ROCKWELL MEDICAL, INC. - Quarter Report: 2023 September (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 September 30, 2023
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)
| Delaware | 38-3317208 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
30142 S. Wixom Road, Wixom, Michigan | 48393 | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(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 every Interactive Data File required to be submitted 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 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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||||||||||||
| Common Stock, par value $0.0001 | RMTI | Nasdaq Capital Market | ||||||||||||
The number of shares of common stock outstanding as of November 10, 2023 was 28,489,663.
Rockwell Medical, Inc. and Subsidiaries
Index to Form 10-Q
| Page | |||||
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Par Value Amounts)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and Cash Equivalents | $ | 7,759 | $ | 10,102 | |||||||
| Investments Available-for-Sale | 3,971 | 11,390 | |||||||||
| Accounts Receivable, net | 9,361 | 6,259 | |||||||||
| Inventory, net | 5,486 | 5,814 | |||||||||
| Prepaid and Other Current Assets | 1,596 | 1,745 | |||||||||
| Total Current Assets | 28,173 | 35,310 | |||||||||
| Property and Equipment, net | 6,771 | 2,194 | |||||||||
| Inventory, Non-Current | 178 | 1,276 | |||||||||
| Right of Use Assets-Operating, net | 3,095 | 3,943 | |||||||||
| Right of Use Assets-Financing, net | 2,044 | 2,468 | |||||||||
| Intangible Asset, net | 10,897 | — | |||||||||
| Goodwill | 921 | 921 | |||||||||
| Other Non-Current Assets | 527 | 523 | |||||||||
| Total Assets | $ | 52,606 | $ | 46,635 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Accounts Payable | $ | 3,929 | $ | 4,053 | |||||||
| Accrued Liabilities | 6,708 | 7,702 | |||||||||
| Deferred Consideration - Current | 2,500 | — | |||||||||
| Lease Liabilities-Operating - Current | 1,529 | 1,483 | |||||||||
| Lease Liabilities-Financing - Current | 550 | 522 | |||||||||
| Deferred License Revenue - Current | 46 | 1,731 | |||||||||
| Term Loan - Current - Net of Issuance Costs | 5,631 | 1,631 | |||||||||
| Insurance Financing Note Payable | 488 | 503 | |||||||||
| Customer Deposits | 27 | 66 | |||||||||
| Total Current Liabilities | 21,408 | 17,691 | |||||||||
| Lease Liabilities-Operating - Long-Term | 1,676 | 2,581 | |||||||||
| Lease Liabilities-Financing - Long-Term | 1,672 | 2,088 | |||||||||
| Term Loan - Long-Term, net of issuance costs | 3,331 | 7,555 | |||||||||
| Deferred License Revenue - Long-Term | 487 | 2,600 | |||||||||
| Deferred Consideration - Long-Term | 2,500 | — | |||||||||
| Long Term Liability - Other | 14 | 14 | |||||||||
| Total Liabilities | 31,088 | 32,529 | |||||||||
3
| September 30, 2023 | December 31, 2022 | ||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred Stock, $0.0001 par value, 2,000,000 shares authorized; 15,000 shares issued and outstanding at September 30, 2023 and December 31, 2022 | — | — | |||||||||
Common Stock, $0.0001 par value; 170,000,000 shares authorized; 28,489,663 and 12,163,673 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 3 | 1 | |||||||||
| Additional Paid-in Capital | 417,133 | 402,701 | |||||||||
| Accumulated Deficit | (395,686) | (388,759) | |||||||||
| Accumulated Other Comprehensive Income | 68 | 163 | |||||||||
| Total Stockholders’ Equity | 21,518 | 14,106 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 52,606 | $ | 46,635 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts)
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Net Sales | $ | 23,771 | $ | 18,691 | $ | 61,519 | $ | 53,497 | |||||||||||||||
| Cost of Sales | 21,569 | 17,914 | 55,685 | 51,760 | |||||||||||||||||||
| Gross Profit | 2,202 | 777 | 5,834 | 1,737 | |||||||||||||||||||
| Research and Product Development | 494 | 469 | 939 | 2,963 | |||||||||||||||||||
| Selling and Marketing | 556 | 762 | 1,584 | 1,743 | |||||||||||||||||||
| General and Administrative | 2,889 | 3,254 | 9,434 | 11,845 | |||||||||||||||||||
| Operating Loss | (1,737) | (3,708) | (6,123) | (14,814) | |||||||||||||||||||
| Other (Expense) Income | |||||||||||||||||||||||
| Realized Gain on Settlement of Investments | 220 | — | 220 | 4 | |||||||||||||||||||
| Interest Expense | (411) | (476) | (1,193) | (1,497) | |||||||||||||||||||
| Interest and Other Income (Expense) - net | 56 | (6) | 169 | (10) | |||||||||||||||||||
| Total Other Expense, net | (135) | (482) | (804) | (1,503) | |||||||||||||||||||
| Net Loss | $ | (1,872) | $ | (4,190) | $ | (6,927) | $ | (16,317) | |||||||||||||||
| Basic and Diluted Net Loss per Share | $ | (0.07) | $ | (0.23) | $ | (0.32) | $ | (1.26) | |||||||||||||||
| Basic and Diluted Weighted Average Shares Outstanding * | 27,521,088 | 18,463,673 | 21,526,978 | 12,902,890 | |||||||||||||||||||
* See Note 3 for more detail related to Basic and Diluted Weighted Average Shares Outstanding
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Net Loss | $ | (1,872) | $ | (4,190) | $ | (6,927) | $ | (16,317) | |||||||||||||||
| Unrealized (Loss) Gain on Available-for-Sale Investments | (69) | 5 | (90) | 5 | |||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | (4) | (3) | |||||||||||||||||||
| Comprehensive Loss | $ | (1,941) | $ | (4,185) | $ | (7,021) | $ | (16,315) | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
| PREFERRED STOCK | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED DEFICIT | ACCUMULATED OTHER COMPREHENSIVE INCOME | TOTAL STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | SHARES | AMOUNT | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2023 | 15,000 | $ | — | 12,163,673 | $ | 1 | $ | 402,701 | $ | (388,759) | $ | 163 | $ | 14,106 | |||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (1,750) | — | (1,750) | |||||||||||||||||||||||||||||||||||||||
| Unrealized Loss on Available-for-Sale Investments | — | — | — | — | — | — | (3) | (3) | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | — | — | — | (4) | (4) | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock upon exercise of Pre-Funded Warrants | — | — | 389,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | 193 | — | — | 193 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | 15,000 | — | 12,552,673 | 1 | 402,894 | (390,509) | 156 | 12,542 | |||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (3,305) | — | (3,305) | |||||||||||||||||||||||||||||||||||||||
| Unrealized Loss on Available-for-Sale Investments | — | — | — | — | — | — | (18) | (18) | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock upon exercise of Pre-Funded Warrants | — | — | 4,118,000 | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Vesting of Restricted Stock Units Issued, net of taxes withheld | — | — | 125,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | 309 | — | — | 309 | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | 15,000 | — | 16,795,673 | 2 | 403,203 | (393,814) | 137 | 9,528 | |||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (1,872) | — | (1,872) | |||||||||||||||||||||||||||||||||||||||
| Unrealized Loss on Available-for-Sale Investments | — | — | — | — | — | — | (69) | (69) | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock in connection with exercise of Prior Warrant and Pre-Funded Warrants, net of offering costs | — | — | 11,693,990 | 1 | 13,718 | — | — | 13,719 | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | 212 | — | — | 212 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | 15,000 | $ | — | 28,489,663 | $ | 3 | $ | 417,133 | $ | (395,686) | $ | 68 | $ | 21,518 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
| PREFERRED STOCK | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED DEFICIT | ACCUMULATED OTHER COMPREHENSIVE INCOME | TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | SHARES | AMOUNT | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | — | $ | — | 8,544,225 | $ | 1 | $ | 372,562 | $ | (370,080) | $ | 52 | $ | 2,535 | |||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (7,162) | — | (7,162) | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | (179) | — | — | (179) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | — | — | 8,544,225 | 1 | 372,383 | (377,242) | 51 | (4,807) | |||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (4,967) | — | (4,967) | |||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | — | — | — | — | — | — | (2) | (2) | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock, net of offering costs/Public Offering | — | — | 844,613 | — | 14,893 | — | — | 14,893 | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock, net of offering costs/At-the-Market Offering | — | — | 7,500 | — | 15 | — | — | 15 | |||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock, net of offering costs | 15,000 | — | — | — | 14,916 | — | — | 14,916 | |||||||||||||||||||||||||||||||||||||||
| Vesting of Restricted Stock Units Issued, net of taxes withheld | — | — | 10,958 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | 97 | — | — | 97 | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 15,000 | — | 9,407,296 | 1 | 402,304 | (382,209) | 49 | 20,145 | |||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (4,190) | — | (4,190) | |||||||||||||||||||||||||||||||||||||||
| Unrealized Gain on Available-for-Sale Investments | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock, net of offering costs/Public Offering | — | — | 1,745,377 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based Compensation | — | — | — | — | 176 | — | — | 176 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 15,000 | $ | — | 11,152,673 | $ | 1 | $ | 402,480 | $ | (386,399) | $ | 54 | $ | 16,136 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net Loss | $ | (6,927) | $ | (16,317) | |||||||
| Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities: | |||||||||||
| Depreciation and Amortization | 894 | 422 | |||||||||
| Stock-based Compensation | 714 | 95 | |||||||||
| Increase in Inventory Reserves | 1,098 | 307 | |||||||||
| Non-cash Lease Expense from Right of Use Assets | 1,529 | 1,518 | |||||||||
| Amortization of Debt Financing Costs and Accretion of Debt Discount | 276 | 276 | |||||||||
| Loss (Gain) on Disposal of Assets | 1 | (3) | |||||||||
| Realized Gain on Sale of Investments | (220) | (4) | |||||||||
| Changes in Operating Assets and Liabilities: | |||||||||||
| Accounts Receivable, net | (3,102) | (1,454) | |||||||||
| Inventory | 1,561 | (921) | |||||||||
| Prepaid and Other Assets | 875 | 2,058 | |||||||||
| Accounts Payable | (124) | (688) | |||||||||
| Lease Liabilities | (1,113) | (1,435) | |||||||||
| Other Liabilities | (1,033) | 756 | |||||||||
| Deferred License Revenue | (3,798) | (1,427) | |||||||||
| Cash Used In Operating Activities | (9,369) | (16,817) | |||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Purchase of Investments Available-for-Sale | (3,752) | (17,389) | |||||||||
| Sale of Investments Available-for-Sale | 11,301 | 11,972 | |||||||||
| Purchase of Equipment | (241) | (197) | |||||||||
Cash Paid in Connection with Evoqua Asset Acquisition | (12,361) | — | |||||||||
| Cash Used In Investing Activities | (5,053) | (5,614) | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Payments on Debt | (500) | (6,750) | |||||||||
| Payments on Insurance Financing Note Payable | (748) | (941) | |||||||||
| Payments on Financing Lease Liabilities | (388) | — | |||||||||
| Proceeds from Issuance of Common Stock | 13,763 | 15,016 | |||||||||
| Offering Costs from Issuance of Common Stock | (43) | (106) | |||||||||
| Proceeds from Issuance of Preferred Stock | — | 15,000 | |||||||||
| Offering Costs from Issuance of Preferred Stock | — | (85) | |||||||||
| Cash Provided by Financing Activities | 12,084 | 22,134 | |||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | (5) | (3) | |||||||||
| Net Decrease in Cash and Cash Equivalents | (2,343) | (300) | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 10,102 | 13,280 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 7,759 | $ | 12,980 | |||||||
| Supplemental Disclosure of Cash Flow Information: | |||||||||||
| Cash Paid for Interest | $ | 929 | $ | 1,261 | |||||||
| Supplemental Disclosure of Non-cash Operating, Investing and Financing Activities: | |||||||||||
| Change in Unrealized (Loss) Gain on Investments Available-for-Sale | $ | (90) | $ | 5 | |||||||
| Increase in Prepaid Assets from Insurance Financing Note Payable | $ | 733 | $ | — | |||||||
Deferred Consideration from Evoqua Asset Acquisition | $ | 5,000 | $ | — | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business
Rockwell Medical, Inc. (the "Company", "Rockwell", "we", or "us") is a healthcare company that develops, manufactures, commercializes, and distributes a portfolio of hemodialysis products for dialysis providers worldwide.
Rockwell is a revenue-generating business and the second largest supplier of liquid and powder 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 at freestanding outpatient dialysis centers, hospital-based outpatient centers, skilled nursing facilities, or in a patient’s home.
Rockwell provides the hemodialysis community with products controlled by a Quality Management System regulated by the U.S. Food and Drug Administration ("FDA"). Rockwell manufactures hemodialysis concentrates at its facilities in Michigan, South Carolina, and Texas totaling approximately 175,000 square feet, and manufactures its dry acid concentrate mixers at its facility in Iowa. Rockwell 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.
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 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 its manufacturing and selling of hemodialysis concentrates products, all of which are manufactured under a contract manufacturing agreement with a third-party organization. See Note 4 for further detail.
In addition to its primary focus on hemodialysis concentrates, Rockwell also has a proprietary parenteral iron product, Triferic® (ferric pyrophosphate citrate ("FPC")), which is indicated to maintain hemoglobin in adult patients with hemodialysis-dependent chronic kidney disease. While Rockwell has discontinued commercialization of Triferic in the United States, the Company has established international partnerships with companies seeking to develop and commercialize Triferic outside the United States and is working closely with these international partners to develop and commercialize Triferic in their respective regions. During the third quarter of 2023, the ongoing Triferic development effort was terminated resulting in an acceleration of the corresponding deferred license revenue (see Note 10) and a reserve on the non-current inventory (see Note 7). Additionally, Rockwell continues to evaluate the viability of its FPC platform and FPC's potential to treat iron deficiency, iron deficiency anemia, and acute heart failure.
Rockwell was incorporated in the state of Michigan in 1996 and re-domiciled to the state of Delaware in 2019. Rockwell's headquarters is located at 30142 Wixom Road, Wixom, Michigan 48393.
2. Liquidity and Capital Resources
As of September 30, 2023, Rockwell had approximately $11.7 million of cash, cash equivalents and investments available-for-sale, and working capital of $6.8 million. Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $9.4 million. Based on the currently available working capital, 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.
The Company continues to review its operational plans and execute on the acquisition of new customers, and has implemented cost containment activities. The Company may require additional capital to sustain its operations and make the investments it needs to execute its strategic plan. Additionally, the Company's operational plans include raising capital, if needed, by using its at-the-market ("ATM") facility or other methods or forms of financings, subject to existing limitations.
If the Company attempts to obtain additional debt or equity financing, the Company cannot assume such financing will be available on favorable terms, if at all.
In 2023, the Company is no longer subject to the "baby shelf" limitations under Form S-3, which limit the amount the Company may offer pursuant to its registration statement on Form S-3.
The Company is subject to certain covenants and cure provisions under its Loan Agreement with Innovatus. As of the date of this report, the Company is in compliance with all covenants (See Note 15 for further detail).
In addition, the global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increased U.S. trade tariffs and trade disputes with other countries, 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, Israel-Hamas conflict and other political tensions, and lingering effects of the COVID-19 pandemic. 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.
3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U. S. Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements.
The condensed consolidated balance sheet at September 30, 2023, and the condensed consolidated statements of operations, comprehensive loss, and changes in stockholders' equity for the three and nine months ended September 30, 2023 and cash flows for the nine months ended September 30, 2023 are unaudited, but include all adjustments, consisting of normal recurring adjustments the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023 or for any future interim period. The condensed consolidated balance sheet at December 31, 2022 has been derived from audited financial statements, however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2022 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 30, 2023. The Company’s consolidated subsidiaries consist of its wholly-owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited.
The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Restatement of Loss Per Share
Loss per share for the three and nine months ended September 30, 2022 have been recalculated and restated and is presented on a comparable basis with the three and nine months ended September 30, 2023. In the first quarter of 2023, the Company determined it should have included pre-funded warrants issued in the second quarter of 2022 in the earnings per share calculation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC") 260-10-45-13, which treats shares of common stock exercisable for little to no consideration as included in the denominator of both the basic and diluted earnings per share calculations. While the Company has determined the impact of including the pre-funded warrants in the earnings per share calculations does not have a material impact on previously issued financial statements, the Company has recalculated and restated amounts presented on a comparative and consistent basis with current period results. The table below summarizes previously reported and restated amounts on a comparative basis. See the table presentation of loss per share calculations as of September 30, 2023 and 2022 in the "Loss Per Share" section below.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2022 | ||||||||||||||||
| As Previously Reported: | |||||||||||||||||
| Net loss per share attributable to common stockholders - basic and diluted | $ | (0.40) | $ | (1.75) | |||||||||||||
| Weighted average number of shares of common stock outstanding - basic and diluted | 10,528,148 | 9,299,788 | |||||||||||||||
| As Restated: | |||||||||||||||||
| Net loss per share attributable to common stockholders - basic and diluted | $ | (0.23) | $ | (1.26) | |||||||||||||
| Weighted average number of shares of common stock outstanding - basic and diluted | 18,463,673 | 12,902,890 | |||||||||||||||
Loss Per Share
Basic and diluted net loss per share for the three and nine months ended September 30, 2023 and 2022, after giving effect to the restatement discussed above, was calculated as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In Thousands, Except Share and Per Share Amounts) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | (1,872) | $ | (4,190) | $ | (6,927) | $ | (16,317) | |||||||||||||||
| Net loss attributable to common stockholders for basic and diluted loss per share | $ | (1,872) | $ | (4,190) | $ | (6,927) | $ | (16,317) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average number of shares of common stock outstanding - basic and diluted | 27,521,088 | 18,463,673 | 21,526,978 | 12,902,890 | |||||||||||||||||||
| Net loss per share attributable to common stockholders - basic and diluted | $ | (0.07) | $ | (0.23) | $ | (0.32) | $ | (1.26) | |||||||||||||||
Included within the weighted average shares of common stock outstanding for the three and nine months ended September 30, 2022 are 7,311,000 shares of common stock issuable upon the exercise of pre-funded warrants (See Note 11), as the warrants are exercisable at any time for nominal consideration and, as such, the shares are considered outstanding for the purpose of calculating basic and diluted net loss per share attributable to common stockholders.
The Company’s potentially dilutive securities include stock options, restricted stock awards and units, convertible preferred stock and warrants. These securities were excluded from the computations of diluted net loss per share for the three and nine months ended September 30, 2023 and 2022, as the effect would be to reduce the net loss per share. The following table includes the potential shares of common stock, presented based on amounts outstanding at each period end, that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
| As of September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Options to Purchase Common Stock | 1,367,493 | 1,311,691 | |||||||||
| Unvested Restricted Stock Awards | 891 | 891 | |||||||||
| Unvested Restricted Stock Units | 287,400 | 125,000 | |||||||||
| Convertible Preferred Stock | 1,363,636 | 1,363,636 | |||||||||
| Warrants to Purchase Common Stock | 4,045,278 | 17,507,268 | |||||||||
| Total | 7,064,698 | 20,308,486 | |||||||||
Adoption of Recent Accounting Pronouncements
The Company continually assesses new accounting pronouncements to determine their applicability. When it is determined a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a review to determine the consequences of the change to its consolidated financial statements and assures there are sufficient controls in place to ascertain the Company’s consolidated financial statements properly reflect the change.
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which introduced an impairment model that is based on expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (e.g., loan commitments). The expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit losses. In addition, ASC 326 requires expected credit related losses for trade accounts receivable, as well as available-for-sale debt securities, which are to be recorded through an allowance for credit losses, while non-credit related losses will continue to be recognized through other comprehensive income. The Company adopted the new guidance, as of January 1, 2023, and it did not have a material impact on the condensed consolidated financial statements.
4. Asset Acquisition
On July 10, 2023, the Company completed the Evoqua Acquisition. At the Closing, the Company purchased customer relationships, equipment and inventory from Evoqua, which were related to manufacturing and selling of hemodialysis concentrates products, all of which are manufactured under a contract manufacturing agreement with a third-party organization.
Pursuant to the Purchase Agreement, total consideration was $17.4 million, comprising a cash payment at Closing of $12.2 million (inclusive of transaction costs) and two $2.5 million deferred payments, the first to be paid on the one-year anniversary of the Closing, which is included as a current liability on the Company's condensed consolidated balance sheet, and the second to be paid on the second anniversary of the Closing (collectively, the “deferred consideration”).
The transaction was accounted for as an asset acquisition, as the acquired assets did not meet the definition of a business as defined by ASC 805, Business Combinations.
The purchase price was allocated, on a relative fair value basis, to the assets acquired at the July 10, 2023 acquisition date as follows (table in thousands):
| Consideration | ||||||||
| Cash Payment | $ | 12,233 | ||||||
| Deferred Consideration | 5,000 | |||||||
| Transaction Costs | 128 | |||||||
| Total Consideration | $ | 17,361 | ||||||
| Assets Acquired | ||||||||
| Customer Relationships Intangible Asset | $ | 11,035 | ||||||
| Equipment | 5,093 | |||||||
| Inventory | 1,233 | |||||||
| Total Assets Acquired | $ | 17,361 | ||||||
The fair value of the customer relationships intangible asset was determined using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from the customer base. Key assumptions included discounted cash flow, estimated life cycle and customer attrition rates. Customer relationships are being amortized over a period of 20 years. Given the recency of the purchase of the equipment in which the assets were recorded at fair value, the Company determined the fair value of the equipment using a cost approach, which considered
9
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
assumptions over the equipment's current replacement cost and useful life. Inventory was purchased directly from the contract manufacturer holding the inventory, which approximated fair value.
During the three and nine months ended September 30, 2023, the Company recorded amortization of its customer relationship intangible asset of $0.1 million, resulting in a net intangible asset of $10.9 million as of September 30, 2023.
Estimated future amortization expense on the Company's customer relationships intangible asset as of September 30, 2023 is as follows (table in thousands):
| Year ended December 31: | ||||||||
| 2023 (remainder of year) | $ | 138 | ||||||
| 2024 | 552 | |||||||
| 2025 | 552 | |||||||
| 2026 | 552 | |||||||
| 2027 | 552 | |||||||
| Thereafter | 8,551 | |||||||
| Total | $ | 10,897 | ||||||
5. Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
•Step 1: Identify the contract with the customer
•Step 2: Identify the performance obligations in the contract
•Step 3: Determine the transaction price
•Step 4: Allocate the transaction price to the performance obligations in the contract
•Step 5: Recognize revenue when the company satisfies a performance obligation
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight related to contracts with customers are accounted for as a fulfillment cost and are included in cost of sales when control of the goods transfers to the customer.
Nature of goods and services
The following is a description of principal activities from which the Company generates its revenue.
The Company currently operates in one market segment, the hemodialysis market, which involves the manufacture, sale and distribution of hemodialysis products to hemodialysis clinics, including pharmaceutical, dialysis concentrates, dialysis kits and other ancillary products used in the dialysis process. Rockwell's customer mix is diverse, with most customer sales concentrations under 10% and one customer, DaVita, Inc. ("DaVita"), at approximately 50% of total net product sales for each of the three and nine months ended September 30, 2023. Rockwell's accounts receivable from this customer were approximately 31% and 30% of the total net consolidated accounts receivable balance at September 30, 2023 and December 31, 2022, respectively.
Product sales – The Company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. The stand-alone selling prices are determined based on the cost plus margin approach.
Drug and dialysis concentrates products are sold directly to dialysis clinics and to wholesale distributors in both domestic and international markets. Distribution and license agreements for which upfront fees are received are evaluated upon execution or modification of the agreement to determine if the agreement creates a separate performance obligation from the underlying product sales. For all existing distribution and license agreements, the distribution and license agreement is not a distinct performance obligation from the product sales. In instances where regulatory approval of the product has not been established and the Company does not have sufficient experience with the foreign regulatory body to conclude 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 control of the product transfers to the customer.
The Company received upfront fees under five distribution and license agreements that have been deferred as a contract liability. The amounts received from Wanbang Biopharmaceuticals Co., Ltd. (“Wanbang”), Sun Pharmaceutical Industries Ltd. ("Sun Pharma"), Jeil Pharmaceutical Co., Ltd. ("Jeil Pharma") and Drogsan Pharmaceuticals ("Drogsan Pharma") are recognized as revenue over the estimated term of the applicable distribution and license agreement as regulatory approval was not received and the Company did not have sufficient experience in China, India, South Korea and Turkey, respectively, to determine regulatory approval was probable as of the execution of the agreement. The amounts received from Baxter Healthcare Corporation (“Baxter”) were deferred and recognized as revenue at the point in time the estimated product sales under the agreement occurred. During the three months ended September 30, 2023, the amounts received from Wanbang were accelerated out of deferred license revenue and into revenue upon notice that the development effort was terminated (see Note 10).
In November 2022, Rockwell reacquired its distribution rights to its hemodialysis concentrates products from Baxter and terminated the exclusive distribution agreement. Under the exclusive distribution agreement, Baxter distributed and commercialized Rockwell’s hemodialysis concentrates products and provided customer service and order delivery to nearly all U.S. customers. Following the reacquisition of these rights, Rockwell is now unrestricted in its ability to sell its hemodialysis concentrates products to dialysis clinics throughout the U.S. and around the world. For additional information, see Note 10.
Rockwell agreed to pay Baxter a fee for the reacquisition of its distribution rights which was reflected as an expense at that time. This fee was payable in two equal installments on January 1, 2023 and April 1, 2023. As of September 30, 2023, all payments were completed.
On September 18, 2023, the Company and its long-time partner, DaVita, a leading provider of kidney care, entered into an Amended and Restated Products Purchase Agreement (the "Amended Agreement"), which amends and restates 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 to Rockwell on or after December 1, 2023. The term of the Amended Agreement will expire on December 31, 2024. DaVita will have the right, in its sole discretion upon written notice to the Company given no later than September 30, 2024, to further extend the term through December 31, 2025. In the event of such an extension, product pricing will be increased for the extended term. In addition, DaVita is required to provide the Company with nine-month purchasing forecasts and a commitment to purchase at least the forecasted amounts. In the event that DaVita does not meet its forecasts, it is required to pay the Company for the amount forecasted, purchase additional product, or the Company may terminate the Amended Agreement. Upon expiration or termination of the Amended Agreement, and upon request by DaVita, the Company has agreed to provide transition services to DaVita during a transition period.
Additionally during the third quarter of 2023, the Company entered into several long-term product purchase agreements, which include supply and purchasing commitments from certain parties.
For the majority of the Company’s U.S. and international customers, the Company recognizes revenue at the shipping point, which is generally the Company’s plant or warehouse. For other business, the Company recognizes revenue based on when the customer takes control of the product. The amount of revenue recognized is based on the purchase order less returns and adjusted for any rebates, discounts, chargebacks or other amounts paid to customers estimated at the time of sale. There were no such adjustments for the periods reported. Customers typically pay for the product based on customary business practices with payment terms averaging 30 days, while a small subset of customers have payment terms averaging 60 days.
Disaggregation of revenue
Revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.
| In thousands | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||
| Products By Geographic Area | Total | U.S. | Rest of World | Total | U.S. | Rest of World | |||||||||||||||||||||||||||||
| Drug Revenues | |||||||||||||||||||||||||||||||||||
| Product Sales – Point-in-time | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| License Fee – Over time | 2,197 | — | 2,197 | 2,327 | — | 2,327 | |||||||||||||||||||||||||||||
| Total Drug Products | 2,197 | — | 2,197 | 2,327 | — | 2,327 | |||||||||||||||||||||||||||||
| Concentrates Products | |||||||||||||||||||||||||||||||||||
| Product Sales – Point-in-time | 21,574 | 19,741 | 1,833 | 57,720 | 52,326 | 5,394 | |||||||||||||||||||||||||||||
| License Fee – Over time | — | — | — | 1,472 | 1,472 | — | |||||||||||||||||||||||||||||
| Total Concentrate Products | 21,574 | 19,741 | 1,833 | 59,192 | 53,798 | 5,394 | |||||||||||||||||||||||||||||
| Net Revenue | $ | 23,771 | $ | 19,741 | $ | 4,030 | $ | 61,519 | $ | 53,798 | $ | 7,721 | |||||||||||||||||||||||
| In thousands | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||
| Products By Geographic Area | Total | U.S. | Rest of World | Total | U.S. | Rest of World | |||||||||||||||||||||||||||||
| Drug Revenues | |||||||||||||||||||||||||||||||||||
| Product Sales – Point-in-time | $ | 193 | $ | 193 | $ | — | $ | 834 | $ | 561 | $ | 273 | |||||||||||||||||||||||
| License Fee – Over time | 65 | — | 65 | 192 | — | 192 | |||||||||||||||||||||||||||||
| Total Drug Products | 258 | 193 | 65 | 1,026 | 561 | 465 | |||||||||||||||||||||||||||||
| Concentrates Products | |||||||||||||||||||||||||||||||||||
| Product Sales – Point-in-time | 17,953 | 16,619 | 1,334 | 51,035 | 46,334 | 4,701 | |||||||||||||||||||||||||||||
| License Fee – Over time | 480 | 480 | — | 1,436 | 1,436 | — | |||||||||||||||||||||||||||||
| Total Concentrate Products | 18,433 | 17,099 | 1,334 | 52,471 | 47,770 | 4,701 | |||||||||||||||||||||||||||||
| Net Revenue | $ | 18,691 | $ | 17,292 | $ | 1,399 | $ | 53,497 | $ | 48,331 | $ | 5,166 | |||||||||||||||||||||||
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
| In thousands | September 30, 2023 | December 31, 2022 | |||||||||
| Accounts Receivable, net | $ | 9,361 | $ | 6,259 | |||||||
| Contract Liabilities, which are included in deferred license revenue | $ | 533 | $ | 4,331 | |||||||
There were no other material contract assets recorded on the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022. The Company does not generally accept returns of its concentrates products and no material reserve for returns of concentrates products was established as of September 30, 2023 or December 31, 2022.
The contract liabilities primarily relate to upfront payments and consideration received from customers in advance of the customer assuming control of the related products.
10
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Investments - Available-for-Sale
Investments available-for-sale consisted of the following as of September 30, 2023 and December 31, 2022 (table in thousands):
| September 30, 2023 | |||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Loss | Accrued Interest | Fair Value | |||||||||||||||||||||||||
| Available-for-Sale Securities | |||||||||||||||||||||||||||||
| Debt securities | $ | 3,898 | $ | 73 | $ | — | $ | — | $ | 3,971 | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Loss | Accrued Interest | Fair Value | |||||||||||||||||||||||||
| Available-for-Sale Securities | |||||||||||||||||||||||||||||
| Debt securities | $ | 11,315 | $ | 75 | $ | — | $ | — | $ | 11,390 | |||||||||||||||||||
The fair value of investments available-for-sale are determined using quoted market prices from daily exchange-traded markets based on the closing price as of the balance sheet date and are classified as a Level 1 measurement under ASC 820 Fair Value Measurements.
As of September 30, 2023 and December 31, 2022, all of our available-for-sale securities were all due within one year.
7. Inventory
Components of inventory, net of reserves, as of September 30, 2023 and December 31, 2022 are as follows (table in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Inventory - Current Portion | |||||||||||
| Raw Materials | $ | 2,335 | $ | 3,351 | |||||||
| Work in Process | 337 | 351 | |||||||||
| Finished Goods | 2,814 | 2,112 | |||||||||
| Total Current Inventory | 5,486 | 5,814 | |||||||||
Inventory - Long Term (1) | 178 | 1,276 | |||||||||
| Total Inventory | $ | 5,664 | $ | 7,090 | |||||||
1.Represents inventory related to Triferic raw materials. This Triferic inventory will be utilized for the Company's international partnerships. In September 2022, the Company discontinued its New Drug Applications ("NDAs") for Triferic (dialysate) and Triferic AVNU in the United States. During the three months ended September 30, 2023, the Company reserved $1.1 million of long-term inventory as a result of the termination of the Wanbang development effort.
As of September 30, 2023 and December 31, 2022, Rockwell had total current concentrate inventory aggregating $5.5 million and $5.8 million, respectively, against which Rockwell had reserved $25,000 at both September 30, 2023 and December 31, 2022.
11
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Property and Equipment, net
As of September 30, 2023 and December 31, 2022, the Company’s property and equipment consisted of the following (table in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Leasehold Improvements | $ | 1,423 | $ | 1,256 | |||||||
| Machinery and Equipment | 11,085 | 5,922 | |||||||||
| Information Technology & Office Equipment | 1,845 | 1,845 | |||||||||
| Laboratory Equipment | 807 | 807 | |||||||||
| Total Property and Equipment | 15,160 | 9,830 | |||||||||
| Accumulated Depreciation and Amortization | (8,389) | (7,636) | |||||||||
| Property and Equipment, net | $ | 6,771 | $ | 2,194 | |||||||
Depreciation and amortization expense for the three months ended September 30, 2023 and 2022 was $0.4 million and $0.1 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2023 and 2022 was $0.8 million and $0.4 million, respectively.
9. Accrued Liabilities
Accrued liabilities as of September 30, 2023 and December 31, 2022 consisted of the following (table in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accrued Compensation and Benefits | $ | 2,240 | $ | 2,568 | |||||||
| Accrued Unvouchered Receipts | 1,947 | 585 | |||||||||
| Accrued Manufacturing Expense | 732 | — | |||||||||
| Accrued Workers Compensation | 202 | 306 | |||||||||
| Accrued Research & Development Expense | — | 43 | |||||||||
| Other Accrued Liabilities | 1,587 | 4,200 | |||||||||
| Total Accrued Liabilities | $ | 6,708 | $ | 7,702 | |||||||
10. Deferred License Revenue
In October 2014, the Company entered into an exclusive distribution agreement with Baxter, which had a term of 10 years and received an upfront fee of $20 million. The upfront fee was recorded as deferred license revenue and was 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. On November 9, 2022, Rockwell reacquired its distribution rights to its hemodialysis concentrates products from Baxter and terminated the distribution agreement. Exclusivity and other provisions associated with the distribution agreement terminated November 9, 2022 and the remaining operational elements of the agreement terminated December 31, 2022. Rockwell agreed to provide certain services to a group of Baxter's customers until March 31, 2023. Under the distribution agreement, Baxter distributed and commercialized Rockwell’s hemodialysis concentrates products and provided customer service and order delivery to nearly all United States customers. Following the reacquisition of these rights, Rockwell is now unrestricted in its ability to sell its hemodialysis concentrates products to dialysis clinics throughout the United States and around the world. The Company recognized the remaining revenue of $1.5 million during the three months ended March 31, 2023.
In 2016, the Company entered into a distribution agreement with Wanbang (the "Wanbang Agreement") and received an upfront fee of $4.0 million. The upfront fee was recorded as deferred license revenue and is being recognized as revenue based on the agreement term. On August 7, 2023, Rockwell was informed by Wanbang 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 Company recognized all remaining revenue under the Wangbang Agreement of approximately $2.2 million during the third quarter of 2023. Additionally, in connection with these events, the Company
12
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
established a reserve for related Triferic long-term inventory of $1.1 million, resulting in a net increase in gross profit of $1.1 million.
In January 2020, the Company entered into license and supply agreements with Sun Pharma (the "Sun Pharma Agreements"), for the rights to commercialize Triferic (dialysate) in India. In consideration for the license, the Company received an upfront fee of $0.1 million. The upfront fee was recorded as deferred license revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of approximately $2,500 and $7,500 for the three and nine months ended September 30, 2023 and 2022, respectively. Deferred license revenue related to the Sun Pharma Agreement totaled $62,500 and $70,000 as of September 30, 2023 and December 31, 2022, respectively.
In September 2020, the Company entered into a license and supply agreements with Jeil Pharmaceutical (the "Jeil Agreements"), for the rights to commercialize Triferic (dialysate) in South Korea. In consideration for the license, the Company received an upfront fee of $0.2 million. In May 2022, Jeil Pharmaceutical obtained regulatory approval in South Korea and paid the Company $0.2 million in consideration of reaching the milestone. The upfront fee and milestone payments were recorded as deferred license revenue and are being recognized as revenue based on the agreement term. The Company recognized revenue of $5,200 and $15,600 for the three and nine months ended September 30, 2023 and 2022, respectively. Deferred license revenue related to the Jeil Agreement totaled approximately $0.4 million as of both September 30, 2023 and December 31, 2022.
In June 2021, the Company entered into license and supply agreements with Drogsan Pharmaceuticals (the "Drogsan Agreements"), for the rights to commercialize Triferic (dialysate) and Triferic AVNU in Turkey. In consideration for the license, the Company received an upfront fee of $0.15 million. The upfront fee was recorded as deferred license revenue and will be recognized as revenue based on the agreement term. The Company recognized revenue of $3,750 and $11,250 for the three and nine months ended September 30, 2023 and 2022, respectively. Deferred license revenue related to the Drogsan Agreements totaled approximately $0.1 million as of each of September 30, 2023 and December 31, 2022. In April 2023, Drogsan submitted a Marketing Authorization application and GMP application for Triferic AVNU to the Turkish Medicines and Medical Devices Agency, for which Drogsan received priority status and high priority status, respectively. Drogsan is responsible for all regulatory approval and commercialization activities.
11. Stockholders’ Equity
The Company held its annual meeting of stockholders on May 23, 2023 (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders approved the amendment and restatement of the Rockwell Medical, Inc. 2018 Long Term Incentive Plan to increase the number of shares of common stock issuable thereunder by 1,600,000 shares (the “Amended 2018 Plan”).
Preferred Stock
On April 6, 2022, the Company and DaVita entered into the Securities Purchase Agreement (the "SPA"), which provided for the issuance by the Company of up to $15 million of preferred stock to DaVita. On April 6, 2022, the Company issued 7,500 shares of Series X Preferred Stock for gross proceeds of $7.5 million. On June 16, 2022 the Company issued an additional 7,500 shares of the Series X Preferred Stock to DaVita for gross proceeds of $7.5 million.
The Series X Preferred Stock was issued for a price of $1,000 per share (the "Face Amount"), subject to accretion at a rate of 1% per annum, compounded annually. If the Company’s common stock trades above $22.00 for a period of 30 calendar days, the accretion will thereafter cease. As of September 30, 2023, the Series X Preferred Stock accreted a total $150,000.
The Series X Convertible Preferred Stock is convertible to common stock at a rate equal to the Face Amount, divided by a conversion price of $11.00 per share (subject to adjustment for future stock splits, reverse stock splits and similar recapitalization events). As a result, each share of Series X Preferred Stock will initially convert into approximately 91 shares of common stock. DaVita’s right to convert to common stock is subject to a beneficial ownership limitation, which is initially set at 9.9% of the outstanding common stock, which limitation may be reset (not to exceed 19.9%) at DaVita’s option and upon providing prior written notice to the Company. 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.
Additionally, the Series X Preferred Stock has a deemed liquidation event and redemption clause which could be triggered if the sale of all or substantially all of the Company's assets relating to the Company's dialysis concentrates business line. Since the Series X Preferred Stock may be redeemed if certain assets are sold at the option of the holder, but is not mandatorily redeemable and the sale of the assets that would allow for redemption is within the control of the Company, the preferred stock has been classified as permanent equity and initially recognized at fair value of $15 million (the proceeds on the date of issuance) less issuance costs of $0.1 million, resulting in an initial value of $14.9 million. The Company will assess at each reporting period whether conditions have changed to now meet the mandatory redemption definition which could trigger liability classification.
As of both September 30, 2023 and December 31, 2022, there were 2,000,000 shares of preferred stock, $0.0001 par value per share, authorized and 15,000 shares of preferred stock issued and outstanding.
Common Stock
As of September 30, 2023 and December 31, 2022, there were 170,000,000 shares of common stock, $0.0001 par value per share, authorized and 28,489,663 and 12,163,673 shares issued and outstanding, respectively.
As of September 30, 2023 and 2022, the Company reserved for issuance the following shares of common stock related to the potential exercise of employee stock options, unvested restricted stock, convertible preferred stock, pre-funded warrants and all other warrants (collectively, "common stock equivalents"):
| As of September 30, | |||||||||||
| Common stock and common stock equivalents: | 2023 | 2022 | |||||||||
| Common stock | 28,489,663 | 11,152,673 | |||||||||
| Common stock issuable upon exercise of pre-funded warrants | — | 7,311,000 | |||||||||
| Common stock and pre-funded stock warrants | 28,489,663 | 18,463,673 | |||||||||
| Options to Purchase Common Stock | 1,367,493 | 1,311,691 | |||||||||
| Unvested Restricted Stock Awards | 891 | 891 | |||||||||
| Unvested Restricted Stock Units | 287,400 | 125,000 | |||||||||
| Convertible Preferred Stock | 1,363,636 | 1,363,636 | |||||||||
| Warrants to Purchase Common Stock | 4,045,278 | 17,507,268 | |||||||||
| Total | 35,554,361 | 38,772,159 | |||||||||
During the three months ended September 30, 2023 and 2022, 1,793,000 and 477,480 pre-funded warrants were exercised, respectively. During the nine months ended September 30, 2023 and 2022, 6,300,000 and 477,480 pre-funded warrants were exercised, respectively.
During the three and nine months ended September 30, 2023 and 2022, no vested employee stock options were exercised.
Controlled Equity Offering
On April 8, 2022, the Company entered into the Sales Agreement (the "ATM facility") with Cantor Fitzgerald & Co. as Agent, pursuant to which the Company may offer and sell from time to time up to $12.2 million of shares of Company’s common stock through the Agent. The offering and sale of such shares has been registered under the Securities Act of 1933, as amended.
During the quarter ended September 30, 2023, no sales were made pursuant to the Sales Agreement. Approximately $12.2 million remains available for sale under the ATM facility.
Registered Direct Offering
On May 30, 2022, the Company entered into the Registered Direct Purchase Agreement (the "Agreement") with the Purchaser, pursuant to which the Company issued and sold, in a registered direct offering (the “Offering”), 844,613 shares of its common stock at price of $1.39 per share, and pre-funded warrants to purchase up to an aggregate of 7,788,480 shares of common stock (the “Pre-Funded Warrants” and the shares of common stock underlying the Pre-Funded Warrants, the “Warrant Shares”). The purchase price of each Pre-Funded Warrant is equal to the price at which a share of common stock was sold to the public in the Offering, minus $0.0001, and the exercise price of each Pre-Funded Warrant is $0.0001 per share.
A holder (together with its affiliates) may not exercise any portion of the Pre-Funded Warrants to the extent the holder would own more than 9.99% of the Company’s outstanding common stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Pre-Funded Warrant. The Agreement contains customary representations and warranties and agreements of the Company and the Purchaser and customary indemnification rights and obligations of the parties.
On July 5, 2023, all of the remaining Pre-Funded Warrants to purchase 1,793,000 shares of common stock were exercised. The exercise price of each Pre-Funded Warrant was $0.0001 per share and resulted in gross proceeds to the Company of $179.
Private Placement
Also on May 30, 2022, concurrent with the Offering, the Company entered into the private investment in public equity "PIPE" Purchase Agreement relating to the offering and sale (the “Private Placement”) of warrants to purchase up to a total of 9,900,990 shares of common stock (the "PIPE Warrants") and pre-funded warrants to purchase up to a total of 1,267,897 shares of common stock (the “Pre-Funded PIPE Warrants”). Each warrant was sold at a price of $0.125 per underlying warrant share and is exercisable at an exercise price of $1.39 per share. The purchase price of each Pre-Funded Warrant was equal to the price at which a share of common stock was sold to the public in the Offering, minus $0.0001, and the exercise price of each Pre-Funded Warrant is $0.0001 per share. As of December 2022, all Pre-Funded PIPE Warrants have been exercised.
On July 10, 2023, the Company entered into a letter agreement (the “Letter Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice”), which held a warrant (the “Prior Warrant”) to purchase 9,900,990 shares of common stock of the Company (the “Common Stock”) with an exercise price of $1.39 per share, offering Armistice the opportunity to exercise the Prior Warrant for cash, provided the Prior Warrant was exercised for cash on or prior to 5:00 P.M. Eastern Time on July 10, 2028 (the “End Date”). In addition, Armistice would receive a “reload” warrant (the “Reload Warrant”) to purchase 3,750,000 shares of Common Stock with an exercise price of $5.13 per share, the closing price as reported by the Nasdaq Capital Market on July 7, 2023. The terms of the Reload Warrant and Letter Agreement provide for customary resale registration rights. The Letter Agreement also provides that for a period of 45 days after the issuance of the Reload Warrant, the Company’s may not sell shares of Common Stock pursuant to its sales agreement with Cantor Fitzgerald & Co., dated as of April 8, 2022, at price per share less than $6.25. The Reload Warrant may be exercised at all times prior to the 54 months month anniversary of its issuance date. The Prior Warrant and the Reload Warrant both provide that a holder (together with its affiliates) may not exercise any portion of the Prior Warrant or the Reload Warrant to the extent that the holder would own more than 9.99% of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of such warrant. To the extent the exercise of the Prior Warrant would result in Armistice holding more than 9.99% of the Company’s outstanding Common Stock, such shares of Common Stock in excess of 9.99% will be held in abeyance. The Letter Agreement amended the Prior Warrant to extend the expiration date thereof to one year following the original expiration date set forth therein.
Armistice exercised the Prior Warrant on July 10, 2023, and the Company received gross proceeds of approximately $13.8 million from the exercise of the Prior Warrant as a result of such exercise pursuant to the terms of the Letter Agreement.
13
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Stock-Based Compensation
The Company recognized total stock-based compensation expense during the three and nine months ended September 30, 2023 and 2022 as follows (table in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service-based awards: | |||||||||||||||||||||||
| Restricted Stock Units | $ | 112 | $ | 46 | $ | 276 | $ | 84 | |||||||||||||||
| Stock Option Awards | 100 | 130 | 438 | 401 | |||||||||||||||||||
| Total Service Based Awards | 212 | 176 | 714 | 485 | |||||||||||||||||||
| Performance-based awards: | |||||||||||||||||||||||
| Restricted Stock Awards | — | — | — | (391) | |||||||||||||||||||
| Total | $ | 212 | $ | 176 | $ | 714 | $ | 94 | |||||||||||||||
Performance Based Restricted Stock
A summary of the Company’s restricted stock awards during the nine months ended September 30, 2023 is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at January 1, 2023 | 891 | $ | 62.70 | ||||||||
| Unvested at September 30, 2023 | 891 | $ | 62.70 | ||||||||
A summary of the Company’s restricted stock awards during the nine months ended September 30, 2022 is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at January 1, 2022 | 7,118 | $ | 62.70 | ||||||||
| Forfeited (1) | (6,227) | $ | 62.70 | ||||||||
| Unvested at September 30, 2022 | 891 | $ | 62.70 | ||||||||
__________
1.These forfeited awards were due to the resignation of the Company's Chief Development Officer on March 25, 2022 and reduced stock-based compensation expense by $0.4 million in 2022.
Restricted stock awards are measured based on their fair value on the date of grant and amortized over the vesting period of 20 months.
14
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Service-Based Restricted Stock Units
A summary of the Company’s service-based restricted stock units during the nine months ended September 30, 2023 is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at January 1, 2023 | 125,000 | $ | 1.47 | ||||||||
| Granted | 313,065 | 1.87 | |||||||||
| Vested | (125,000) | 1.47 | |||||||||
| Forfeited | (25,665) | 1.37 | |||||||||
| Unvested at September 30, 2023 | 287,400 | $ | 1.85 | ||||||||
A summary of the Company’s service-based restricted stock units during the nine months ended September 30, 2022 is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||||
| Unvested at January 1, 2022 | 29,289 | $ | 12.87 | ||||||||
| Granted | 125,000 | 1.47 | |||||||||
| Vested | (23,515) | 11.33 | |||||||||
| Forfeited | (5,774) | 19.00 | |||||||||
| Unvested at September 30, 2022 | 125,000 | $ | 1.47 | ||||||||
Service based restricted stock units are measured based on their fair value on the date of grant and amortized over the vesting period. The vesting periods range from 1 to 3 years. Stock-based compensation expense of $0.1 million and $46,000 was recognized for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense of $0.3 million and $0.1 million was recognized for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the unrecognized stock-based compensation expense was $0.4 million, which is expected to be recognized over an estimated weighted average remaining term of less than 1.4 years.
Service-Based Stock Options
The fair value of the service-based stock options granted for the nine months ended September 30, 2023 were based on the following assumptions:
| Nine Months Ended September 30, 2023 | |||||
| Exercise price | $1.37 - $2.83 | ||||
| Expected stock price volatility | 81.6% - 81.8% | ||||
| Risk-free interest rate | 3.41% - 3.46% | ||||
| Term (years) | 5.6 - 6 | ||||
15
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the Company’s service-based stock option activity for the nine months ended September 30, 2023 is as follows:
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| in years | in thousands | ||||||||||||||||||||||
| Outstanding at January 1, 2023 | 1,206,905 | $ | 8.32 | ||||||||||||||||||||
| Granted | 382,745 | 1.48 | |||||||||||||||||||||
| Forfeited | (143,430) | 2.82 | |||||||||||||||||||||
| Expired | (78,727) | 26.74 | |||||||||||||||||||||
| Outstanding at September 30, 2023 | 1,367,493 | $ | 5.93 | 8.4 | $ | 680 | |||||||||||||||||
| Exercisable at September 30, 2023 | 444,836 | $ | 14.64 | 7 | $ | 114 | |||||||||||||||||
A summary of the Company’s service-based stock option activity for the nine months ended September 30, 2022 is as follows:
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | ||||||||||||||||||
| in years | ||||||||||||||||||||
| Outstanding at January 1, 2022 | 528,591 | $ | 32.01 | 7.5 | ||||||||||||||||
| Granted | 898,659 | 1.49 | 5.5 | |||||||||||||||||
| Forfeited | (30,093) | 15.11 | — | |||||||||||||||||
| Expired | (85,466) | 82.09 | — | |||||||||||||||||
| Outstanding at September 30, 2022 | 1,311,691 | $ | 8.23 | 9.1 | ||||||||||||||||
| Exercisable at September 30, 2022 | 243,973 | $ | 29.31 | 6.9 | ||||||||||||||||
The aggregate intrinsic value is calculated as the difference between the closing price of the Company's common stock and the exercise price of the stock options that had strike prices below the closing price. The intrinsic value of the outstanding options as of September 30, 2022 was not significant.
Stock-based compensation expense recognized for service-based stock options was $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation expense recognized for service-based stock options was $0.4 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, total stock-based compensation expense related to unvested options not yet recognized totaled approximately $0.7 million, which is expected to be recognized over an estimated weighted average remaining term of 3.2 years. Forfeitures are recorded in the period of occurrence and compensation expense is adjusted accordingly.
13. Licensing Agreements
Product License Agreements
The Company is a party to a Licensing Agreement between the Company and Charak, LLC ("Charak") dated January 7, 2002 (the "2002 Agreement") that grants the Company exclusive worldwide rights to certain patents and information related to our Triferic product. On October 7, 2018, the Company entered into a Master Services and IP Agreement (the “Charak MSA”) with Charak and Dr. Ajay Gupta, a former Officer of the Company. Pursuant to the MSA, the parties entered into three additional agreements described below related to the license of certain soluble ferric pyrophosphate (“SFP”) intellectual property owned by Charak. As of September 30, 2023 and December 31, 2022, the Company has accrued $85,400 relating to
16
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
certain IP reimbursement expenses and certain sublicense royalty fees, which is included within accrued liabilities on the condensed consolidated balance sheet.
Pursuant to the Charak MSA, the aforementioned parties entered into an Amendment, dated as of October 7, 2018 (the “Charak Amendment”), to the 2002 Agreement, under which Charak granted the Company an exclusive, worldwide, non-transferable license to commercialize SFP for the treatment of patients with renal failure. The Charak Amendment amends the royalty payments due to Charak under the 2002 Agreement such that the Company is liable to pay Charak royalties on net sales by the Company of products developed under the license, which includes the Company’s Triferic product, at a specified rate until December 31, 2021 and thereafter at a reduced rate from January 1, 2022 until February 1, 2034. Additionally, the Company is required to pay Charak a percentage of any sublicense income during the term of the agreement, which amount cannot be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and be no less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Commercialization and Technology License Agreement I.V. Triferic dated as of October 7, 2018 (the “IV Agreement”), under which Charak granted the Company an exclusive, sub-licensable, royalty-bearing license to SFP for the purpose of commercializing certain intravenous-delivered products incorporating SFP for the treatment of iron disorders worldwide for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. The Company was liable to pay Charak royalties on net sales by the Company of products developed under the license at a specified rate until December 31, 2021. From January 1, 2022 until February 1, 2034, the Company is liable to pay Charak a base royalty at a reduced rate on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the IV Agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Technology License Agreement TPN Triferic dated as of October 7, 2018 (the “TPN Agreement”), pursuant to which Charak granted the Company an exclusive, sub-licensable, royalty-bearing license to SFP for the purpose of commercializing worldwide certain TPN products incorporating SFP. The license grant under the TPN Agreement continues for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. During the term of the TPN Agreement, the Company is liable to pay Charak a base royalty on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the TPN Agreement, which amount shall not be less than a minimum royalty on net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
The potential sub-license milestone payments are not yet considered probable, and no milestone payments have been accrued as of September 30, 2023 and December 31, 2022.
14. Leases
Rockwell leases its production facilities and administrative offices as well as certain equipment used in its operations including leases on transportation equipment used in the delivery of its products. The lease terms range from monthly to six years. Rockwell occupies a 51,000 square foot facility and a 17,500 square foot facility in Wixom, Michigan under a lease expiring in August 2024. Rockwell also occupies two other manufacturing facilities, a 51,000 square foot facility in Grapevine, Texas under a lease expiring in December 2025, and a 57,000 square foot facility in Greer, South Carolina under a lease expiring February 2026. In addition, Rockwell occupied 4,100 square feet of office space in Hackensack, New Jersey under a lease expiring on October 31, 2024. This lease was subleased on December 15, 2021 with an expiration date of October 31, 2024.
At September 30, 2023, the Company had operating and finance lease liabilities of $5.4 million and right-of-use assets of $5.1 million, which are included in the condensed consolidated balance sheet.
At December 31, 2022, the Company had operating and finance lease liabilities of $6.7 million and right-of-use assets of $6.4 million, which are included in the condensed consolidated balance sheet.
The following summarizes quantitative information about the Company’s operating and finance leases (table in thousands):
| Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||
| Operating leases | |||||||||||||||||||||||
| Operating lease cost | $ | 422 | $ | 410 | $ | 1,281 | $ | 1,289 | |||||||||||||||
| Variable lease cost | 112 | 101 | 336 | 287 | |||||||||||||||||||
| Operating lease expense | 534 | 511 | 1,617 | 1,576 | |||||||||||||||||||
| Finance leases | |||||||||||||||||||||||
| Non-cash lease expense from right-of-use assets | 142 | 141 | 424 | 424 | |||||||||||||||||||
| Interest on lease obligations | 36 | 44 | 113 | 136 | |||||||||||||||||||
| Finance lease expense | 178 | 185 | 537 | 560 | |||||||||||||||||||
| Short-term lease rent expense | 4 | 5 | 12 | 14 | |||||||||||||||||||
| Total lease expense | $ | 716 | $ | 701 | $ | 2,166 | $ | 2,150 | |||||||||||||||
| Other information | |||||||||||||||||||||||
| Payments for principal from operating leases | $ | 461 | $ | 427 | $ | 1,363 | $ | 1,338 | |||||||||||||||
| Payments for interest from finance leases | $ | 37 | $ | 44 | $ | 114 | $ | 136 | |||||||||||||||
| Payments for principal from finance leases | $ | 130 | $ | 121 | $ | 388 | $ | 359 | |||||||||||||||
| Weighted-average remaining lease term – operating leases | 2.5 | 3.2 | 2.5 | 3.2 | |||||||||||||||||||
| Weighted-average remaining lease term – finance leases | 3.7 | 4.7 | 3.7 | 4.7 | |||||||||||||||||||
| Weighted-average discount rate – operating leases | 6.5 | % | 6.4 | % | 6.5 | % | 6.4 | % | |||||||||||||||
| Weighted-average discount rate – finance leases | 6.4 | % | 6.4 | % | 6.4 | % | 6.4 | % | |||||||||||||||
Future minimum rental payments under operating and finance lease agreements are as follows (in thousands):
| Operating | Finance | ||||||||||
| Year ending December 31, 2023 (remaining) | $ | 439 | $ | 168 | |||||||
| Year ending December 31, 2024 | 1,511 | 672 | |||||||||
| Year ending December 31, 2025 | 1,021 | 676 | |||||||||
| Year ending December 31, 2026 | 362 | 666 | |||||||||
| Year ending December 31, 2027 | 131 | 311 | |||||||||
| Total | 3,464 | 2,493 | |||||||||
| Less present value discount | (259) | (271) | |||||||||
| Operating and finance lease liabilities | $ | 3,205 | $ | 2,222 | |||||||
15. Loan and Security Agreement
On March 16, 2020, the Company and Rockwell Transportation, Inc., as Borrowers, entered into a Loan and Security Agreement (the "Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP ("Innovatus"), as collateral agent and the lenders party thereto, pursuant to which Innovatus, as a lender, agreed to make certain term loans to the Company in the aggregate principal amount of up to $35.0 million (the "Term Loans"). Funding of the first $22.5 million tranche was completed on March 16, 2020. The Company is no longer eligible to draw on additional tranches, which were tied to the achievement of certain milestones. Net draw down proceeds were $21.2 million with closing costs of $1.3 million.
In connection with each funding of the Term Loans, the Company was required to issue to Innovatus a warrant (the “Warrants”) to purchase a number of shares of the Company’s common stock equal to 3.5% of the principal amount of the relevant Term Loan funded divided by the exercise price. In connection with the first tranche of the Term Loans, the Company issued a Warrant to Innovatus, exercisable for an aggregate of 43,388 shares of the Company’s common stock at an exercise price of $18.15 per share. The Warrant may be exercised on a cashless basis and is immediately exercisable through the seventh anniversary of the applicable funding date. The number of shares of common stock for which the Warrant is exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in such Warrant. The Company evaluated the warrant under ASC 470, Debt, and recognized an additional debt discount of approximately $0.5 million based on the relative fair value of the base instruments and warrants. The Company calculated the fair value of the warrant using the Black-Scholes model.
The Term Loans mature on March 16, 2025, and bear interest at the greater of (i) Prime Rate (as defined in the Loan Agreement) and (ii) 4.75%, plus 4.00%, with an initial interest rate of 8.75% per annum and an effective interest rate of 12.5% as of September 30, 2023. The Company has the option, under certain circumstances, to add 1.00% of such interest rate amount to the then outstanding principal balance in lieu of paying such amount in cash. For the three months ended September 30, 2023 and 2022, interest expense amounted to $0.3 million and $0.4 million, respectively. For the nine months ended September 30, 2023 and 2022, interest expense amounted to $0.9 million and $1.2 million, respectively.
The Loan Agreement is secured by all assets of the Company and Rockwell Transportation, Inc. and contains customary representations and warranties and covenants, subject to customary carve outs, and initially included financial covenants related to liquidity and sales of Triferic.
In September 2021, the Company entered into an amendment to the Loan Agreement in which the Company, in exchange for Innovatus lowering the sales covenants, agreed to: (i) prepay an aggregate principal amount of $7.5 million in ten installments commencing on December 1, 2021; (ii) pay an additional prepayment premium of 5% on prepaid amounts if the Company elects to prepay all outstanding Term Loans on or before September 24, 2023 and (iii) maintain minimum liquidity of no less than $5.0 million if the aggregate principal amount of Term Loans is greater than $15 million pursuant to the liquidity covenant in the Loan Agreement.
On November 10, 2022, the Company entered into a Second Amendment to the Loan and Security Agreement (the “Second Amendment”) dated as of November 14, 2022 with Innovatus, which amended the Loan Agreement. Pursuant to the Second Amendment, the Company (i) prepaid an additional aggregate principal amount of $5.0 million in Term Loans in one installment on November 14, 2022; (ii) paid interest only payments until September 2023, at which time it resumed scheduled debt payments. The financial covenant related to the sales of Triferic was replaced with the trailing 6 months revenue of our concentrates products. The Company cannot assure that it can maintain compliance with the covenants under our Loan Agreement, which may result in an event of default. The Company's ability to comply with these covenants may be adversely affected by events beyond its control. If the Company is unable to comply with the covenants under the Loan Agreement, it would pursue all available cure options in order to regain compliance. However, the Company may not be able to mutually agree with Innovatus on appropriate remedies to cure a future breach of a covenant, which could give rise to an event of default. If the Company is unable to avoid an event of default, any required repayments could have an adverse effect on its liquidity.
As of September 30, 2023, the Company was in compliance with all covenants under the Loan Agreement.
As of September 30, 2023, the outstanding balance of the Term Loan was $9.0 million, net of unamortized issuance costs and discount of $0.5 million.
The following table reflects the schedule of principal payments on the Term Loan as of September 30, 2023 (in thousands):
| Principal Payments | |||||
| 2023 (remaining) | $ | 1,500 | |||
| 2024 | 6,000 | ||||
| 2025 | 2,000 | ||||
| $ | 9,500 | ||||
17
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
16. Insurance Financing Note Payable
On June 3, 2023, the Company entered into a short-term note payable for $0.7 million, bearing interest at 9.59% per annum to finance various insurance policies. Principal and interest payments related to this note began on July 3, 2023 and will be paid on a straight-line amortization over nine months with the final payment due on March 3, 2024. As of September 30, 2023, the outstanding balance was $0.5 million.
18
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 our condensed consolidated financial statements and related notes in “Item 1. Condensed Consolidated Financial Statements”. References in this report to “Rockwell,” 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 current 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,” “could,” “plan,” “potential,” “predict,” “forecast,” “project,” “intend,” “is focused on” 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 liquidity and capital resources; our ability to continue as a going concern; our ability to successfully integrate acquisitions; our ability to develop Ferric Pyrophosphate Citrate (“FPC”) for other indications; our ability to successfully execute on our business strategy; our ability to raise additional capital; our ability to successfully implement certain cost containment and cost-cutting measures; our ability to achieve profitability and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.
While we believe 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, 2022 and from time to time in our other reports filed with the SEC.
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 future results will meet expectations. Forward-looking statements speak only as of the date of this report and we expressly disclaim any intent 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 Medical is a healthcare company that develops, manufactures, commercializes, and distributes a portfolio of hemodialysis products for dialysis providers worldwide.
Rockwell is a revenue-generating business and the second largest supplier of liquid and powder 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 at freestanding outpatient dialysis centers, hospital-based outpatient centers, skilled nursing facilities, or in 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 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 Manufacturing Practices ("cGMP") and Association for Advancement of Medical Instrumentation ("AAMI") standards. Rockwell manufactures hemodialysis concentrates at its facilities in Michigan, South Carolina, and Texas totaling approximately 175,000 square feet, and manufactures its dry acid concentrate mixers at its facility in Iowa. In addition, the Company manufactures hemodialysis concentrates in Minnesota under a contract manufacturing agreement with a contract manufacturing organization. (See Note 4 of the accompanying condensed consolidated interim financial statements for further detail). Rockwell 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.
In addition to its primary focus on hemodialysis concentrates, Rockwell also has a proprietary parenteral iron product, Triferic (ferric pyrophosphate citrate, ("FPC")), which is indicated to maintain hemoglobin in adult patients with hemodialysis-dependent chronic kidney disease. While Rockwell has discontinued commercialization of Triferic in the United States, the Company has established international partnerships with companies seeking to develop and commercialize Triferic outside the United States and is working with these international partners to develop and commercialize Triferic in their respective regions. Additionally, Rockwell continues to evaluate the viability of its FPC platform and FPC's potential to treat iron deficiency, iron deficiency anemia, and acute heart failure.
Rockwell’s strategy is focused on growing the Company's revenue-generating business, which currently includes hemodialysis concentrates and international partnerships for Triferic and achieving profitability to put the Company in a stronger and more stable financial position.
Hemodialysis Concentrates Business: Rockwell is the second largest supplier of life-sustaining hemodialysis concentrates products to dialysis clinics in the United States. Our hemodialysis concentrates products are used to sustain a patient's life by removing toxins and balancing electrolytes in a dialysis patient’s bloodstream. A key element of our dialysis business strategy going forward is to improve the strength of our concentrates business. According to an independent research report from L.E.K. Consulting LLC, which was commissioned by Rockwell in 2022, the hemodialysis concentrates market in the United States alone was valued at $380 million in 2022 and is anticipated to grow to approximately $500 million by 2026. We believe we can grow our business through the addition of new customers, expanding our territory coverage, increasing the efficiency of our production, and pricing our products appropriately to drive profitability.
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 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 manufacturing and selling of hemodialysis concentrates products, all of which are manufactured under a contract manufacturing agreement with a third-party organization. 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, the first to be paid on the first anniversary and the second to be paid on the second anniversary of the Closing. See Note 4 for further detail.
On September 18, 2023, Rockwell and our long-time partner, DaVita, Inc. ("DaVita"), a leading provider of kidney care, entered into an Amended and Restated Products Purchase Agreement (the "Amended Agreement"), which amends and restates 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 to Rockwell on or after December 1, 2023. The term of the Amended Agreement will expire on December 31, 2024. DaVita will have the right, in its sole discretion upon written notice to the Company given no later than September 30, 2024, to further extend the term through December 31, 2025. In the event of such an extension, product pricing will be increased for the extended term. In addition, DaVita is required to provide the Company with nine-month purchasing forecasts and a commitment to purchase at least the forecasted amounts. In the event that DaVita does not meet its forecasts, it is required to pay the Company for the amount forecasted, purchase additional product, or the Company may terminate the Amended Agreement. Upon expiration or termination of the Amended Agreement, and upon request by DaVita, the Company has agreed to provide transition services to DaVita during a transition period.
In 2022, in connection with an amendment of the original Products Purchase Agreement, DaVita invested $15 million in the Company's preferred stock in two equal tranches. The first tranche of $7.5 million was funded on April 7, 2022. The second tranche of $7.5 million was funded on June 16, 2022.
Additionally, during the third quarter of 2023, Rockwell entered into several long-term product purchase agreements, which include supply and purchasing commitments from certain parties. These agreements include Sanderling Renal Services, Inc., a full-service provider of in-center, home dialysis and renal telemedicine services focusing on patients in rural and underserved communities across the United States; Centers for Dialysis Care, the largest non-profit, independent outpatient dialysis provider in Northeast Ohio; Houston Methodist, a leading health system and academic medical center; Dialyze Direct, a leading provider of home dialysis services in the skilled nursing facility setting; and Outset Medical (Nasdaq:OM), a medical technology company pioneering a first-of-its-kind technology to reduce the cost and complexity of dialysis with its Tablo® Hemodialysis System, which is FDA-cleared for use from the hospital to the home.
On November 9, 2022, Rockwell reacquired its distribution rights to its hemodialysis concentrates products from Baxter and has agreed to terminate the exclusive distribution agreement dated October 2, 2014. Exclusivity and other provisions
associated with the distribution agreement terminated November 9, 2022 and the remaining operational elements of the agreement terminate December 31, 2022. Under the exclusive distribution agreement, Baxter distributed and commercialized Rockwell’s hemodialysis concentrates products in the United States and certain other countries. Rockwell manufactured all hemodialysis concentrates products and provided customer service and order delivery to nearly all U.S. customers. Following the reacquisition of these rights, Rockwell is able to sell its hemodialysis concentrates products directly to dialysis clinics throughout the United States and around the world. Additionally, Rockwell is able to independently price its products, eliminate costs associated with manufacturing covenants, improve manufacturing efficiencies, realize the full benefits from those improvements, and develop, in-license, or acquire new products to develop a broader kidney care products portfolio. This is expected to improve Rockwell's overall profitability and set the Company on a positive growth trajectory. Collectively, we believe this affords Rockwell the opportunity to expand its leadership position within a large market opportunity.
Triferic: Our first two branded products from our FPC platform, Triferic (dialysate) and Triferic AVNU, are indicated to maintain hemoglobin in patients undergoing hemodialysis. We began commercializing Triferic and Triferic AVNU in the United States in the second half of 2019 and in early 2021, respectively. In addition, Rockwell established six international partnerships to develop and commercialize Triferic in China, India, Korea, Turkey, Peru and Chile.
In 2022, Rockwell undertook a strategic review of Triferic's viability in the United States. Triferic was launched into a very competitive marketplace with well-entrenched products and a lack of consensus regarding unmet medical needs for dialysis patients with anemia. Due to its limited market adoption, unfavorable reimbursement, and absence of interest from other companies to license or acquire Triferic despite Rockwell's significant effort to partner the program, the Company discontinued its NDAs for Triferic and Triferic AVNU in the United States in the fourth quarter of 2022. Sustaining Triferic commercially in the United States resulted in annual losses to Rockwell. The decision to discontinue the NDAs was not made lightly as the Company realizes the direct impact this action had on patients using the products. Triferic and its approved presentations were not discontinued for safety reasons.
Rockwell continues to support its partners outside the United States that have exclusive license agreements to develop and commercialize Triferic in India, Korea, Turkey, Peru and Chile. Partnering in these regions allows us to better leverage the development, regulatory, commercial presence, and expertise of business partners to increase sales of our products throughout the world. Currently, India, Peru and Chile development work has been put on hold. However, we believe there is still potential opportunity for Triferic internationally and will work diligently to support our partners, which requires minimal financial commitment from Rockwell and provides us with potential for near- and long-term revenue.
On August 7, 2023, Rockwell was informed by 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 will not bring the product forward to registration.
Research and Development Pipeline: FPC for Home Infusion is Rockwell's follow-up to Triferic and utilizes the FPC platform in the home infusion setting.
In late 2021, Rockwell filed an Investigational New Drug (“IND”) application with the United States Food and Drug Administration (“FDA”) for the treatment of iron deficiency anemia in patients, who are receiving medications in the home infusion setting. During the second quarter 2022, Rockwell provided the FDA with supplemental data to be used in Rockwell’s clinical studies and to clinically support the Company’s IND application for home infusion. The FDA placed this program on Clinical Hold and requested that additional data related to the microbiology and short-term stability of this formulation be provided to support the application. During the third quarter of 2022, Rockwell conducted a microbiological and short-term stability study of FPC for Home Infusion, in accordance with FDA guidance, to support the Company’s IND application. Preliminary results from the microbiology and short-term stability study indicated that the program would likely not meet the FDA’s requirements to support the IND application and would require significant capital expenditure and resources to support additional re-formulation work and conduct a Phase 2 trial. As a result, Rockwell has put development work associated with FPC for Home Infusion on hold.
Rockwell is also exploring FPC’s impact on the treatment of hospitalized acute heart failure patients, which affects more than one million people in the United States annually. Rockwell conducted a pre-IND meeting with the FDA in 2022 and will determine the path forward for FPC in acute heart failure as the Company works toward profitability.
Results of Operations for the Three Months Ended September 30, 2023 and 2022
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The following table summarizes our operating results for the periods presented below (dollars in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||
| 2023 | % of Revenue | 2022 | % of Revenue | % Change | |||||||||||||||||||||||||
| Net Sales | $ | 23,771 | $ | 18,691 | 27 | % | |||||||||||||||||||||||
| Cost of Sales | 21,569 | 91 | % | 17,914 | 96 | % | 20 | % | |||||||||||||||||||||
| Gross Profit | 2,202 | 9 | % | 777 | 4 | % | 183 | % | |||||||||||||||||||||
| Research and Product Development | 494 | 2 | % | 469 | 3 | % | 5 | % | |||||||||||||||||||||
| Selling and Marketing | 556 | 2 | % | 762 | 4 | % | (27) | % | |||||||||||||||||||||
| General and Administrative | 2,889 | 12 | % | 3,254 | 17 | % | (11) | % | |||||||||||||||||||||
| Operating Loss | $ | (1,737) | (7) | % | $ | (3,708) | (20) | % | (53) | % | |||||||||||||||||||
Net Sales
During the three months ended September 30, 2023, our net sales were $23.8 million compared to net sales of $18.7 million during the three months ended September 30, 2022. The increase of $5.1 million was primarily due to the Evoqua Asset Acquisition (see Note 4) which, through the acquisition of customer lists, resulted in new revenue during the third quarter of 2023 of $3.4 million, and the recognition of deferred license revenue of $2.2 million related to the Wanbang Agreement (see Note 10 to the condensed consolidated financial statements included elsewhere in this Form 10-Q). Overall, product revenue for the three months ended September 30, 2023 was $21.6 million compared to product revenue of $18.1 million for the three months ended September 30, 2022.
Gross Profit
Cost of sales for the three months ended September 30, 2023 was $21.6 million, resulting in gross profit of $2.2 million for the three months ended September 30, 2023, compared to cost of sales of $17.9 million and a gross profit of $0.8 million for the three months ended September 30, 2022. Cost of sales for the three months ended September 30, 2023 included a $1.1 million increase to Triferic inventory reserves due to the decision by Wanbang not to pursue registration in China. Gross profit increased by $1.4 million primarily due to $1.1 million net impact of Wanbang revenue and inventory reserves, as well as lower distribution costs associated with the concentrates business.
Research and Product Development Expense
Research and product development expenses were $0.5 million for each of the three months ended September 30, 2023 and 2022. Employee compensation expense decreased as a result of lower headcount, but was offset by severance costs.
Selling and Marketing Expense
Selling and marketing expenses were $0.6 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively. We continue to evaluate marketing spend and focus on target opportunities for greater return on investments.
General and Administrative Expense
General and administrative expenses were $2.9 million for the three months ended September 30, 2023, compared with $3.3 million for the three months ended September 30, 2022. The decrease of $0.4 million was primarily due to lower employee compensation as a result of reduced headcount, decreased government fees related to Triferic and lower administrative costs.
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Other Expense
Total other expense of $0.1 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively, was primarily driven by $0.4 million and $0.5 million of other expense for the three months ended September 30, 2023 and 2022, respectively, largely due to interest expense related to our debt facility (See Note 15 to the condensed consolidated financial statements included elsewhere in this Form 10-Q).
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
The following table summarizes our operating results for the periods presented below (dollars in thousands):
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2023 | % of Revenue | 2022 | % of Revenue | % Change | |||||||||||||||||||||||||
| Net Sales | $ | 61,519 | $ | 53,497 | 15 | % | |||||||||||||||||||||||
| Cost of Sales | 55,685 | 91 | % | 51,760 | 97 | % | 8 | % | |||||||||||||||||||||
| Gross Profit | 5,834 | 9 | % | 1,737 | 3 | % | 236 | % | |||||||||||||||||||||
| Research and Product Development | 939 | 2 | % | 2,963 | 6 | % | (68) | % | |||||||||||||||||||||
| Selling and Marketing | 1,584 | 3 | % | 1,743 | 3 | % | (9) | % | |||||||||||||||||||||
| General and Administrative | 9,434 | 15 | % | 11,845 | 22 | % | (20) | % | |||||||||||||||||||||
| Operating Loss | $ | (6,123) | (10) | % | $ | (14,814) | (28) | % | (59) | % | |||||||||||||||||||
Net Sales
During the nine months ended September 30, 2023, our net sales were $61.5 million compared to net sales of $53.5 million during the nine months ended September 30, 2022. The increase of $8.0 million was primarily due to the restructuring of our products purchase agreement with DaVita, the reacquired rights to commercialize and distribute our products, the asset acquisition of Evoqua, onboarding of new customers and increased pricing to other customers. Overall, product revenue for the nine months ended September 30, 2023 was $57.7 million compared to product revenue of $51.9 million for the nine months ended September 30, 2022, an increase of $5.8 million.
Gross Profit
Cost of sales during the nine months ended September 30, 2023 was $55.7 million, resulting in gross profit of $5.8 million during the nine months ended September 30, 2023, compared to cost of sales of $51.8 million and a gross profit of $1.7 million during the nine months ended September 30, 2022. Gross profit increased by $4.1 million primarily due to the restructuring of our supply contract with DaVita in 2022, recognition of the remaining deferred license revenue related to the termination of the Baxter distribution agreement (See Note 10 to the condensed condensed consolidated financial statements included elsewhere in this Form 10-Q), onboarding of new customers, increased pricing to other customers and net impact of Wanbang revenue and inventory reserves.
Research and Development Expense
Research and product development expenses were $0.9 million and $3.0 million for the nine months ended September 30, 2023 and 2022, respectively. Research and product development expenses decreased by $2.1 million due to a reduction in wages and project costs resulting from the decision to pause all research related to our FPC for Home Infusion program. Approximately 44% of research and development expenses for the nine months ended September 30, 2023 were comprised of severance costs.
Selling and Marketing Expense
Selling and marketing expenses were $1.6 million and $1.7 million for the nine months ended September 30, 2023, and 2022, respectively. We continue to evaluate marketing spend and focus on target opportunities for greater return on investments.
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General and Administrative Expense
General and administrative expenses were $9.4 million during the nine months ended September 30, 2023, compared with $11.8 million during the nine months ended September 30, 2022. The decrease of $2.4 million is primarily driven by lower employee compensation as a result of reduced headcount, decreased government fees related to Triferic, reduced professional fees and lower administrative costs.
Other Expense
Total other expense of $0.8 million and $1.5 million for the nine months ended September 30, 2023 and 2022, respectively, was primarily driven by $1.2 million and $1.5 million of other expense for the nine months ended September 30, 2023 and 2022, respectively, largely due to interest expense related to our debt facility (See Note 15 to the condensed consolidated financial statements included elsewhere in this Form 10-Q).
Liquidity and Capital Resources
As of September 30, 2023, we had approximately $11.7 million of cash, cash equivalents and investments available-for-sale, and working capital of $6.8 million. Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $9.4 million. Based on the currently available working capital, 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.
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 and the Company received gross proceeds of approximately $13.8 million (See Note 11 to the condensed consolidated financial statements included elsewhere in this Form 10-Q).
On July 10, 2023, the Company completed the Evoqua Acquisition. Total consideration was $17.4 million, comprising a cash payment at Closing of $12.2 million (inclusive of transaction costs) and two $2.5 million deferred payments, the first to be paid on the first anniversary and the second to be paid on the second anniversary of the Closing. See Note 4 for further detail.
The Company continues to review its operational plans and execute on the acquisition of new customers and cost containment activities. The Company may require additional capital to sustain its operations and make the investments it needs to execute its strategic plan. Additionally, the Company's operational plans include raising capital, if needed, by using our ATM facility or other methods or forms of financings, subject to existing limitations.
If the Company attempts to obtain additional debt or equity financing, the Company cannot assume such 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 2023, the Company is no longer subject to the "baby shelf" limitations under Form S-3, which limit the amount the Company may offer pursuant to its registration statement on Form S-3.
The Company is subject to certain covenants and cure provisions under its Loan Agreement with Innovatus. As of the date of this report, the Company is in compliance with all covenants (See Note 15 to the accompanying condensed consolidated interim financial statements).
The global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increased U.S. trade tariffs and trade disputes with other countries, 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 Israel-Hamas conflict and other political tensions, and lingering effects of the COVID-19 pandemic. 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.
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 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 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 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, ii) our ability to achieve profitability, 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.
Cash Used in Operating Activities
Net cash used in operating activities was $9.4 million for the nine months ended September 30, 2023 compared to net cash used in operating activities of $16.8 million for the nine months ended September 30, 2022. The decrease in cash used from operating activities during the current period was primarily due to a decrease in net loss, offset by changes in current balance sheet accounts in the ordinary course of business of approximately $6.7 million, including a decrease in deferred license revenue of $3.8 million for recognition of the remaining deferred license revenue related to the termination of the Baxter distribution agreement, a decrease in net accounts receivable of $3.1 million, a decrease in other liabilities of $1.0 million and a decrease in prepaid and other assets of $0.9 million.
Cash Used In Investing Activities
Net cash used in investing activities was $5.1 million during the nine months ended September 30, 2023 compared to net cash used in investing activities of $5.6 million for the nine months ended September 30, 2022. Net cash used in investing activities during the nine months ended September 30, 2023 was primarily due to the cash paid in connection with the Evoqua Asset Acquisition of $12.4 million, partially offset by the net cash proceeds from sales and purchase of available-for-sale investments during the period of $7.4 million. Net cash used in investing activities during the nine months ended September 30, 2022 were primarily related to the purchase and sale of investments.
Cash Provided by Financing Activities
Net cash provided by financing activities was $12.1 million during the nine months ended September 30, 2023 compared to net cash provided by financing activities of $22.1 million for the nine months ended September 30, 2022. Net cash provided financing activities during the nine months ended September 30, 2023 was primarily due to the gross proceeds from the issuance of common stock in connection with the exercise of the Prior Warrant and Pre-Funded Warrants of $13.8 million. Net cash provided by financing activities for the nine months ended September 30, 2022 was primarily due to the gross proceeds from the issuance of common and preferred stock of $15.0 million each, offset by debt repayment of $6.8 million.
Contractual Obligations and Other Commitments
See Note 13 to the condensed consolidated financial statements included elsewhere in this Form 10-Q for additional disclosures. There have been no other material changes from the contractual obligations and other commitments disclosed in Note 14 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Critical Accounting Policies and Significant Judgments and Estimates
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, our critical accounting policies and significant estimates related to the Evoqua Asset Acquisition, including changes to our existing accounting policies, are detailed below.
Fair Value Measurements
Nonrecurring Valuations. The assets acquired through the Evoqua Asset Acquisition were recorded at relative fair value, which required the determination of the fair values of assets acquired as of the acquisition date. In making these fair value determinations, we were required to make estimates and assumptions that affected the recorded amounts, including, but not limited to, (i) for the customer relationships intangible asset, expected future cash flows, discount rates and remaining useful life and (ii) for the equipment, replacement cost. To assist us in making these fair value determinations, we engaged third-party valuation specialists. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain.
Intangible Assets
Definite-lived intangible assets consist of our customer relationships intangible asset, which has been capitalized and is being amortized over 20 years.
Recently issued and adopted accounting pronouncements:
We have evaluated all recently issued accounting pronouncements and believe such pronouncements do not have a material effect our financial statements. See Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. 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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure material information required to be disclosed in our reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance 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 was required to apply its judgment in evaluating the cost‑benefit relationship of possible controls and procedures.
Under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer concluded our disclosure controls and procedures were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We may be involved in certain routine 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 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 1A. Risk Factors
Our business is subject to various risks, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 under "Item 1A - Risk Factors" and subsequent quarterly report on Form 10-Q for the quarter ended June 30, 2023, except as noted below.
Our agreement with our largest customer in our concentrates business is set to expire on December 31, 2024 and our inability to negotiate a new agreement would have a material and adverse effect on our financial condition and results of operations.
Our Amended and Restated Products Purchase Agreement (the “Products Purchase Agreement”) with DaVita is set to expire on December 31, 2024. The Products Purchase Agreement is a fixed price agreement. In September 2023, we amended the original Products Purchase Agreement with DaVita to raise our prices in light of inflationary pressures and to remove certain provisions. The Products Purchase Agreement may be extended by DaVita for one year in its sole discretion. When the Products Purchase Agreement is again up for renewal, we may be unable to reach an agreement with DaVita on new terms that make economic sense for us. In that case, we would not expect to enter into a new agreement. This would result in the loss of approximately one-half of our current volume of concentrates products and would have a material and adverse effect on our financial condition and results of operations and would likely lead to the implementation of cost saving measures that would negatively impact our activities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX | ||||||||||||||
| Exhibit No. | Description | |||||||||||||
| 4.1 | ||||||||||||||
| 10.1 *+ | ||||||||||||||
| 10.2 | ||||||||||||||
| 10.3 | ||||||||||||||
| 31.1* | ||||||||||||||
| 32.1** | ||||||||||||||
| 101.INS* | XBRL Instance Document | |||||||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema | |||||||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |||||||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Database | |||||||||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |||||||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase | |||||||||||||
| 104* | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included as Exhibit 101) | |||||||||||||
| * | Filed herewith | |||||||||||||
| ** | Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act | |||||||||||||
| + | Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. | |||||||||||||
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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.
| ROCKWELL MEDICAL, INC. | |||||||||||
| (Registrant) | |||||||||||
| Date: November 14, 2023 | /s/ Mark Strobeck | ||||||||||
| Mark Strobeck, Ph.D. Chief Executive Officer (Principal Executive Officer and Interim Financial Officer) | |||||||||||
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