for Triferic (dialysate) and Triferic AVNU in Turkey. Drogsan Pharma will be responsible for all regulatory approval and commercialization activities, and the Company will supply the product to Drogsan Pharma for Turkey. The upfront fee will be recorded as deferred revenue and will be recognized as revenue based on the agreement term. The Company recognized revenue of $7,500 during the year ended December 31, 2021. Deferred revenue related to the Drogsan Agreements totaled approximately $0.1 million as of December 31, 2021. Stock-Based Compensation The Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards. For stock-based compensation awards to non-employees, the Company re-measures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards are recognized as compensation expense in the period of change. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. For the years ended December 31, 2021 and 2020, the Company recorded stock-based compensation expense on its options granted under the Company’s equity compensation plans to its directors and officers, and its employees. Accounting for Income Taxes We estimate our income tax provision to recognize our tax expense and our deferred tax liabilities and assets for future tax consequences of events that have been recognized in our financial statements using current enacted tax laws. Deferred tax assets must be assessed based upon the likelihood of recoverability from future taxable income and to the extent that recovery is not likely, a valuation allowance is established. The allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgment about whether the related deferred tax asset may be realized. These calculations and assessments involve complex estimates and judgments because the ultimate tax outcome can be uncertain and future events unpredictable. If we determine that the deferred tax asset will be realized in the future, it may result in a material beneficial effect on earnings. 55 Table of Contents New Accounting Pronouncements New accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. For further discussion on recent accounting pronouncements, please see Note 3, “ New Accounting Pronouncements ,” to our consolidated financial statements included in this Annual Report on Form 10‑K for additional information. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Per §229.305 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is not required to provide the disclosure required by this Item. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements of the Registrant and other information required by this item are set forth beginning on page F‑1 immediately following the signature page hereof and incorporated herein by reference. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None.