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, 2017March 31, 2018
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)
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Michigan | 38-3317208 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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30142 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Common Stock, no par value |
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk | 17 |
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17 | |
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Triferic® is a registered trademark of Rockwell Medical, Inc.
2
PART I – FINANCIAL INFORMATION
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
As of September 30, 2017March 31, 2018 and December 31, 20162017
(Unaudited)
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| September 30, |
| December 31, |
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| March 31, |
| December 31, |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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ASSETS |
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Cash and Cash Equivalents |
| $ | 3,887,923 |
| $ | 17,180,594 |
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| $ | 3,278,087 |
| $ | 8,406,917 |
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Investments Available for Sale |
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| 35,028,841 |
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| 40,759,703 |
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| 24,821,682 |
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| 24,648,459 |
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Accounts Receivable, net of a reserve of $6,000 in 2017 and $5,000 in 2016 |
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| 5,374,390 |
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| 6,393,228 |
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Accounts Receivable, net of a reserve of $3,400 in 2018 and $11,000 in 2017 |
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| 5,993,708 |
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| 6,355,566 |
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Inventory |
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| 14,864,642 |
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| 12,141,072 |
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| 8,544,854 |
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| 7,637,384 |
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Other Current Assets |
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| 2,032,095 |
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| 2,034,598 |
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| 1,607,440 |
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| 1,779,992 |
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Total Current Assets |
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| 61,187,891 |
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| 78,509,195 |
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| 44,245,771 |
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| 48,828,318 |
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Property and Equipment, net |
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| 1,708,817 |
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| 1,391,575 |
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| 2,572,619 |
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| 2,548,978 |
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Inventory, Non-Current |
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| 1,494,175 |
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| 1,826,554 |
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| 3,722,901 |
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| 5,986,752 |
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Intangible Assets |
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| 4,117 |
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| 4,382 |
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| 3,940 |
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| 4,028 |
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Goodwill |
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| 920,745 |
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| 920,745 |
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| 920,745 |
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| 920,745 |
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Other Non-current Assets |
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| 490,655 |
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| 501,187 |
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| 490,703 |
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| 490,819 |
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Total Assets |
| $ | 65,806,400 |
| $ | 83,153,638 |
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| $ | 51,956,679 |
| $ | 58,779,640 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Accounts Payable |
| $ | 4,188,677 |
| $ | 5,858,234 |
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| $ | 4,012,341 |
| $ | 4,222,159 |
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Accrued Liabilities |
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| 3,231,789 |
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| 4,210,151 |
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| 4,191,501 |
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| 4,715,712 |
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Customer Deposits |
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| 199,407 |
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| 77,217 |
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| 235,078 |
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| 205,303 |
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Total Current Liabilities |
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| 7,619,873 |
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| 10,145,602 |
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| 8,438,920 |
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| 9,143,174 |
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Deferred License Revenue |
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| 17,396,167 |
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| 20,051,737 |
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| 16,150,609 |
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| 16,723,318 |
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Shareholders’ Equity: |
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Common Shares, no par value, 51,761,040 and 51,527,711 shares issued and outstanding |
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| 272,055,391 |
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| 268,199,939 |
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Common Shares, no par value, 51,768,424 and 51,768,424 shares issued and outstanding |
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| 274,386,910 |
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| 273,210,907 |
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Accumulated Deficit |
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| (231,223,093) |
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| (214,341,092) |
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| (246,791,897) |
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| (240,262,376) |
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Accumulated Other Comprehensive Income |
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| (41,938) |
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| (902,548) |
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| (227,863) |
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| (35,383) |
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Total Shareholders’ Equity |
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| 40,790,360 |
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| 52,956,299 |
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| 27,367,150 |
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| 32,913,148 |
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Total Liabilities And Shareholders’ Equity |
| $ | 65,806,400 |
| $ | 83,153,638 |
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| $ | 51,956,679 |
| $ | 58,779,640 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the three and nine months ended September 30,March 31, 2018 and March 31, 2017 and September 30, 2016
(Unaudited)
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| Three Months Ended September 30, 2017 |
| Three Months Ended September 30, 2016 |
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 |
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| Three Months Ended March 31, 2018 |
| Three Months Ended March 31, 2017 |
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Sales |
| $ | 14,626,904 |
| $ | 12,814,815 |
| $ | 42,462,265 |
| $ | 39,894,380 |
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| $ | 14,948,579 |
| $ | 14,592,254 |
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Cost of Sales |
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| 13,555,853 |
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| 11,234,934 |
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| 37,535,454 |
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| 35,130,045 |
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| 14,919,072 |
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| 12,234,782 |
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Gross Profit |
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| 1,071,051 |
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| 1,579,881 |
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| 4,926,811 |
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| 4,764,335 |
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| 29,507 |
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| 2,357,472 |
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Selling, General and Administrative |
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| 4,791,636 |
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| 5,070,127 |
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| 17,433,530 |
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| 15,071,238 |
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| 5,061,955 |
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| 6,100,715 |
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Research and Product Development |
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| 1,304,658 |
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| 1,261,863 |
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| 4,195,003 |
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| 4,639,617 |
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| 1,666,356 |
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| 1,214,851 |
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Operating Income (Loss) |
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| (5,025,243) |
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| (4,752,109) |
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| (16,701,722) |
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| (14,946,520) |
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| (6,698,804) |
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| (4,958,094) |
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Interest and Investment Income |
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| (31,751) |
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| 188,847 |
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| (180,279) |
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| 602,429 |
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| 169,283 |
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| 216,071 |
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Income (Loss) Before Income Taxes |
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| (5,056,994) |
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| (4,563,262) |
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| (16,882,001) |
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| (14,344,091) |
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| (6,529,521) |
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| (4,742,023) |
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Income Tax Expense |
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| — |
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| — |
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| — |
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| (404,527) |
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| — |
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Net Income (Loss) |
| $ | (5,056,994) |
| $ | (4,563,262) |
| $ | (16,882,001) |
| $ | (14,748,618) |
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| $ | (6,529,521) |
| $ | (4,742,023) |
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Basic Earnings (Loss) per Share |
| $ | (0.10) |
| $ | (0.09) |
| $ | (0.33) |
| $ | (0.29) |
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| $ | (0.13) |
| $ | (0.09) |
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Diluted Earnings (Loss) per Share |
| $ | (0.10) |
| $ | (0.09) |
| $ | (0.33) |
| $ | (0.29) |
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| $ | (0.13) |
| $ | (0.09) |
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The accompanying notes are an integral part of the consolidated financial statements.
4
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30,March 31, 2018 and March 31, 2017 and September 30, 2016
(Unaudited)
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| Three Months Ended September 30, 2017 |
| Three Months Ended September 30, 2016 |
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 |
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| Three Months Ended March 31, 2018 |
| Three Months Ended March 31, 2017 |
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Net Income (Loss) |
| $ | (5,056,994) |
| $ | (4,563,262) |
| $ | (16,882,001) |
| $ | (14,748,618) |
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| $ | (6,529,521) |
| $ | (4,742,023) |
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Unrealized Gain on Available-for-Sale Investments |
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| 248,628 |
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| 115,541 |
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| 860,752 |
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| 311,273 |
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Unrealized Gain (Loss) on Available-for-Sale Investments |
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| (189,995) |
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| 112,002 |
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Foreign Currency Translation Adjustments |
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| 132 |
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| (18) |
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| (142) |
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| (18) |
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| (2,485) |
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| 505 |
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Comprehensive Income (Loss) |
| $ | (4,808,234) |
| $ | (4,447,739) |
| $ | (16,021,391) |
| $ | (14,437,363) |
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| $ | (6,722,001) |
| $ | (4,629,516) |
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The accompanying notes are an integral part of the consolidated financial statements.
5
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the ninethree months ended September 30, 2017March 31, 2018
(Unaudited)
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| ACCUMULATED |
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| ACCUMULATED |
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| OTHER |
| TOTAL |
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| OTHER |
| TOTAL |
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| COMMON SHARES |
| ACCUMULATED |
| COMPREHENSIVE |
| SHAREHOLDER’S |
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| COMMON SHARES |
| ACCUMULATED |
| COMPREHENSIVE |
| SHAREHOLDER’S |
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| SHARES |
| AMOUNT |
| DEFICIT |
| INCOME (LOSS) |
| EQUITY |
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| SHARES |
| AMOUNT |
| DEFICIT |
| INCOME (LOSS) |
| EQUITY |
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Balance as of December 31, 2016 |
| 51,527,711 |
| $ | 268,199,939 |
| $ | (214,341,092) |
| $ | (902,548) |
| $ | 52,956,299 |
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Balance as of December 31, 2017 |
| 51,768,424 |
| $ | 273,210,907 |
| $ | (240,262,376) |
| $ | (35,383) |
| $ | 32,913,148 |
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Net Loss |
| — |
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| — |
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| (16,882,001) |
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| — |
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| (16,882,001) |
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| — |
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| — |
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| (6,529,521) |
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| — |
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| (6,529,521) |
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Unrealized Gain on Available-for-Sale Investments |
| — |
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| — |
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| — |
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| 860,752 |
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| 860,752 |
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Unrealized (Loss) on Available-for-Sale Investments |
| — |
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| — |
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| — |
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| (189,995) |
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| (189,995) |
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Foreign Currency Rate Changes |
| — |
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| — |
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| — |
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| (142) |
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| (142) |
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| — |
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| — |
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| — |
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| (2,485) |
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| (2,485) |
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Issuance of Common Shares |
| 21,000 |
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| 116,105 |
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| — |
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| — |
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| 116,105 |
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| — |
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| — |
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| — |
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| — |
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| — |
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Shares Issued in Exchange for Services |
| 50,000 |
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| 158,667 |
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| 158,667 |
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| — |
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| 68,653 |
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| — |
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| — |
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| 68,653 |
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Stock Option Based Expense |
| — |
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| 3,275,339 |
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| — |
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| — |
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| 3,275,339 |
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| — |
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| 616,273 |
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| — |
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| — |
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| 616,273 |
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Stock Tendered in Satisfaction of Tax Liabilities |
| (317,671) |
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| (2,287,231) |
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| — |
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| — |
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| (2,287,231) |
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| — |
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| — |
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| — |
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| — |
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| — |
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Restricted Stock Amortization |
| 480,000 |
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| 2,592,572 |
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| — |
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| — |
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| 2,592,572 |
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| — |
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| 491,077 |
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| — |
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| — |
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| 491,077 |
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Balance as of September 30, 2017 |
| 51,761,040 |
| $ | 272,055,391 |
| $ | (231,223,093) |
| $ | (41,938) |
| $ | 40,790,360 |
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Balance as of March 31, 2018 |
| 51,768,424 |
| $ | 274,386,910 |
| $ | (246,791,897) |
| $ | (227,863) |
| $ | 27,367,150 |
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The accompanying notes are an integral part of the consolidated financial statements.
6
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ninethree months ended September 30,March 31, 2018 and March 31, 2017 and September 30, 2016
(Unaudited)
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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Cash Flows From Operating Activities: |
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Net (Loss) |
| $ | (16,882,001) |
| $ | (14,748,618) |
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| $ | (6,529,521) |
| $ | (4,742,023) |
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Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities: |
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Depreciation and Amortization |
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| 384,835 |
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| 583,501 |
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| 129,076 |
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| 130,215 |
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Share Based Compensation—Non-employee |
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| 158,667 |
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| — |
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| 68,654 |
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| 19,071 |
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Share Based Compensation—Employees |
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| 5,874,769 |
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| 7,794,690 |
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| 1,107,349 |
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| 2,259,316 |
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Increase in Inventory Reserves |
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| 1,296,954 |
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| — |
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Loss on Disposal of Assets |
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| 4,084 |
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| 7,340 |
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| 3,083 |
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| 3,350 |
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Loss on Sale of Investments Available for Sale |
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| 704,695 |
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| 26,820 |
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| 2,892 |
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| — |
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Changes in Assets and Liabilities: |
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(Increase) in Accounts Receivable |
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| (149,429) |
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| (2,984,463) |
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(Increase) in Inventory |
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| (2,391,191) |
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| (3,888,489) |
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Decrease (Increase) in Other Assets |
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| 224,635 |
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| (1,376,042) |
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Decrease (Increase) in Accounts Receivable |
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| 295,973 |
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| (344,500) |
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Decrease (Increase) in Inventory |
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| 59,427 |
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| (2,291,108) |
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Decrease in Other Assets |
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| 238,438 |
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| 160,406 |
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(Decrease) in Accounts Payable |
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| (1,669,651) |
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| (598,427) |
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| (209,208) |
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| (1,914,780) |
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(Decrease) in Other Liabilities |
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| (863,034) |
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| (179,856) |
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(Decrease) Increase in Other Liabilities |
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| (494,969) |
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| 2,160,268 |
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(Decrease) in Deferred License Revenue |
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| (1,494,360) |
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| (1,445,058) |
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| (504,528) |
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| (498,120) |
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(Decrease) Increase in Deferred Drug License Revenue |
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| (204,543) |
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| 3,818,184 |
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(Decrease) in Deferred Drug License Revenue |
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| (68,181) |
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| (93,181) |
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Changes in Assets and Liabilities |
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| (6,547,573) |
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| (6,654,151) |
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| (683,048) |
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| (2,821,015) |
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Cash (Used In) Operating Activities |
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| (16,302,524) |
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| (12,990,418) |
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| (4,604,561) |
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| (5,151,086) |
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Cash Flows From Investing Activities: |
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Purchase of Investments Available for Sale |
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| (34,235,347) |
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| (23,158,809) |
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| (1,416,665) |
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| — |
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Sale of Investments Available for Sale |
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| 40,122,266 |
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| 24,491,678 |
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| 1,050,554 |
|
| 31,123 |
|
Purchase of Equipment |
|
| (706,346) |
|
| (328,322) |
|
|
| (155,712) |
|
| (162,003) |
|
Proceeds on Sale of Assets |
|
| 450 |
|
| 1,000 |
|
|
| — |
|
| 450 |
|
Cash Provided by Investing Activities |
|
| 5,181,023 |
|
| 1,005,547 |
| |||||||
Cash (Used In) Investing Activities |
|
| (521,823) |
|
| (130,430) |
| |||||||
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Issuance of Common Shares |
|
| 116,105 |
|
| 80,161 |
| |||||||
Restricted Stock Retained in Satisfaction of Tax Liabilities |
|
| (2,287,231) |
|
| — |
| |||||||
Cash (Used In) Provided By Financing Activities |
|
| (2,171,126) |
|
| 80,161 |
|
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes |
|
| (44) |
|
| (18) |
|
|
| (2,446) |
|
| 632 |
|
(Decrease) In Cash |
|
| (13,292,671) |
|
| (11,904,728) |
|
|
| (5,128,830) |
|
| (5,280,884) |
|
Cash At Beginning Of Period |
|
| 17,180,594 |
|
| 31,198,182 |
|
|
| 8,406,917 |
|
| 17,180,594 |
|
Cash At End Of Period |
| $ | 3,887,923 |
| $ | 19,293,454 |
|
| $ | 3,278,087 |
| $ | 11,899,710 |
|
Supplemental Cash Flow disclosure
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Income Taxes Paid |
| $ | — |
| $ | 404,527 |
|
The accompanying notes are an integral part of the consolidated financial statements.
7
Rockwell Medical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business
Rockwell Medical, Inc. and Subsidiaries (collectively, “we”, “our”, “us”, or the “Company”) is a fully-integrated pharmaceutical company targeting end-stage renal disease and chronic kidney disease with innovative products for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis.
We are currently marketing and developing unique, proprietary renal drug therapies. These novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience and outcome. We have also obtained licenses for certain dialysis related drugs which we are developing and planning to market globally.
We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the United States and abroad. We manufacture, sell and distribute hemodialysis concentrates and other ancillary medical products and supplies used in the treatment of patients with End Stage Renal Disease,end stage renal disease, or “ESRD”. In 2017, we supplied approximately 25% of the United States domestic market with dialysis concentrates. We also supply our productsdialysis concentrates to dialysis providers and distributors who treat patients with kidney disease. Our concentrate products are used to remove waste and replace essential nutrientsserving a number of foreign countries, primarily in the blood of dialysis patients during their hemodialysis treatment.Americas and the Pacific Rim. The majority of our sales occur in the United States.
We are regulated by the FederalUnited States Food and Drug Administration (“FDA”) under the Federal Drug and Cosmetics Act, as well as by other federal, state and local agencies. We hold several FDA product approvals including both drugs and medical devices.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements include our accounts and the accounts forof our wholly owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America, or “GAAP,” and with the instructions to Form 10-Q and Securities and Exchange Commission Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The balance sheet at December 31, 20162017 has been derived from theour audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of our management, all adjustments have been included that are necessary to make the financial statements not misleading. All of these adjustments that are material are of a normal and recurring nature. Our operating results for the three and nine months ended September 30, 2017March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.2018. You should read our unaudited interim financial statements together with the financial statements and related footnotes for the year ended December 31, 20162017 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017. Our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 includes a description of our significant accounting policies.
Revenue Recognition
Our policy is to recognize revenue consistent with authoritative guidance for revenue recognition including the provisions ofIn May 2014, the Financial Accounting Standards Board Accounting Standards Codification. We recognize(“FASB”) issued a new accounting standard, ASC 606 Revenue from Contracts with Customers, which requires recognition of revenue when allto depict the transfer of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurredpromised goods or services have been rendered, (iii)to customers in an amount that reflects the seller's priceconsideration to which we expect to be entitled in exchange for those goods or services. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the buyer is fixed or determinable,use of more estimates and (iv) collectability is reasonably assured.judgments than the former standards.
8
ConsistentThe new revenue standard became effective for us on January 1, 2018, and was adopted using the modified retrospective method. The adoption of the new revenue standard as of January 1, 2018, did not change our revenue recognition as the majority of our revenues continue to be recognized when the customer takes control of our product. As we did not identify any accounting changes that impacted the amount of reported revenues with these guidelines we recognize revenue at the time we transfer titlerespect to our productsproduct revenues or licensing agreements, no adjustment to our customers which generally occurs when our products are delivered to our customer’s location consistentretained earnings was required upon adoption.
In accordance with our terms of sale.the standard, revenue is measured based on consideration transferred as specified in a contract with a customer, and excludes any sales incentives or rebates. We recognize revenue for international shipments when title has transferred consistentit satisfies a performance obligation by transferring control over a product or service to a customer. We recognize revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with standard terms of sale.a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligations.
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 we generate our revenue.
Product sales – Product sales are tracked in two reportable segments – Drug Products and Concentrate Products. We apply judgment as we analyze each elementaccount 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 concentrate 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 our contractual agreementsthe agreement to determine appropriate revenue recognition. The terms of our contractual agreements may include milestone payments if specified research and development objectives are achieved, non-refundable licensing fees, milestone payments on sales or royalties from product sales.
When entering into an arrangement, we first determine whether the arrangement includes multiple deliverables and is subject to the accounting guidance in ASC subtopic 605-25, Multiple-Element Arrangements. If we determine that an arrangement includes multiple elements, we determine whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be measured and allocated among the separate units of accounting. An element qualifies asagreement creates a separate unitperformance 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 accounting when the delivered elementproduct has standalone value to the customer. Our arrangements do not include a general right of return relative to delivered elements. Any delivered elements that do not qualify as separate units of accounting are combined with other undelivered elements within the arrangement as a single unit of accounting. If the arrangement constitutes a single combined unit of accounting, we determine the revenue recognition method for the combined unit of accountingbeen established and recognize the revenue either on a straight-line basis or on a modified proportional performance method over the period from inception through the date the last deliverable within the single unit of accounting is delivered.
Non-refundable upfront license fees are recorded as deferred revenue and recognized into revenue over the estimated period of our substantive performance obligations. If we do not have substantive performance obligations, we recognize non-refundable upfront fees intosufficient experience with the foreign regulatory body to conclude that regulatory approval is probable, the revenue through the date the deliverable is satisfied. Analyzing the arrangement to identify deliverables requires the use of judgment and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. In arrangements that include license rights and other non-contingent deliverables, such as participation in a steering committee, these deliverables do not have standalone value because the non-contingent deliverables are dependent on the license rights. That is, the non-contingent deliverables would not have value without the license rights, and only we can perform the related services. Upfront license rights and non-contingent deliverables, such as participation in a steering committee, do not have standalone value as they are not sold separately and they cannot be resold. In addition, when non-contingent deliverables are sold with upfront license rights, the license rights do not represent the culmination of a separate earnings process. As such, we account for the license and the non-contingent deliverables as a single combined unit of accounting. In such instances, the license revenue in the form of non-refundable upfront paymentsperformance obligation is deferred and recognized over the applicable relationship period.
For milestone payments based on sales and for royalties based on sales, we recognize revenue in the quarter that the information related to the sales becomes available and collectability is reasonably assured.
For international license agreements that we have entered into, deferred license revenue is being recognized over the term of the license agreement.agreement (over time recognition). Conversely, when regulatory approval already exists or is probable, revenue is recognized at the point in time that control of the product transfers to the customer.
We have received upfront fees under two distribution and license agreements that have been deferred as a contract liability. The initial paymentamounts received from Wanbang Biopharmaceuticals Co., Ltd. (“Wanbang”) are recognized as revenue over the estimated term of $20 millionthe distribution and license agreement as regulatory approval was not received pursuantand we did not have sufficient experience in China to determine that regulatory approval was probable as of the execution of the agreement. The amounts received from Baxter are recognized as revenue at the point in time that the estimated product sales under the agreement occur.
For the business under our long-term Exclusive Distribution Agreement (the “Distribution Agreement”)distribution agreement with Baxter Healthcare Corporation (“Baxter”(the “Baxter Agreement”) in October 2014 has been accountedand for as deferred license revenue. Deferred licensethe majority of our international customers we recognize revenue at the shipping point, which is beinggenerally our plant or warehouse. For other business, we recognize revenue based on when the customer takes control of the product. The amount of revenue recognized is based on the proportion of product shipmentspurchase order less returns and adjusted for any rebates, discounts, chargebacks or other amounts paid to Baxter in each period to total expected sales volumecustomers. There were no such adjustments for the term ofperiods reported. Customers typically pay for the agreement. See Note 4 to condensed consolidated financial statements for information related to the settlement of arbitration proceedingsproduct based on customary business practices with Baxter. payment terms averaging 30 days, while distributor payment terms averaging 45 days.
We recognize other revenues at the time the related fees and or payments are earned.
We require certain customers, mostly international customers, to pay for product prior to the transfer of title to the customer. Deposits received from customers and payments in advance for orders are recorded as liabilities under Customer Deposits until such time as orders are filled and title transfers to the customer consistent with our terms of sale.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements
9
in Topic 605, Revenue Recognition. The standard’s core principle
Disaggregation of revenue
In the following table, revenue is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for the year beginning January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of evaluating how the new revenue recognition standard could impact the financial statementsdisaggregated by primary geographical market, major product line, and disclosures. For the majority of our sales transactions, the new standard is not expected to significantly change the timing of revenue recognition.
|
|
|
|
|
|
|
|
In thousands of US dollars ($) |
| Three Months Ended March 31, 2018 |
| ||||
Products By Geographic Area |
| Total |
| U.S. |
| Rest of World |
|
Drug Revenue Segment |
|
|
|
|
|
|
|
License Fee – Over time | $ | 68 | $ | - | $ | 68 |
|
Concentrate Products |
|
|
|
|
|
|
|
Product Sales – Point-in-time |
| 14,376 |
| 12,472 |
| 1,904 |
|
License Fee – Point-in-time |
| 504 |
| 504 |
| - |
|
Total Concentrate Products |
| 14,880 |
| 12,976 |
| 1,904 |
|
Net Revenue | $ | 14,948 | $ | 12,976 | $ | 1,972 |
|
Contract balances
The new standard could impact the timing of revenue recognitionfollowing table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
|
|
|
|
|
In thousands of US dollars ($) |
| March 31, 2018 |
| December 31, 2017 |
Receivables, which are included in ‘Trade and other receivables’ | $ | 5,684 | $ | 5,544 |
Contract liabilities | $ | 16,151 | $ | 16,723 |
There were no impairment losses recognized related to up-frontany receivables arising from our contracts with customers for the quarter ending March 31, 2018.
For the three months ended March 31, 2018, we had no material bad-debt expense and milestonethere were no material contract assets recorded on the Consolidated Balance Sheet as of March 31, 2018. We do not generally accept returns of our concentrate products and no reserve for returns of concentrate products was established as of March 31, 2018 or December 31, 2017.
The contract liabilities primarily relate to upfront payments for licensing agreements./ consideration received from customers that are received in advance of the customer assuming control of the related products.
Transaction price allocated to remaining performance obligations
For the three months ended March 31, 2018, revenue recognized from performance obligations related to prior periods was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, totaled $16,151,000 as of March 31, 2018. The new standard will also require expanded disclosures surrounding revenueamount relates primarily to upfront payments / consideration received from customers that are received in advance of the notescustomer assuming control of the related products. We apply the practical expedient in paragraph 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. The Baxter Agreement includes minimum commitments of product sales over the duration of the agreement. Unfulfilled performance obligations related to the financial statements. Baxter Agreement are product sales of $12,742,000 through expiration of the agreement on October 2, 2024.
Cash and Cash Equivalents
We consider cash on hand, money market funds, unrestricted certificates of deposit and short term marketable securities with an original maturity of 90 days or less as cash and cash equivalents.
10
Investments Available for Sale
Investments Available for Sale are short-term investments, consisting of investments in short term bond fundsshort-term notes and in short term bonds and are stated at fair value based upon observed market prices (Level 1 in the fair value hierarchy). The portfolio generally consists of high credit quality short termshort-term debt instruments. These instruments are subject to changes in fair market value due primarily to changes in interest rates. The fair value of these investments was $35,028,841$24,821,682 as of September 30, 2017.March 31, 2018. Unrealized holding gains or losses on these securities are included in accumulated other comprehensive income (loss). Realized gains and losses, including declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of other income or expense. Gross unrealized losses were $76,399$216,256 and gross unrealized gains were $35,274$26,260 as of September 30, 2017.March 31, 2018. There were realized gains of $57$1,425 and realized losses of $199,758$4,417 in the third quarter. For the nine months ended September 30, 2017, there were realized gainsfirst quarter of $57 and realized losses of $704,752.2018.
The Company has evaluated the near term interest rate environment and the expected holding period of the investments along with the duration of the fund portfoliosportfolio assets in assessing the severity and duration of potential impairments. Based on thatour evaluation, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017.March 31, 2018.
Research and Product Development
We recognize research and product development expenses as incurred. We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products aggregating approximately $4.2$1.7 million and $4.6$1.2 million for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
Share Based Compensation
We measure the cost of employee and non-employee services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards in accordance with ASC 718-10, Compensation — Stock Compensation. The cost of equity based compensation is recognized as compensation expense over the vesting period of the awards.
We estimate the fair value of compensation involving stock options utilizing the Black-Scholes option pricing model. This model requires the input of several factors such as the expected option term, expected volatility of our stock price over the expected option term, and an expected forfeiture rate, and is subject to various assumptions. We believe the valuation methodology is appropriate for estimating the fair value of stock options we grant to employees and directors which are subject to ASC 718-10 requirements. These amounts are estimates and thus may not be reflective of actual future results or amounts ultimately realized by recipients of these grants.
10
Net Earnings Per Share
We computed our basic earnings (loss) per share using weighted average shares outstanding for each respective period. Diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially dilutive securities, consisting of stock options and common share purchase warrants, unless inclusion would have had an anti-dilutive effect. The calculation of basic weighted average shares outstanding excludes unvested restricted stock. Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, 2017 |
| Three Months Ended September 30, 2016 |
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 |
|
| Three Months Ended March 31, 2018 |
| Three Months Ended March 31, 2017 |
|
Basic Weighted Average Shares Outstanding |
| 51,260,975 |
| 50,677,076 |
| 50,995,079 |
| 50,675,667 |
|
| 51,288,424 |
| 50,686,044 |
|
Effect of Dilutive Securities |
| — |
| — |
| — |
| — |
|
| — |
| — |
|
Diluted Weighted Average Shares Outstanding |
| 51,260,975 |
| 50,677,076 |
| 50,995,079 |
| 50,675,667 |
|
| 51,288,424 |
| 50,686,044 |
|
11
3. Inventory
Components of inventory, net of reserves as of September 30, 2017March 31, 2018 and December 31, 20162017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| ||||
Raw Materials |
| $ | 10,868,301 |
| $ | 10,903,084 |
|
| $ | 9,403,198 |
| $ | 10,604,232 |
|
Work in Process |
|
| 231,381 |
|
| 86,452 |
|
|
| 124,534 |
|
| 212,505 |
|
Finished Goods |
|
| 5,259,134 |
|
| 2,978,090 |
|
|
| 2,740,023 |
|
| 2,807,399 |
|
Total |
| $ | 16,358,816 |
| $ | 13,967,626 |
|
| $ | 12,267,755 |
| $ | 13,624,136 |
|
A
As of September 30, 2017,March 31, 2018, we classified $1,494,175$3,722,901 of inventory as non-current all of which related to the active pharmaceutical ingredient for Triferic.
As of March 31, 2018, we had total Triferic finished goods inventory aggregating $5,903,000 against which we had reserved $4,758,000.
4. Baxter Distribution Agreement
As of October 2, 2014, we entered into the DistributionBaxter Agreement, with Baxter, pursuant to which Baxter became the Company’sour exclusive agent for sales, marketing and distribution activities for the Company’sour hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years.years ending on October 2, 2024. The DistributionBaxter Agreement does not include any of the Company’sour drug products. The Company retainsWe retain sales, marketing and distribution rights for itsour hemodialysis concentrate products in specified foreign countries in which the Company haswe have an established commercial presence.
On September 12, 2016, Baxter initiated an arbitration proceeding against Rockwell in accordance withDuring the International Institute for Conflict Prevention and Resolution, Inc.’s Rules for Non-Administered Arbitration under the Distribution Agreement alleging various breachesterm of the DistributionBaxter Agreement, and Rockwell counterclaimed alleging various breaches by Baxter. On June 23, 2017,Baxter has agreed not to manufacture or sell any competitive concentrate products in the Company and Baxter settled the arbitration (the “Settlement”). The Settlement included a mutual release with respect to all known claims existing on the date of the Settlement and the arbitration was dismissed with prejudice. No payments were made by either party in connection with the Settlement.
In connection with the Settlement, on June 23, 2017, the Company and Baxter entered into a First Amendment to Exclusive Distribution Agreement and a First Amendment to Investment Agreement. The terms of the Settlement included, amongUnited States hemodialysis market, other things, modified pricing that provides incentive to Baxter to pursue new customers and increase future sales. Our Settlement with Baxter is not expected to have a material impact on our liquidity or results of operations.than specified products.
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. References in this report to the “Company,” “we,” “our” and “us” are references to Rockwell Medical, Inc. and its subsidiaries.
Forward-Looking Statements
We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission, or SEC. We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of our operations. When we use words such as “may,” “might,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “predict,” “forecast,” “projected,” “intend,” or similar expressions, or make statements regarding our intent, belief, or current expectations, we are making forward-looking statements. Our forward looking statements also include, without limitation, statements about our competitors, statements regarding Triferic and Calcitriol statements relating to our Settlement with Baxter and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed in our quarterlythis report, for the period ended June 30, 2017 under “Part II - Item“Item 1A — Risk Factors” as modified in “Part II - Item 1A — Risk Factors” of this report, as well asour Form 10-K for the risks listed below:year ended December 31, 2017 and from time to time in our other reports filed with the SEC.
Risks Related To Our Drug Business
· | There can be no assurance of if or when we might receive separate reimbursement status for Triferic from CMS. |
12
· | Although Triferic has been approved by the FDA, we may not be able to commercialize it |
· | If we are unable to use our Triferic inventory before its shelf life expires, we |
· | Our ability to market Triferic and other FDA-approved drugs is limited by the FDA to those specific indications and conditions for which clinical safety and efficacy have been demonstrated, which may limit our ability to market Triferic and our other drug products. |
· | If we are unable to obtain and maintain adequate protection for our data, intellectual property and other proprietary rights, our business may be harmed. |
· | Defending our proprietary rights could be expensive, we may not always be successful in protecting our intellectual property, licenses and other proprietary rights and we could be prevented from selling products, forced to pay royalties and damages and compelled to defend against litigation if we infringe the rights of a third party. |
· | We depend on contract manufacturing organizations to manufacture our drug products. If these organizations are unable or unwilling to manufacture our drug products, or if these organizations fail to comply with FDA or other applicable regulations or otherwise fail to meet our requirements, our drug business will be harmed. |
· | We rely on third party suppliers for raw materials and packaging components of our drug products. We may not be able to obtain the raw materials and proper components we need, or the cost of the materials or components may be higher than expected, any of which could impair our production or commercialization of drug products and have a material adverse effect on our business, results of operations and financial |
· | We may not be successful in obtaining foreign regulatory approvals or in arranging out-licensing partners capable of obtaining the approvals needed to effectively commercialize our drug products outside of the United States. Even if we are successful in out-licensing our drug products and obtaining the required regulatory approvals, the licensees or partners may not be effective at marketing our products in certain markets or at all. |
· | If our products are approved and marketed outside of the United States, a variety of risks associated with international operations could materially adversely affect our business. |
· | We may not be successful in expanding our drug product portfolio or in our business development efforts related to in-licensing, acquisitions or other business collaborations. Even if we are able to enter into business development arrangements, they could have a negative impact on our business and our profitability. |
· | Expansion of our drug business in the United States may require FDA approval of new drug candidates or indications for use. The process of obtaining FDA approval is a long and expensive process with no guarantee of success. |
· | Our drug business depends on government funding of health care, and changes could impact our ability to be paid in full for our products, increase prices or cause consolidation in the dialysis provider market. |
· | It may be difficult for us to capture market share for Calcitriol in the highly competitive generic drug market. |
12
· | Inventory obsolescence due to finite shelf lives could adversely affect our business. |
Risks Related To Our Concentrate Business
· | We may be required to repay a portion of the fees received from Baxter, which could materially and adversely affect our financial position and cash reserves. |
· | A few customers account for a substantial portion of the end user sales of our concentrate products. The loss of any of these customers could have a material adverse effect on our results of operations and cash flow from our concentrate business. |
· | The concentrate market is competitive and has a large competitor with substantial resources. |
· | We may be affected materially and adversely by increases in raw material costs. |
Risks Related To Our Business As A Whole
· | Our drug and concentrate businesses are highly regulated, resulting in additional expense and risk of noncompliance that can materially and adversely affect our business, |
· | Our business could be impacted as a result of actions by activist shareholders, including as a result of a potential proxy contest for the election of directors at our annual meeting. |
· | Health care reform could adversely affect our business. |
· | We depend on key personnel, the loss of which could harm our ability to operate. |
· | Defending our intellectual property rights could be expensive, we may not always be successful in protecting our exclusive rights and we could be prevented from selling products, forced to pay damages and compelled to defend against litigation if we infringe the rights of a third party. |
13
· | Our products may have undesirable side effects and our product liability insurance may not be sufficient to protect us from material liability or harm to our business. |
· | Our business and operations would suffer in the event of a security breach, system failure, invasion, corruption, destruction or interruption of our or our business partners’ critical information technology systems or infrastructure. |
· | We use biological and hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly. |
· | Our existing capital resources may not be adequate to finance our operating cash requirements for the length of time that we have estimated. |
· | We may be unable to obtain secured debt financing because of borrowing restrictions under the Baxter Agreement. |
· | We may need to raise additional equity or debt capital in the near future |
· | Any adverse conclusions from our ongoing SEC inquiry could result |
Risks Related To Our Common Stock
· | Shares eligible for future sale may affect the market price of our common shares. |
· | The market price for our common stock is volatile. |
· | Any additional issuances of our common shares in order to raise equity capital would likely be dilutive to our existing shareholders. |
· | Our ability to use our net operating loss carryforwards to offset potential taxable income and related income taxes that would otherwise be due may be limited. |
· | We could have a material weakness in our internal control over financial reporting, which, until remedied, could result in errors in our financial statements requiring restatement of our financial statements. As a result, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price. |
· | Structural and anti-takeover provisions reduce the likelihood that you will receive a takeover premium. |
· | We do not anticipate paying dividends in the foreseeable future. |
Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flow and financial position. There can be no assurance that future results will meet expectations. We do not undertake and expressly disclaim any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.
Overview
Rockwell isWe are a fully-integrated pharmaceutical company targeting end-stage renal disease and chronic kidney disease with innovative products and services for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis. We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates/dialysates to dialysis providers and distributors in the United States and abroad. We supply approximately 25% of the United States domestic market with dialysis concentrates and we also supply dialysis concentrates to distributors serving a number of foreign countries, primarily in the Americas and the Pacific Rim. Substantially all of our sales were concentrate products and related ancillary items.
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Our business strategy is developing unique, proprietary renal drug therapies that we can commercialize or out-license, while also expanding our dialysis products business. These novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy, while decreasing drug administration costs and improving patient convenience and outcome.
Triferic is our lead branded drug. We believe it has the potential to capture significant market share due to its improved clinical and cost-saving benefits. Triferic received FDA approval in 2015, and is the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. Triferic received a reimbursement J-code effectiveon January 1, 2016. At about that time, we received clarification from CMS that Triferic would be included in the ESRD bundled payment, which initiated our pursuit of separate reimbursement, which is available for new, innovative therapies. We believe Triferic therapy provides improved clinical benefits to patients and significant cost savings to dialysis providers.
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Although we cannot be certain, we believe that Triferic will receivehas the potential to be granted separate reimbursement which offers greater incentive for dialysis providers to adopt new, innovative therapies.
We believe that Triferic will receive separate reimbursementby CMS as a result of our extensive efforts in working with policy makers.makers to secure separate reimbursement. We have had in-depth discussions with high level officials within the current administration, key members of Congress, patient advocacy groups and otherindustry stakeholders regarding the merits of Triferic and about why this innovative therapy should receive separate reimbursement. Our efforts have resulted in strong support for separate reimbursement all of whom have been supportive of our efforts.for Triferic. We have had meetings with the leadership of the Department of Health and Human Services, the Centers for Medicare and Medicaid Services (CMS) and the Center for Medicare and Medicaid Innovation (CMMI). Upon their guidance, we have submitted a proposalinformation to the Innovation Center at CMS. Among other advantages, the proposalCMS that highlights the improved clinical benefits that Triferic provides to patients, as well as the significant cost savings Triferic delivers to both Medicare and dialysis providers. Additionally, our key supporters in Congress and other influential agencies are encouraging CMS to immediately approve separate reimbursement for Triferic. We cannot predict the outcome or timing of the CMS review.CMS’s process and there can be no assurance of if or when we might receive separate reimbursement for Triferic from CMS.
Until the separate reimbursement issue is resolved for Triferic, we do not anticipate realizing significant revenues from Triferic sales. In the meantime, we continue to make progress in marketing to, and educating our customers about, Triferic and the valuable benefitbenefits it delivers by improving patient outcomes and lowering costs. We also continue to provide Triferic to dialysis providers via a drug sample program, receiving favorable response to-date to theits positive clinical and cost saving benefits. Our marketing and sellingeducation efforts to nephrologists and nurses, as well as to patients, are effective and being received favorably. have been well received.
We have built and previously invested in significant inventory of Triferic in anticipation of receiving separate reimbursement. Ifreimbursement status. However, if we are unable to successfully commercialize Triferic and achieve sufficient sales volumes over the next one to two years, we maywill have to write off a significant portion of our inventory investment in Triferic, which would not have ana material negative impact on our cash flow but would have a material adverse effect on our results of operations.operations and financial position. As of September 30, 2017,March 31, 2018, we had $4.0$5.9 million of Triferic finished goods inventory that could expire within the next twelve months.12 months and against which we have reserved $4.8 million. In the first quarter of 2018, we reserved an additional $1.3 million (included within our $4.8 million reserve) resulting in a remaining net book value of $1.1 million of Triferic finished goods inventory as of March 31, 2018. We reserved $0.6also have approximately $7.5 million in the third quarter for specificof Triferic Active Pharmaceutical Ingredient (“API”) and have classified $3.7 million of Triferic API batches that were determinedas non-current inventory as of March 31, 2018. We believe we have produced sufficient supplies of Triferic API to meet prospective demand in 2018 and 2019. If CMS does not award us separate reimbursement for Triferic during 2018 or further extends its review of Triferic for separate reimbursement or should we not realize commercial sales during 2018 or 2019, some or all of our current investment in Triferic finished goods inventory and some of our Triferic API inventory will likely need to be in excesswritten off, which would not have a material negative impact on our cash flow but would have a material adverse impact on our reported results of our expected requirements over the next yearoperations and for which there was no plan to convert the API into finished goods.financial position.
Our global strategy is to license Triferic to key partners to commercialize internationally. We are actively pursuing international licensing opportunities in a number of countries and regions. Additionally, we are continuing development work on other clinical indications related to iron deficiency that address unmet patient needs and we are evaluating opportunities to in-license other products that will complement our product portfolio.
We are also working to begin marketing Calcitriol, generic injectable vitamin-D, which is manufactured through contract manufacturing organizations (“CMOs”). We received written notice from the FDA in October 2017 that the FDA needed additional time to review the data submitted by us supporting Calcitriol. The notice contained no indication by FDA of any deficiency with the data submitted. We expect to begin marketing Calcitriol in the first quarter of 2018 assuming FDA approval of the submission.
Rockwell sells itssell our dialysis concentrates in the United States and certain foreign markets under the Distribution Agreementagreement with Baxter. Rockwell receivesWe receive a pre-defined gross profit margin on itsour concentrate products sold pursuant to the DistributionBaxter Agreement, subject to an annual true-up of costs. As discussed
We are also working to begin marketing Calcitriol, an active Vitamin D injection for the management of hypocalcemia in more detail in Note 4patients undergoing chronic hemodialysis. Calcitriol is FDA approved under an Abbreviated New Drug Application which is manufactured for us through a contract manufacturing organization (“CMO”). We submitted a manufacturing update to the condensed consolidated financial statements, BaxterFDA to approve the CMO and Rockwell settledFDA has provided a target date for their contractual dispute and, as partresponse of their settlement, modified pricingno later than August 19, 2018. The stability data that provides incentivewas provided in the Calcitriol submission remains within specification. There can be no assurance the FDA will grant approval of our submission. If we are permitted to Baxter to pursue new customers and increase future sales. The Settlement with Baxter isbegin marketing Calcitriol, we do not expected toanticipate Calcitriol sales will have a material impact on our liquidity or results of operations.operations during 2018.
Results of Operations for the Three Months Ended March 31, 2018 and March 31, 2017
Sales
Our sales in the first quarter of 2018 were $14.9 million, $0.4 million or 2.4% higher than the first quarter of 2017. The increase was primarily due to higher domestic concentrate sales of $0.4 million which was primarily due to increased pass through delivery costs billed to Baxter. Our international sales increased 1.6% over the first quarter of 2017. Revenue recognized from licensing fees was slightly lower than the first quarter of 2017.
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Results of Operations for the Three Months and Nine Months Ended September 30, 2017 and September 30, 2016
Sales
Our sales in the third quarter of 2017 were $14.6 million, $1.8 million or 14.1% higher than the third quarter of 2016. The increase was primarily due to higher domestic concentrate sales of $1.6 million which was primarily due to volume growth with our domestic customers. Invoicing for pass through delivery costs to Baxter increased approximately $0.6 million due to volume growth and increased expenses compared to the third quarter of 2016. Our international sales were $0.2 million higher than the third quarter of 2016. Revenue recognized from licensing fees was the same as the third quarter of 2016.
Our sales in the first nine months of 2017 were $42.5 million, an increase of $2.6 million or 6.4% over the first nine months of 2016. Our domestic concentrate sales increased $2.4 million or 6.9% over the first nine months of 2016 primarily due to increased sales volumes and additional pass through billings for delivery services to Baxter. Our international sales were $0.2 million higher than the first nine months of 2016. Our drug business revenue was not significant in the first nine months of 2017 or 2016.
Gross Profit
Gross profit in the thirdfirst quarter of 20172018 was $1.1million comparedslightly positive as the gross profit from our concentrate business was offset by expenses related to our drug business. Gross profit was negatively impacted by $1.6 million in the third quarter of 2016.
Gross profit margins were 7.3 % in the third quarter of 2017 compared to 12.3% in the third quarter of 2016. Our concentrate gross profit decreased $0.2 million due to lower pricing resulting from modifications to our contractual terms with Baxter. Our net drug business costs were approximately $0.3 million higher than the third quarter of 2016. Our drug business costs in the third quarter included inventory reserves of $0.7 million for inventory that was expected to be surplus to our requirements.
Gross profit in the first nine months of 2017 was $4.9 million, an increase of $0.1 million or 3.4% over the first nine months of 2016. Gross profit margins were 11.6 % compared to 11.9% in the first nine months of 2016. The gross profit increase was primarily due to lower costs of $0.5 million related to our drug business operations for regulatory fees and value add taxes paid in connection with our execution of the Wanbang license agreement and partially offset by inventory reserves for surplus product. Thewhich included an increase in our Triferic inventory reserve of $1.3 million. Our concentrate gross profit was approximately $1.7 million and decreased by $0.7 million in the first quarter of 2018 compared to the first quarter of 2017. The decrease in our concentrate business gross profit was largely due to increased concentrate distribution costs and lower pricing under the Baxter Agreement, which was partially offset by lower gross profit onincreased unit volume growth. Recently implemented government regulation in the concentrate business of $0.4 million.trucking industry has further negatively impacted a nationwide driver shortage resulting in increased costs for both incoming materials and shipments within the United States. We expect this trend to continue to increase costs in the near term.
Selling, General and Administrative Expense
Selling, general and administrative expense during the thirdfirst quarter of 20172018 was $4.8$5.1 million compared to $5.1$6.1 million in the thirdfirst quarter of 2016.2017. The $0.3$1.0 million expense decrease was primarily due to lower equity compensation expensesexpense of $0.9$1.1 million. Equity grants awarded to our independent directors and non-executive employees during the first quarter were made expressly contingent upon shareholder approval of our proposed 2018 Long Term Incentive Plan (the “Plan”) at our scheduled June 21, 2018 annual meeting of shareholders. If our shareholders approve the Plan, we will begin to amortize $1.7 million of equity compensation expense associated with these awards at that time, with approximately $830,000 expected to be recognized during the remainder of 2018. We incurred lower legal and litigation costs during the quarter, which was partially offset by higher legal costs, expenses relateda settlement payment to shareholderan activist activities and the contested 2017 annual meetinginvestor group of $0.5 million.
Selling,$428,000. See Part II – Item 1 – Legal Proceedings. We expect our selling, general and administrative expense during the first nine months of 2017 was $17.4 million compared to $15.1 millionwill increase significantly in the first nine monthssecond half of 2016. The $2.3 million increase was primarily duethe year to higher legal and professional costs relating to pending litigation, the Settlement with Baxter and the contested 2017 annual meeting. Equity compensation costs decreased by $1.8 million compared to the first nine months of 2016, partially offset by higher compensation and benefit costs of $0.5 million. Marketing costs forhelp support our expected increased Triferic increased $0.4 million compared to the first nine months of 2016.commercialization efforts.
Research and Product Development Expense
We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic, aggregating approximately $1.3$1.7 million and $1.3compared to $1.2 million in the thirdfirst quarter of 2017 and 2016, respectively.2017. Research and product development costs incurred in the first nine monthsquarter of 2017 and 2016 were $4.2 million and $4.6 million, respectively, and2018 were largely related to Triferic testing and development costs for use in other clinical indications and delivery presentations.
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Interest and Investment Income, Net
Our net interest and investment income in the thirdfirst quarter of 20172018 was $0.2 million less thanand was at the thirdsame level as the first quarter of 2016 due to the repositioning of holdings in our short term bond portfolio in response to market changes. For the first nine months of 2017, we incurred a loss of $0.2 million compared to interest income of $0.6 million in the first nine months of 2016. 2017.
Income Tax Expense
We recognized no income tax expense in the thirdfirst quarter of 20172018 or 2016. We recognized no income tax expense in the first nine months of 2017 compared to approximately $0.4 million in income tax expense in the first nine months of 2016, which pertained to foreign income taxes paid related to license payments received under the Wanbang license agreement.
2017.
Liquidity and Capital Resources
We believe we currently have adequate capital resources and liquidity to pursue our business strategy.strategy in 2018. In addition to operating our concentrate business, our business strategy is centered on developing, marketing and licensing high potential drug products, in particular Triferic. The actual amount of cash that we will need to execute our business strategy is subject to many factors, including, Triferic.but not limited to, the timing and magnitude of cash received from drug product sales, the timing and expenditures associated with the commercialization of Triferic and Calcitriol, the timing and expenditures associated with the build-up of related inventory and whether, and to what extent, separate reimbursement for Triferic is approved by CMS.
As of September 30, 2017,March 31, 2018, we had current assets of $61.2$44.2 million and net working capital of $53.6$35.8 million. We have approximately $38.9$28.1 million in cash and investments as of September 30, 2017.March 31, 2018. Our uses of cash have primarily been for operating expenses and research and product development investments in inventory to support our drug product launches and for operating expenses. Cash used in operating activities was $16.3$4.6 million in the first nine monthsquarter of 2017,2018, which included research and development expenses of $4.2 million and$1.7 million. A settlement payment to an increaseactivist group of $2.4 million in inventory levels. We increased our Trifericinventory over the last year in preparation for commercializing Triferic and believe we have adequate inventory to meet anticipated requirements. We have classified $1.5 million of Triferic’s active pharmaceutical ingredient as non-current inventory as of September 30, 2017 based on expected Triferic demand and production plans during 2018. The amount of non-current API inventory declined from the second quarter of 2017 primarily as a result of the conversion of API into finished goods during the third quarter.
We anticipate that we will increase our accounts receivable as we increase our drug product sales and we may also increase inventories to a more modest degree as we commercialize Triferic and Calcitriol. We also expect to continue investing in research and product development, such as clinical testing in connection with peritoneal dialysis, an orphan drug indication, pediatric indications and certain other indications, as we work to expand potential uses for Triferic. Future spending on such indications is expected to be minor in relation to the Company’s cash resources. We believe that we have adequate capital resources to make these investments in accounts receivable, inventory and research and product development. We expect to generate positive cash flow from operations when our drug products generate substantial sales.
We have no long term debt as of September 30, 2017 and do not expect to incur interest expense in 2017. Capital expenditures on our current facilities are not expected to materially exceed depreciation expense. Our capital expenditures were $0.7 million$428,000 was paid in the first nine monthsquarter of 2017 compared to $0.3 million in the first nine months2018.
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We paid $2.3 million in withholding taxes in connection with restricted stock that vested in 2017 and for which we received common shares to be retired from the holders in accordance with the terms of the grants.
The Company isare in discussions with multiple potential business development partners to out‑license rights to Rockwell’sour drug products outside the United States. Such licensing arrangements oftenmay include a combination of upfront fees, developmental milestone payments and royalties. If such licensing arrangements are negotiated for certain markets, we may receive such consideration in the future in addition to that which we are already entitled to receive under existing agreements. We are also considering other business development arrangements including joint ventures, partnerships and other transactions related to our products or other future products that we may develop or license.
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TableWe are currently using cash to fund our operations and, we believe we have sufficient cash to fund our operations for at least the next twelve months. Until we are able to generate sufficient cash from our commercial business activities, we will need to seek additional financing to provide the cash necessary to execute our business strategy, including working capital needs. Our capital raising activities may include, but may not be limited to, the issuance of Contentscommon stock or other securities via private placement or public offerings or the issuance of debt. While we may seek capital through a number of means, there can be no assurance that additional financing will be available on acceptable terms, if at all. In particular, our Baxter Agreement prohibits us from entering into a contract that would encumber the assets used in our concentrate business without the prior written consent of Baxter. Due to the fact that the assets used in our concentrate business currently constitute a substantial portion of the tangible assets we own other than our drug inventory, we may not, or find it difficult, to obtain secured debt financing without the consent of Baxter. Furthermore, additional equity financings may be dilutive to our stockholders and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have invested $35.0$24.8 million in available for sale securities that are invested in short termshort-term bonds and short term bond funds which typically yield higher returns than the interest realized in money market funds. While these bonds and bond funds hold bondsare of short duration, their market value is affected by changes in interest rates. Increases in interest rates will reduce the market value of bonds held and we may incur unrealized losses from the reduction in market value of the bonds. If we sell some or all of our positions, those unrealized losses may result in realized losses which may or may not exceed the interest and dividends earned from those funds. However, due to the short duration of our portfolio of holdings, we do not believe that a hypothetical 100 basis point increase or decrease in interest rates will have a material impact on the value of our investments.
Foreign Currency Exchange Rate Risk
Our international business is conducted in U.S. dollars. It has not been our practice to hedge the risk of appreciation of the U.S. dollar against the predominant currencies of our trading partners. We have no significant foreign currency exposure to foreign supplied materials, and an immediate 10% strengthening or weakening of the U.S. dollar would not have a material impact on our shareholders’ equity or net income.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities Exchange Act of 1934, as amended, that are designed to ensure that material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act) during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Richmond Matters
Richmond/Ravich Litigation
On March 8, 2017, Rockwell filed suitOur Board of Directors was unable to reach agreement to appoint a seventh director by February 15, 2018 in the United States District Court for the Eastern Districtbreach of Michigan againstour prior settlement agreement with Richmond Brothers, Inc. and certain related entities,(“RBI”), David S. Richmond Mark H. Ravich(“Richmond”) and others. Accordingly, on February 27, 2018, RBI and Richmond delivered a letter to us nominating Lisa Colleran, Benjamin Wolin and Richmond for election to our Board of Directors at our 2018 annual meeting of shareholders. Thereafter, on March 7, 2018, we entered into a letter agreement with RBI and Richmond to memorialize the parties’ mutual agreement on certain related trusts,corporate governance matters (the “Letter Agreement”). The Letter Agreement provided, among other things, that: (a) by March 7, 2018, our Board would increase its size from six directors to eight directors and Matthew J. Curfman (“Richmond/Ravich Defendants”),would appoint: (i) Benjamin Wolin as a Class I director to serve for a term expiring at the Company’s 2019 annual meeting of shareholders and three individual Rockwell shareholders: Jay F. Joliat, Chris
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Paxos,the Board and David Hagelstein (together(ii) Lisa Colleran as a Class II director to serve for a term expiring at the 2020 annual meeting of shareholders; and (b) if the Company complied with the “Richmond/Ravich Defendants,” the “Rockwell Shareholders”). Since then, Rockwell voluntarily dismissed its claims against twoprovisions of the individual shareholders, Chris PaxosLetter Agreement by March 7, 2018, then RBI would withdraw its proposal to separately nominate any directors for election at the 2018 annual meeting of shareholders. As a result, on March 9, 2018, RBI and David Hagelstein. Rockwell’s complaint alleges thatRichmond withdrew their proposal to separately nominate directors for election at our 2018 annual meeting of shareholders. Mr. Wolin was subsequently appointed by our Board as Chairman of the Rockwell Shareholders failedBoard. Additionally, our Board approved the payment to timely file a Schedule 13DRichmond of $428,000 in the first quarter of 2018 related to reimbursement of legal expenses and that a Schedule 13G and Schedules 13D filedother expenses as required by the Richmond/Ravich Defendants contained various material misstatementsLetter Agreement.
Other Proceedings
As a follow up to their prior letters dated February 13, 2017 and omissions, in violation of Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and the rules promulgated thereunder byApril 5, 2017, we received a letter dated April 24, 2018 from the Securities and Exchange Commission. The complaint seeks declaratoryCommission requesting certain information generally with respect to the status of CMS’s determination of separate reimbursement status for Triferic and injunctive relief relatingour current decision not to these alleged violations, including requiring the Rockwell Shareholdersactively market and sell Triferic without such separate reimbursement. We are cooperating and responding to file new or amended Schedules 13D disclosing the proper date of their shareholder group’s formation and providing accurate information about the group’s membership and activities, and issuing a declaratory judgment finding that the Rockwell Shareholders violated Section 13(d) of the Exchange Act. this request.
On June 28, 2017, the Court denied the Richmond/Ravich Defendants’ motion to dismiss this case, in which Defendant Jay F. Joliat had joined. On August 24, 2017, the Richmond/Ravich Defendants answered the Complaint, and Defendant Mark H. Ravich asserted counterclaims against Rockwell alleging that he was denied access to corporate books, not properly notified of a Board of Directors meeting, and that certain settlement agreements with Baxter Healthcare Corporation (“Baxter”) and former Defendant David Hagelstein violate Michigan law. Defendant Ravich also asserted claims against Baxter and Mr. Hagelstein as third party “relief” defendants. On September 19, 2017, Rockwell moved for leave to amend the Complaint to add allegations regarding misstatements in the Richmond/Ravich Defendants’ Schedule 13(d) concerning the voting power of Richmond Brothers, Inc. and Mr. Richmond. The Richmond/Ravich Defendants have opposed this Motion. On September 28, 2017, Rockwell moved to dismiss Counts II-IV of Defendant Ravich’s Counterclaims. The hearing on Rockwell’s Motion to Dismiss is scheduled for December 13, 2017. The parties are currently engaged in discovery, with the trial in this case set for July 2018.
Other Proceedings
We are involved in certain other legal proceedings from time to time before various courts and governmental agencies. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of these pending proceedings is not expected to have a material effect on our operations or consolidated financial statements in the period in which they are resolved.
Item 1A. Risk Factors
The Company has determined that its Triferic patent expiring in 2029 provides sufficient protection of the Company’s interest in Triferic and that it is in the Company’s best interest to no longer pursue an extension under the Hatch-Waxman Act of the earlier Triferic patents as to which it has a license. As a result, the Company has withdrawn its election under the Hatch-Waxman Act and those patents have now expired. In light of these actions, the risk factor entitled “If we do not obtain protection under the Hatch-Waxman Act to extend patent protection for Triferic, our drug business may not reach its full potential.” is no longer a material risk. In addition, as set forth below, the Company has expanded the risk factor entitled “Defending our intellectual property rights could be expensive, we may not always be successful in protecting our exclusive rights and we could be prevented from selling products, forced to pay damages and compelled to defend against litigation if we infringe the rights of a third party.”
Defending our proprietary rights could be expensive, we may not always be successful in protecting our intellectual property, licenses and other proprietary rights and we could be prevented from selling products, forced to pay royalties and damages and compelled to defend against litigation if we infringe the rights of a third party.
Our success, competitive position and future revenues, particularly with respect to our drug products, will depend in part on our ability to obtain and maintain proprietary protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. There can be no assurance that these protections will prove commercially valuable.
We could incur substantial costs in seeking enforcement of our proprietary rights, and we cannot guarantee that we will prevail in any legal action seeking enforcement or that such rights will successfully preclude others from using technology that we rely upon. It is possible that we may infringe on proprietary rights of others, even if we are not aware
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of the infringement or believe our rights are otherwise valid. If a third party believes that one of our products infringes on the third party’s rights, it may sue us even if we have received our own patent protection for the technology or otherwise believe we have valid proprietary rights. If we are found by a court to have infringed the rights of a third party, we could be prevented from manufacturing and selling products, forced to pay royalties and damages, compelled to license technology from the party claiming infringement and lose the opportunity to license our technology to others and collect royalty payments, any of which could have a material adverse effect on our business. In addition, if Baxter is prevented from selling any of our concentrate or ancillary products due to a patent infringement or if its ability to sell any of our concentrate or ancillary products due to a patent infringement is materially and adversely affected, Baxter may be entitled to terminate our Distribution Agreement and obtain a refund of a portion of the upfront fee and facility fee.
Other than the foregoing, there have been no material changes to the risk factors set forth in our quarterlyannual report for the period ended June 30, 2017 under “Part II - Item 1A — Risk Factors”, which amended and restated the risk factors in “Item 1A Risk Factors” of our Form 10-K for the year ended December 31, 2016.2017 under “Item 1A — Risk Factors”.
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The following documents are filed as part of this report or were previously filed and incorporated herein by reference to the filing indicated. Exhibits not required for this report have been omitted. Our Commission file number is 000-23661.
EXHIBIT INDEX
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*10.76 | ||
10.77 | ||
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31.1 |
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31.2 |
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32.1 |
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101.INS |
| XBRL Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
| XBRL Taxonomy Extension Definition Database |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
*Current management contracts or compensatory plans or arrangements.
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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.
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| ROCKWELL MEDICAL, INC. | |
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| (Registrant) | |
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| Date: |
| /s/ ROBERT L. CHIOINI |
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| Robert L. Chioini |
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| President and Chief Executive Officer |
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| (principal executive officer) (duly authorized officer) |
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| Date: |
| /s/ THOMAS E. KLEMA |
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| Thomas E. Klema |
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| Vice President and Chief Financial Officer |
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| (principal financial officer and principal accounting officer) |
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