ROCKWELL MEDICAL, INC. - Quarter Report: 2017 March (Form 10-Q)

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

(Mark One)

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to                              

 

Commission File Number: 000-23661

 

ROCKWELL MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

(248) 960-9009

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes  ☐  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒  Yes  ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes  ☒  No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

Rockwell Medical, Inc.

Index to Form 10-Q

 

 

 

Triferic® is a registered trademark of Rockwell.

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

As of March 31, 2017 and December 31, 2016

 

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED INCOME STATEMENTS

 

For the three ended March 31, 2017 and March 31, 2016

 

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

For the three months ended March 31, 2017 and March 31, 2016

 

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

For the three months ended March 31, 2017

 

(Unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the three months ended March 31, 2017 and March 31, 2016

 

(Unaudited)

 

 

Supplemental Cash Flow disclosure

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

Rockwell Medical, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

1.  Description of Business

 

Rockwell Medical, Inc. and Subsidiaries (collectively, “we”, “our”, “us”, or the “Company”) is a fully-integrated pharmaceutical company targeting end-stage renal disease and chronic kidney disease with innovative products for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis.  We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the United States and abroad.

 

We are currently developing unique, proprietary renal drug therapies. These novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience and outcome.  We have obtained global licenses for certain dialysis related drugs which we are developing and planning to market. 

 

We manufacture, sell and distribute hemodialysis concentrates and other ancillary medical products and supplies used in the treatment of patients with End Stage Renal Disease, or “ESRD”.  We supply our products to dialysis providers and distributors who treat patients with kidney disease.  Our concentrate products are used to remove waste and replace needed nutrients in the blood of dialysis patients during their hemodialysis treatment.  We primarily sell our products in the United States.

 

We are regulated by the Federal Food and Drug Administration (“FDA”) under the Federal Drug and Cosmetics Act, as well as by other federal, state and local agencies.  We hold several FDA product approvals including both drugs and medical devices. 

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts for our wholly owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America, or “GAAP,” and with the instructions to Form 10-Q and Securities and Exchange Commission Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

 

In the opinion of our management, all adjustments have been included that are necessary to make the financial statements not misleading. All of these adjustments that are material are of a normal and recurring nature. Our operating results for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017. You should read our unaudited interim financial statements together with the financial statements and related footnotes for the year ended December 31, 2016 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 includes a description of our significant accounting policies.

 

Revenue Recognition

 

Our policy is to recognize revenue consistent with authoritative guidance for revenue recognition including the provisions of the Financial Accounting Standards Board Accounting Standards Codification.   We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

 

Consistent with these guidelines we recognize revenue at the time we transfer title to our products to our customers which generally occurs when our products are delivered to our customer’s location consistent with our terms of sale.  We recognize revenue for international shipments when title has transferred consistent with standard terms of sale.

 

We apply judgment as we analyze each element of our contractual agreements to determine appropriate revenue recognition.  The terms of our contractual agreements may include milestone payments if specified research and development objectives are achieved, non-refundable licensing fees, milestone payments on sales or royalties from product sales.

 

When entering into an arrangement, we first determine whether the arrangement includes multiple deliverables and is subject to the accounting guidance in ASC subtopic 605-25, Multiple-Element Arrangements. If we determine that an arrangement includes multiple elements, we determine whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be measured and allocated among the separate units of accounting. An element qualifies as a separate unit of accounting when the delivered element has standalone value to the customer. Our arrangements do not include a general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combined with other undelivered elements within the arrangement as a single unit of accounting. If the arrangement constitutes a single combined unit of accounting, we determine the revenue recognition method for the combined unit of accounting and recognize the revenue either on a straight-line basis or on a modified proportional performance method over the period from inception through the date the last deliverable within the single unit of accounting is delivered.

 

Non-refundable upfront license fees are recorded as deferred revenue and recognized into revenue over the estimated period of our substantive performance obligations. If we do not have substantive performance obligations, we recognize non-refundable upfront fees into revenue through the date the deliverable is satisfied. Analyzing the arrangement to identify deliverables requires the use of judgment and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. In arrangements that include license rights and other non-contingent deliverables, such as participation in a steering committee, these deliverables do not have standalone value because the non-contingent deliverables are dependent on the license rights. That is, the non-contingent deliverables would not have value without the license rights, and only we can perform the related services. Upfront license rights and non-contingent deliverables, such as participation in a steering committee, do not have standalone value as they are not sold separately and they cannot be resold. In addition, when non-contingent deliverables are sold with upfront license rights, the license rights do not represent the culmination of a separate earnings process. As such, we account for the license and the non-contingent deliverables as a single combined unit of accounting. In such instances, the license revenue in the form of non-refundable upfront payments is deferred and recognized over the applicable relationship period.

 

For milestone payments based on sales and for royalties based on sales, we recognize revenue in the quarter that the information related to the sales becomes available and collectability is reasonably assured.

 

For international license agreements that we have entered into, deferred license revenue is being recognized over the term of the license agreement.

 

The initial payment of $20 million received pursuant to our long-term Exclusive Distribution Agreement (the “Distribution Agreement”) with Baxter Healthcare Corporation (“Baxter”) in October 2014 has been accounted for as deferred license revenue.   Deferred license revenue is being recognized based on the proportion of product shipments to Baxter in each period to total expected sales volume for the term of the agreement. See Note 4 to condensed consolidated financial statements for information related to our ongoing arbitration with Baxter.

 

We recognize other revenues at the time the related fees and or payments are earned.

 

We require certain customers, mostly international customers, to pay for product prior to the transfer of title to the customer.  Deposits received from customers and payments in advance for orders are recorded as liabilities under Customer Deposits until such time as orders are filled and title transfers to the customer consistent with our terms of sale.

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements

in Topic 605,  Revenue Recognition. The standard’s core principle is that a company will recognize revenue when it transfers 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 new guidance is effective for the year beginning January 1, 2018.  The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of evaluating how the new revenue recognition standard could impact the financial statements and disclosures.  For the majority of our sales transactions, the new standard is not expected to significantly change the timing of revenue recognition; however, we are still analyzing our licensing arrangements to determine the impact of the new standard.  The new standard will also require expanded disclosures surrounding revenue in the notes to the financial statements. 

 

Cash and Cash Equivalents

 

We consider cash on hand, money market funds, unrestricted certificates of deposit and short term marketable securities with an original maturity of 90 days or less as cash and cash equivalents.

 

Investments Available for Sale

 

Investments Available for Sale are short-term investments, consisting of investments in short term bond funds, and are stated at fair value based upon observed market prices (Level 1 in the fair value hierarchy).  These funds generally hold high credit quality short term debt instruments.  These instruments are subject to changes in fair market value due primarily to changes in interest rates.  The fair value of these investments was $40,840,581 as of March 31, 2017.  Unrealized holding gains or losses on these securities are included in accumulated other comprehensive income (loss). Realized gains and losses, including declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of other income or expense. Gross unrealized losses were $789,875 as of March 31, 2017. There were no realized gains or losses in the first quarter of 2017.

 

The Company has evaluated the near term interest rate environment and the expected holding period of the investments along with the duration of the fund portfolios in assessing the severity and duration of potential impairments. Based on that evaluation the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.

 

Research and Product Development

 

We recognize research and product development expenses as incurred.  We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products aggregating approximately $1.2 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.

 

Share Based Compensation

 

We measure the cost of employee and non-employee services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards in accordance with ASC 718-10, Compensation — Stock Compensation. The cost of equity based compensation is recognized as compensation expense over the vesting period of the awards.

 

We estimate the fair value of compensation involving stock options utilizing the Black-Scholes option pricing model.  This model requires the input of several factors such as the expected option term, expected volatility of our stock price over the expected option term, and an expected forfeiture rate, and is subject to various assumptions.  We believe the valuation methodology is appropriate for estimating the fair value of stock options we grant to employees and directors which are subject to ASC 718-10 requirements.  These amounts are estimates and thus may not be reflective of actual future results or amounts ultimately realized by recipients of these grants. 

 

Net Earnings Per Share

 

We computed our basic earnings (loss) per share using weighted average shares outstanding for each respective period.  Diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially

dilutive securities, consisting of stock options and common share purchase warrants, unless inclusion would have had an anti-dilutive effect.  The calculation of basic weighted average shares outstanding excludes unvested restricted stock. Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were:

 

 

 

3.  Inventory

 

Components of inventory as of March 31, 2017and December 31, 2016 are as follows:

 

 

 

 

 

4.  Baxter Distribution Agreement

 

As of October 2, 2014, we entered into the Distribution Agreement with Baxter, pursuant to which Baxter became the Company’s exclusive agent for sales, marketing and distribution activities for the Company’s hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years.  The Distribution Agreement does not include any of the Company’s drug products.  The Company retains sales, marketing and distribution rights for its hemodialysis concentrate products in specified foreign countries in which the Company has an established commercial presence. 

 

On September 12, 2016, Baxter initiated an arbitration proceeding against Rockwell in accordance with the International Institute for Conflict Prevention and Resolution, Inc.’s Rules for Non-Administered Arbitration under the Distribution Agreement. Baxter alleges that Rockwell has breached the Distribution Agreement in various respects. Baxter seeks declaratory relief giving Baxter the right to terminate the Distribution Agreement and recover a portion of the upfront fee, injunctive relief to prevent Rockwell from establishing a West Coast facility, and unspecified damages. 

 

Rockwell filed a response denying all of Baxter’s claims of breach and wrongdoing, and has counterclaimed that Baxter is itself in breach of the Distribution Agreement for failing to pay substantial accounts receivable and for repudiating its obligation to pay the West Coast facility fee of up to $10 million.  Rockwell is seeking damages, declaratory, injunctive and other equitable relief, as well as interest, costs and attorney fees. 

 

In addition, in October 2016, Rockwell gave notice to Baxter that it breached the minimum purchase requirement for the contract year ended October 2, 2016 and that Rockwell intended to cause its distribution rights to become non-exclusive unless it cured the shortfall within the 30-day period specified in the Distribution Agreement. Baxter disputed the existence of a breach and failed to cure the deficiency.  Rockwell subsequently provided Baxter with notice of loss of exclusivity due to its failure to cure as provided in the Distribution Agreement.  The determination of whether a breach occurred resulting in a loss of exclusivity and the outcome of the other pending disputes with Baxter will be determined through the arbitration process.  Such arbitration process is anticipated to conclude during the third quarter of 2017.

 

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. References in this report to the “Company,” “we,” “our” and “us” are references to Rockwell Medical, Inc. and its subsidiaries.

 

Forward-Looking Statements

 

We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission, or SEC.  We may also make forward-looking statements in our press releases or other public or shareholder communications.  Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of our operations.  When we use words such as “may,” “might,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “predict,” “forecast,” “projected,” “intend,” or similar expressions, or make statements regarding our intent, belief, or current expectations, we are making forward-looking statements.  Our forward looking statements also include, without limitation, statements about our competitors, statements regarding Triferic and Calcitriol, statements relating to our disputes with Baxter and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.

 

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements.  While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed in this report, “Item 1A — Risk Factors” in our Form 10-K for the year ended December 31, 2016 and from time to time in our other reports filed with the SEC.

 

Risks Related To Our Drug Business

 

 

Risks Related To Our Concentrate Business

 

 

Risks Related To Our Business As A Whole

 

 

Risks Related To Our Common Stock

 

 

   Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flow and financial position.  There can be no assurance that future results will meet expectations.  We do not undertake and expressly disclaim any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

 

 

 

Overview

 

Rockwell is a fully-integrated pharmaceutical company targeting end-stage renal disease and chronic kidney disease with innovative products and services for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis. We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the United States and abroad. We supply approximately 25% of the United States domestic market with dialysis concentrates and we also supply dialysis concentrates to distributors serving a number of foreign countries, primarily in the Americas and the Pacific Rim.  Substantially all of our sales were concentrate products and related ancillary items.

Our business strategy is developing unique, proprietary renal drug therapies that we can commercialize or out-license, while also expanding our dialysis products business. These novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience and outcome.

Triferic is our lead branded drug. We believe it has the potential to capture significant market share due to its improved clinical and cost-saving benefits. Triferic received FDA approval in 2015, and is the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. Triferic was approved, effective January 1, 2016, for Medicare reimbursement within the standard “bundle”.  About that time, we began pursuit of transitional add-on reimbursement status for Triferic, which is available for new, innovative therapies for a period of two years. Although we cannot be certain, we believe that Triferic will ultimately receive transitional add-on reimbursement status, which offers greater incentive for dialysis providers to adopt new, innovative therapies. 

Until the add-on reimbursement status issue is resolved for Triferic, we do not anticipate realizing significant revenues from it. In the meantime, we continue to make great progress in educating our customers about Triferic, and the valuable benefits it delivers by improving patient outcomes and lowering costs. We are very pleased with the favorable response, and the positive clinical findings that are being reported from dialysis providers using Triferic through our drug sample program. Our marketing and selling efforts to nephrologists and nurses, as well as to patients, are being received favorably.  We have built up a significant inventory of Triferic and the active pharmaceutical ingredient of Triferic in anticipation of receiving transitional add-on reimbursement status.  If we are unable to successfully commercialize Triferic and achieve sufficient sales volumes over the next one to two years, we may have to write off a portion of our inventory investment in Triferic, which would have an adverse effect on our results of operations. 

Our global strategy is to license Triferic to key partners to commercialize internationally. Additionally, we are continuing development work on other clinical indications related to iron deficiency that address unmet patient needs and we are evaluating opportunities to in-license other products that will complement our product portfolio. 

We are also working to produce sufficient inventory to begin marketing Calcitriol, our generic injectable vitamin-D analogue, through  contract manufacturing organizations (“CMOs”) but have had delays due to difficulties they are having manufacturing Calcitriol within specification.  We are working to obtain FDA approval of a prior approval supplement for a manufacturing change with our CMO.  Assuming timely approval by the FDA, we currently expect Calcitriol to be available for marketing later in 2017.

Rockwell sells its dialysis concentrates in the United States and certain foreign markets under the Distribution Agreement with Baxter.  Rockwell receives a pre-defined gross profit margin on its concentrate products sold pursuant to the Distribution Agreement, subject to an annual true-up. Baxter and Rockwell have each alleged breaches by the other under the Distribution Agreement that are the subject of a pending arbitration proceeding discussed in more detail under Note 4 to the condensed consolidated financial statements and “Item 3 Legal Proceedings” in the Company’s Form 10-K for the year ended December 31, 2016.  

 

Results of Operations for the Three Months Ended March 31, 2017 and March 31, 2016

 

Sales

 

Our sales in the first quarter of 2017 were $14.6 million, an increase of $1.0 million or 7.1% from the first quarter of 2016.  We realized increased sales in our domestic concentrate business of $1.0 million due to higher unit volumes including $0.6 million in orders from Baxter in the first quarter of 2017 that were not from recurring customer demand from which we would expect future orders.  Our international sales were $0.1 million lower than the first quarter of 2016.  

 

Until the Triferic reimbursement issue is resolved, we expect Triferic sales will not be significant. We recognized $0.1 million in drug business revenue related to Triferic licensing agreements in the first quarter of 2017.  Our drug business revenue was not otherwise significant in the first quarter of 2017 or 2016.

 

Gross Profit

 

Gross profit in the first quarter of 2017 was $2.4 million which was $0.7 million higher than in the first quarter of 2016.  The increase was due to higher sales in the first quarter of 2017 compared to the first quarter of last year, coupled with lower direct costs in our drug business.  The lower costs in 2017 were primarily a result of the payment of $0.3 million in value added taxes paid in 2016 related to the licensing payments received following execution of our license agreement with Wanbang Biopharmaceutical Co., Ltd. (“Wanbang”).

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense during the first quarter of 2017 was $6.1 million compared to $5.0 million in the first quarter of 2016.  The $1.1 million increase in expense was primarily due to $0.9 million in higher legal costs relating to increased litigation involving the Company and higher costs for the 2017 annual meeting.  The increase was also due to increased marketing costs for Triferic of $0.2 million compared to the first quarter of 2016.  A reduction in equity compensation costs of $0.4 million was partially offset by higher compensation and benefit costs of $0.3 million.

 

Research and Product Development Expense

 

We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic, aggregating approximately $1.2 million and $1.3 million in the first quarters of 2017 and 2016, respectively. Costs incurred in the 2017 and 2016 periods were largely related to Triferic testing for use in other indications and other presentations.

 

Interest and Investment Income, Net

 

Our net interest and investment income in the first quarter of 2017 was consistent with the first quarter of 2016. 

 

Income Tax Expense

 

We recognized no income tax expense in the first quarter of 2017 compared to approximately $0.4 million in income tax expense in the first quarter of 2016, which  pertained to foreign income taxes paid related to license payments received under the Wanbang license agreement.

 

 

Liquidity and Capital Resources

 

We believe we have adequate capital resources and substantial liquidity to pursue our business strategy. In addition to operating our concentrate business, our strategy is centered on developing, marketing and licensing high potential drug products including Triferic.

As of March 31, 2017, we had current assets of $74.8 million and net working capital of $64.4 million. We have approximately $52.7 million in cash and investments as of March 31, 2017. Our uses of cash have primarily been for research and product development, investments in inventory to support our drug product launches and for operating expenses.  Operating activities used $5.2 million of cash in the first quarter of 2017, which included research and development expenses of $1.2 million and an increase of $2.3 million in inventory levels.  We significantly increased our Triferic inventory over the last year in preparation for commercializing Triferic and believe we have adequate inventory to meet anticipated requirements.  We have classified $2.8 million of Triferic’s active pharmaceutical ingredient as non-current inventory as of March 31, 2017.  Our capital expenditures were $0.2 million in the first quarter of 2017.

We anticipate that we will increase our accounts receivable as we increase our drug product sales and we may also increase inventories to a more modest degree as we commercialize Triferic and Calcitriol. We also expect to invest in research and product development throughout 2017 as we work to expand potential uses for Triferic.  We believe that we have adequate capital resources to make these investments in accounts receivable, inventory and research and product development. We expect to generate positive cash flow from operations upon increased sales of our drug products. 

Future research and product development spending on the Triferic platform is expected to include clinical testing in connection with peritoneal dialysis, an orphan drug indication, pediatric indications and certain other indications. Future spending on such indications is expected to be minor in relation to the Company’s cash resources.

We have no long term debt as of March 31, 2017 and do not expect to incur interest expense in 2017.  Capital expenditures on our current facilities are not expected to materially exceed depreciation expense. 

The Company is in discussions with multiple potential business development partners to out‑license rights to Rockwell’s drug products outside the United States. Such licensing arrangements often include upfront fees, developmental milestone payments and royalties. If such licensing arrangements are negotiated for certain markets, we may receive such consideration in the future in addition to that which we are already entitled to receive under existing agreements.  We are also considering other business development arrangements including joint ventures, partnerships and other transactions related to our products or other future products that we may develop or license.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

We have invested $40.8 million in available for sale securities that are invested in short term bond funds which typically yield higher returns than the interest realized in money market funds. While these funds hold bonds of short duration, their market value is affected by changes in interest rates. Increases in interest rates will reduce the market value of bonds held in these funds and we may incur unrealized losses from the reduction in market value of the fund. If we liquidate our position in these funds, those unrealized losses may result in realized losses which may or may not exceed the interest and dividends earned from those funds. However, due to the short duration of these short term bond fund portfolios, we do not believe that a hypothetical 100 basis point increase or decrease in interest rates will have a material impact on the value of our investments.

 

Foreign Currency Exchange Rate Risk

 

Our international business is conducted in U.S. dollars. It has not been our practice to hedge the risk of appreciation of the U.S. dollar against the predominant currencies of our trading partners. We have no significant foreign currency exposure to foreign supplied materials, and an immediate 10% strengthening or weakening of the U.S. dollar would not have a material impact on our shareholders’ equity or net income.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, as amended, that are designed to ensure that 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 Securities and Exchange Commission’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 for 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.

 

As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION 

 

Item 1.  Legal Proceedings

 

Richmond/Ravich Litigation

On March 8, 2017, Rockwell filed suit in the United States District Court for the Eastern District of Michigan against Richmond Brothers, Inc. and certain related entities, David S. Richmond, Mark H. Ravich and certain related trusts, Matthew J. Curfman, and certain other individual investors (the “Richmond Shareholders”). The complaint alleges that the Richmond Shareholders failed to timely file a Schedule 13D and that they made various material misstatements in a Schedule 13G and Schedule 13D that they filed.  Rockwell is seeking declaratory and injunctive relief relating to alleged violations of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder by the Securities and Exchange Commission, including among other things, precluding the Richmond Shareholders from (i) soliciting or contacting Rockwell shareholder in connection with efforts to nominate or elect directors to Rockwell’s board until 30 days after they file an appropriate and complete Schedule 13D and (ii) voting Rockwell common stock until 30 days after they file an appropriate and complete Schedule 13D.  The court held a hearing on May 3, 2017 on Rockwell’s request for a preliminary injunction and a decision is currently pending.

 

 

Other Proceedings

There were no material developments during the three months ended March 31, 2017 in the Baxter arbitration disclosed in the Company’s Form 10-K for the year ended December 31, 2016.  We are involved in certain other legal proceedings from time to time before various courts and governmental agencies. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of these pending proceedings is not expected to have a material effect on our operations or consolidated financial statements in the period in which they are resolved.

 

 

 

 

Item 6. Exhibits

 

See Exhibit Index following the signature page, which is incorporated herein by reference.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

10-Q EXHIBIT INDEX

 

The following documents are filed as part of this report or were previously filed and incorporated herein by reference to the filing indicated. Exhibits not required for this report have been omitted. Our Commission file number is 000-23661.