ROCKWELL MEDICAL, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our current plans, forecasts, estimates and beliefs and involve risks and uncertainties. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Our actual results, outcomes and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section titled “Forward-Looking Statements” and “Risk Factors.” We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Annual Report. Forward-looking statements are not historical facts, reflect our current views with respect to future events, and apply only as of the date made. We do not intend, and undertake no obligation, to update these forward-looking statements, except as required by law. Unless the context requires otherwise, references to “we,” “our,” “us,” “the Company,” "Rockwell," “Rockwell Medical,” and other similar terms refer to Rockwell Medical, Inc., together with its consolidated subsidiaries. Overview Rockwell Medical is a healthcare company that develops, manufactures, commercializes, and distributes a portfolio of hemodialysis products for dialysis providers worldwide. The Company is a leading supplier of liquid and dry, acid and bicarbonate concentrates for dialysis patients in the United States. Hemodialysis is the most common form of end-stage kidney disease treatment and is typically performed in freestanding outpatient dialysis centers, hospital-based outpatient centers, skilled nursing facilities, or a patient’s home. This represents a large market opportunity for which we believe Rockwell's products are well-positioned to meet the needs of patients. Rockwell manufactures hemodialysis concentrates at its facilities in Michigan, South Carolina, and Texas. The Company delivers the majority of its hemodialysis concentrates products and mixers to dialysis clinics throughout the United States and internationally, utilizing its own delivery trucks and third-party carriers. Rockwell has developed a core expertise in manufacturing and delivering hemodialysis concentrates, and has built a longstanding reputation for reliability, quality, and excellent customer service. Rockwell provides the hemodialysis community with products controlled by a Quality Management System regulated by the U.S. Food and Drug Administration ("FDA"). Rockwell is ISO 13485 Certified and adheres to current Good 33 Table of Contents Manufacturing Practices ("cGMP") and the Association for Advancement of Medical Instrumentation ("AAMI") standards. On July 10, 2023, the Company executed and consummated the transactions contemplated by an Asset Purchase Agreement (the "Purchase Agreement") with Evoqua Water Technologies LLC ("Evoqua") (the “Evoqua Asset Acquisition”). Subject to the terms and conditions of the Purchase Agreement, at the closing of the transaction (the “Closing”), the Company purchased customer relationships, equipment and inventory from Evoqua, which were related to the manufacturing agreement ("CMA") with a third-party contract manufacturing organization ("CMO") located in Minnesota. Total consideration was $17.4 million, comprising a cash payment at Closing of $12.4 million (inclusive of transaction costs) and two $2.5 million deferred payments. On July 12, 2024, the Company and Evoqua executed an amendment to the Purchase Agreement (the "First Amendment"), which stipulated that the first deferred payment would be partially offset by $0.3 million to reimburse the Company for certain expenses incurred following the close of the Evoqua Asset Acquisition and split the first deferred payment into four quarterly installments to be paid through April 2025. The First Amendment also split the second deferred payment into four quarterly installments to be paid from July 2025 through April 2026. See Note 4 to our consolidated financial statments included in this Annual Report on Form 10-K for additional information. The CMA with the CMO expired on December 31, 2024 after which the Company will only manufacture Rockwell Medical hemodialysis concentrates through its own facilities. Prior to the expiration of the CMA, the Company transitioned customer relationships acquired through the Purchase Agreement over to Rockwell Medical's hemodialysis concentrates products. On August 7, 2023, Rockwell was informed by Wanbang Biopharmaceuticals Co., Ltd. (“Wanbang”), the Company’s commercialization partner in China for Triferic, that the main efficacy results of Wanbang’s clinical trial for Triferic (dialysate) compared with placebo were not obtained and Wanbang will not bring the product forward to registration. As a result, the remaining $2.1 million of deferred license revenue was recorded into revenue, and the related portion of long-term inventory of $1.1 million was reserved. On September 18, 2023, Rockwell and DaVita, Inc. (“DaVita”) entered into an Amended and Restated Products Purchase Agreement (the "Amended Agreement"), which amended and restated the Product Purchase Agreement, dated July 1, 2019, as amended, under which the Company supplies DaVita with certain dialysis concentrates. Under the Amended Agreement, the Company and DaVita agreed to an increase in product pricing, effective September 1, 2023 and a one-time payment of $0.4 million to Rockwell on or after December 1, 2023. The term of the Amended Agreement was scheduled to expire on December 31, 2024. Prior to the expiration, the Company received written notice from DaVita, notifying the Company that DaVita intended to extend the term of the Amended Agreement through December 31, 2025 (the "Extension Term"). Product pricing was increased for the Extension Term. DaVita subsequently indicated that it will completely transition to another supplier by mid-2025, subject to further discussions between Rockwell and DaVita, which are ongoing. We believe that this will result in the loss of almost half of our sales volume and $34 million in revenue compared to 2024. See Note 3 to our consolidated financial statements included in this Annual Report on Form 10‑K for additional information. On January 2, 2024, the Company's Loan and Security Agreement (the “Loan Agreement”) with Innovatus Life Sciences Lending Fund I, LP (“Innovatus”) was amended to include, among other things, an interest-only period for 30 months, or up to 36 months if certain conditions are met, and extend the maturity date to January 1, 2029. The Company satisfied those conditions and will now make interest-only payments for the full 36 months. See Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. On August 21, 2024, the Company entered into a distribution agreement with Nipro Medical Corporation ("Nipro"), a subsidiary of Nipro Corporation Japan and a leader in the global healthcare and medical device industry, under which Rockwell Medical supplies Nipro with the Company's liquid and dry acid and bicarbonate hemodialysis concentrates, as well as its dry acid concentrates mixer, for which Nipro has the right to distribute the Company's products globally, excluding the United States. The Nipro Agreement will remain in effect for two years with the option to extend the agreement for an additional one-year period. Nipro is the primary distributor of our dialysis concentrates in certain countries in Latin America. On December 16, 2024, the Company entered into a product purchase agreement (the "Fresenius Agreement") with Fresenius Medical Care NA (“Fresenius”), the world's leading provider of dialysis products and services, under which the Company supplies Fresenius with the Company's liquid bicarbonate hemodialysis concentrates product, SteriLyte. The Fresenius Agreement will remain in effect for three years with the option to renew for two additional one-year periods. Additionally, during the year ended December 31, 2024, Rockwell Medical entered into several other multi-year product purchase agreements, which include supply and purchasing commitments from certain parties. These agreements were with, but not limited to: HydroCare, a leading provider of state-of-the-art dialysis water systems to healthcare facilities globally; Nephro Group Dialysis Centers, the largest dialysis provider in the Philippines; one of the largest health systems in the Mountain West region of the United States; BioNuclear, a distributor of Rockwell's hemodialysis concentrates products within 34 Table of Contents the Dominican Republic; and Atlantic Medical International, Bermuda's leading supplier of medical products and equipment for the acute and continuing care markets. Results of Operations The following table summarizes our operating results for the periods presented below (dollars in thousands): For the Year Ended December 31, 2024 % of Revenue 2023 % of Revenue % Change Net Sales $ 101,489 $ 83,612 21.4 % Cost of Sales 84,005 82.8 % 74,908 89.6 % 12.1 % Gross Profit 17,484 17.2 % 8,704 10.4 % 100.9 % Research and Product Development 19 — % 1,107 1.3 % (98.3) % Selling and Marketing 2,749 2.7 % 2,125 2.5 % 29.4 % General and Administrative 14,108 13.9 % 12,142 14.5 % 16.2 % Operating Income (Loss) $ 608 0.6 % $ (6,670) (8.0) % (109.1) % Net Sales During the year ended December 31, 2024, our net sales were $101.5 million compared to net sales of $83.6 million during the year ended December 31, 2023. Product revenue for the year ended December 31, 2024 was $101.4 million compared to product revenue of $79.8 million for the year ended December 31, 2023. The increase of $21.6 million was primarily due to $6.2 million from customers added through the Evoqua Asset Acquisition, $6.4 million from a special large order of premium-priced product by DaVita, as well as $9.1 million of increased sales and price increases to existing customers. Net sales of non-product revenue were not material during the year ended December 31, 2024 compared to $3.8 million during the year ended December 31, 2023, which was the result of $2.3 million and $1.5 million of deferred license revenue recognition related to the terminations of distribution and license agreements with Wanbang and Baxter Healthcare Corporation ("Baxter") (respectively, the “Wanbang Agreement” and the “Baxter Distribution Agreement”) during the year ended December 31, 2023. Cost of Sales and Gross Profit Cost of sales during the year ended December 31, 2024 was $84.0 million, resulting in gross profit of $17.5 million, compared to cost of sales of $74.9 million and a gross profit of $8.7 million during the year ended December 31, 2023. Gross profit increased by $8.8 million during the year ended December 31, 2024 compared to the year ended December 31, 2023 driven by $9.6 million of improved gross margin to existing customers driven primarily by price increases, $1.8 million from a special large order of premium-priced product by DaVita, partially offset by $1.5 million and $1.1 million of gross profit for the year ended December 31, 2023 associated with deferred license revenue recognition related to the terminations of the Baxter Distribution Agreement and the Wanbang Agreement, respectively. Research and Product Development Expense Research and product development expenses were $19,000 for the year ended December 31, 2024 compared with $1.1 million during the year ended December 31, 2023. The decrease of $1.1 million is due to the decision to pause all research and development related to Triferic in 2023. Approximately 37% of research and development expenses for the year ended December 31, 2023 were comprised of severance costs. Selling and Marketing Expense Selling and marketing expenses were $2.7 million during the year ended December 31, 2024 compared with $2.1 million during the year ended December 31, 2023. The increase of $0.6 million is primarily due to higher employee compensation expenses. 35 Table of Contents General and Administrative Expense General and administrative expenses were $14.1 million during the year ended December 31, 2024 compared with $12.1 million during the year ended December 31, 2023. The $2.0 million increase was primarily due to $1.5 million of additional compensation expense, $0.2 million of increased administrative costs and $0.3 million increase in amortization of intangible assets. Other Expense Total other expense for the years ended December 31, 2024 and December 31, 2023 was $1.1 million and $1.8 million, respectively, which was driven by interest expense of $1.3 million and $2.3 million for the years ended December 31, 2024 and December 31, 2023, respectively, related to our debt facility (See Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information on our debt facility), partially offset by $0.1 million and $0.2 million of interest income, respectively, as well as realized gains on available-for-sale of investments of $0.1 million and $0.3 million, respectively. 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. On December 31, 2024, we had an accumulated deficit of approximately $397.7 million and stockholders’ equity of $32.6 million. As of December 31, 2024, we had approximately $21.6 million of cash, cash equivalents and investments available-for-sale, and working capital of $22.9 million. Net cash provided by operating activities for the year ended December 31, 2024 was approximately $4.2 million. On July 10, 2023, Armistice Capital Master Fund Ltd. (“Armistice”) exercised its warrant to purchase 9,900,990 shares of common stock with an exercise price of $1.39 per share (the "Prior Warrant") and the Company received gross proceeds of approximately $13.8 million. See Note 12 to the consolidated financial statements included elsewhere in this Form 10-K for further details. On July 10, 2023, the Company completed the Evoqua Asset Acquisition. Total consideration was $17.4 million, comprising a cash payment at Closing of $12.4 million (inclusive of transaction costs) and two $2.5 million deferred payments. On July 12, 2024, the Company and Evoqua executed the First Amendment, which stipulated that the first deferred payment would be partially offset by $0.3 million to reimburse the Company for certain expenses incurred following Closing and split the first deferred payment into four quarterly installments to be paid through April 2025. The First Amendment also split the second deferred payment into four quarterly installments to be paid from July 2025 through April 2026. See Note 4 to our consolidated financial statements statements included in this Annual Report on Form 10-K for additional information. 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 ability to meet our revenue forecasts, including those from DaVita, as well as 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/or debt raises through the equity and capital markets, though there can be no assurance that we will be able to secure additional capital or funding on acceptable terms, or if at all; and (ii) strategic transactions, including potential alliances and collaborations focused on markets outside the United States, as well as potential combinations (including by merger or acquisition) or other corporate transactions. In addition, any debt financing is limited by the terms of our Securities Purchase Agreement with DaVita. Specifically, until DaVita holds less than 50% of its original investment in the Company's Convertible Series X Preferred Stock, 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. We believe our ability to fund our activities in the long term will be highly dependent upon (i) our ability to execute on the growth strategy of our hemodialysis concentrates business and maintain sales with existing customers, (ii) our ability to achieve sustained profitability, including successfully reducing expenses to account for the lost DaVita business, and (iii) our ability to identify, develop, in-license, or acquire new products in developing our renal care product portfolio. All of these strategies are subject to significant risks and uncertainties such that there can be no assurance we will be successful in achieving them. If we are unsuccessful in executing our business plan and 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. 36 Table of Contents Management evaluated its going concern by reviewing the Company's operational plans, which include executing on the projected financial information, including price increases, acquisition of new customers, projected growth of margins and cost containment activities. Based on the currently available working capital and expectation of the ability of management to execute on the Company's operational plans 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. Additionally, the Company's plans may include raising capital, if needed, by using the $21.1 million remaining under our Sales Agreement, dated April 8, 2022, with Cantor Fitzgerald & Co. acting as sales agent (as amended, the “ATM facility”), which provides for the offer and sale of up to an aggregate of $25.0 million of shares of the Company's common stock through the sales agent, or other methods or forms of financings, subject to existing limitations. On January 2, 2024 the Loan Agreement was amended to include, among other things, an interest only period for 30 months, or up to 36 months if certain conditions are met, and extend the maturity date to January 1, 2029. The Company is subject to certain covenants and cure provisions under its Loan Agreement with Innovatus. As of December 31, 2024, the Company is in compliance with all covenants. The Loan Agreement includes a financial covenant that requires actual consolidated revenue from the sale and supply of hemodialysis products for the trailing six-month period (ended on the date when tested), to be not less than 85.0% of the projections for the same period and, beginning with the quarter ending September 30, 2024, actual consolidated revenue from the sale and supply of hemodialysis products for the trailing six-month period (ended on the date when tested), to be not less than 80.0% of the projections for the same period. Because those projections were submitted prior to our becoming aware of DaVita’s intention to completely transition its business to another supplier by mid-2025, we may not be able to satisfy this covenant if we are unable to acquire enough new business to increase our revenue or cure a breach by submitting a new financial plan under which the Company is expected to break even on a cash flow basis prior to Maturity Date in accordance with the A&R Loan Agreement. While we believe we will be able to take actions to satisfy this financial covenant, there can be no assurances. Our inability to satisfy this financial covenant or cure any breach would constitute an event of default. See Note 17 to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Global Economic Considerations The global macroeconomic environment is uncertain and could be negatively affected by, among other things, changes in U.S. trade policies, including tariffs and other trade restrictions or the threat of such actions, instability in the global capital and credit markets, recent bank failures in the United States, supply chain weaknesses, and instability in the geopolitical environment, including as a result of the Russian invasion of Ukraine, the Middle East conflict and other political tensions, and the occurrence of natural disasters and public health crises. Such challenges have caused, and may continue to cause, recession fears, rising interest rates, foreign exchange volatility and inflationary pressures. At this time, the Company is unable to quantify the potential effects of this economic instability on our future operations. 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. Cash Provided By (Used In) Operating Activities Net cash provided by operating activities was $4.2 million for the year ended December 31, 2024 compared to net cash used in operating activities of $9.4 million for the year ended December 31, 2023. The change in cash provided by operating activities during the current period as compared to cash used in operating activities in the prior period was primarily due to (i) a decrease in net loss of approximately $8.0 million, (ii) an increase in cash provided by changes in current balance sheet accounts in the ordinary course of business of approximately $5.7 million, primarily due to increases of $7.3 million from accounts receivable, net and $3.8 million from deferred license revenue, partially offset by decreases of $2.1 million from accounts payable and $1.5 million from inventory and (iii) an increase in cash provided from non-cash adjustments. Cash Used In Investing Activities Net cash used in investing activities was $4.9 million during the year ended December 31, 2024 . The net cash used was due to $5.9 million in purchases of our available-for-sale investments and $1.0 million for the purchase of equipment, offset by proceeds from the sale of our available-for-sale investments of $2.0 million . Net cash used in investing activities was $3.0 million during the year ended December 31, 2023. The net cash used was primarily due to the $12.4 million of cash paid in connection with the Evoqua Asset Acquisition, $5.7 million in purchases 37 Table of Contents of our available-for-sale investments and $0.3 million for the purchase of equipment, offset by proceeds from the sale of our available-for-sale investments of $15.3 million . Cash Provided By Financing Activities Net cash provided by financing activities was $7.3 million during the year ended December 31, 2024. The net cash provided by financing activities was primarily due to the gross proceeds from the issuance of common stock in connection with the ATM facility of $10.2 million, partially offset by the cash paid in connection with the Evoqua Asset Acquisition of $1.6 million during the year ended December 31, 2024 . Net cash provided by financing activities was $11.3 million during the year ended December 31, 2023. The net cash provided by financing activities was primarily due to the net proceeds from issuance of equity securities of $14.9 million, primarily comprised of gross proceeds from the issuance of common stock of $13.8 million in connection with Armistice's exercise of the Prior Warrant, offset by payments on the Company's debt, short term note payable, and finance leases which aggregated $3.5 million during the year ended December 31, 2023 . Contractual Obligations and Other Commitments We generally expect to satisfy our material cash requirements, including contractual obligations and commitments, with cash on hand and cash provided by operating activities. See Notes 14, 15, 16, and 17 to the consolidated financial statements included elsewhere in this Form 10-K for further details. Critical Accounting Estimates and Judgments Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results 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. Certain accounting estimates, including those concerning revenue recognition, impairments of long‑lived assets, and deferred consideration 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 in this Annual Report on Form 10-K. Revenue Recognition The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The core principle of the 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. Deferred License Revenue - Upfront fees received under distribution and license agreements have been deferred as a contract liability. For all existing distribution and license agreements, the distribution and license agreement is not a distinct 38 Table of Contents performance obligation from the underlying product sales. In instances where regulatory approval of the product has not been established and we do 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 the estimated product sales under the agreement occur. 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 and definite-lived intangible assets, 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, 2024 and 2023, 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 customer relationships intangible asset recorded in connection with the Evoqua Asset Acquisition, which is being amortized over 20 years. 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 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.