Table of Contents

 

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, 20182019

 

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)

 

 

 

MichiganDelaware

38-3317208

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

30142 Wixom Road, Wixom, Michigan411 Hackensack Avenue, Suite 501, Hackensack , New Jersey

4839307601

(Address of principal executive offices)

(Zip Code)

 

(248) 960-9009

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year,

if changed since last report)

 

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

 

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

 

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

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company 

 

Emerging growth company ☐

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuer’s classes of common stock, as of the latest practicable date.Act:

 

 

 

 

ClassTitle of each class:

    

Outstanding asTrading Symbol

Name of November 8, 2018each exchange on which registered:

Common Stock, no par value  $.0001

 

56,977,656 sharesRMTI

Nasdaq Global Market

The number of shares of common stock outstanding as of November 12, 2019 was 63,955,893.

 

 

 

 

 


Table of Contents

Rockwell Medical, Inc. and Subsidiaries

Index to Form 10-Q

 

 

 

 

Page

Part I — Financial Information (unaudited) 

 

 

 

Item 1 - Financial Statements (unaudited) 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 20182019 and December 31, 20172018 

3

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 20182019 and 20172018 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 20182019 and 20172018 

5

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20182019 and 20172018 

710

 

 

Notes to Condensed Consolidated Financial Statements 

811

 

 

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

2028

 

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk 

26

35

 

 

Item 4 - Controls and Procedures 

2635

 

 

Part II — Other Information 

 

      

 

Item 1 -    Legal Proceedings 

2736

 

 

Item 1A - Risk Factors 

2837

 

 

Item 6 -    Exhibits 

3139

 

 

Signatures 

3240

 

 

 

 

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

 

2018

 

2017

 

2019

 

2018

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

4,292,328

 

$

8,406,917

 

$

14,421,394

 

$

22,713,980

Investments Available for Sale

 

 

13,410,151

 

 

24,648,459

Investments Available-for -Sale

 

 

14,575,589

 

 

10,818,059

Accounts Receivable, net

 

 

5,122,453

 

 

6,979,514

Insurance Receivable

 

 

500,000

 

 

 —

 

 

 —

 

 

371,217

Accounts Receivable, net of a reserve of $7,800 in 2018 and $11,000 in 2017

 

 

7,581,699

 

 

6,355,566

Inventory

 

 

4,646,522

 

 

7,637,384

 

 

3,583,452

 

 

4,038,778

Prepaid and Other Current Assets

 

 

1,662,398

 

 

1,779,992

 

 

2,861,708

 

 

1,903,682

Total Current Assets

 

 

32,093,098

 

 

48,828,318

 

 

40,564,596

 

 

46,825,230

Property and Equipment, net

 

 

2,667,760

 

 

2,548,978

 

 

2,506,093

 

 

2,638,293

Inventory, Non-Current

 

 

1,865,834

 

 

5,986,752

 

 

528,000

 

 

1,637,000

Right of Use Assets, net

 

 

3,011,805

 

 

 —

Goodwill

 

 

920,745

 

 

920,745

 

 

920,745

 

 

920,745

Other Non-current Assets

 

 

536,605

 

 

494,847

 

 

555,933

 

 

536,516

Total Assets

 

$

38,084,042

 

$

58,779,640

 

$

48,087,172

 

$

52,557,784

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Payable

 

$

6,931,292

 

$

4,222,159

 

$

3,194,039

 

$

4,492,071

Accrued Liabilities

 

 

2,724,777

 

 

4,715,712

 

 

3,916,069

 

 

5,129,761

Settlement Payable

 

 

666,667

 

 

 —

 

 

270,000

 

 

416,668

Current Portion of Deferred License Revenue

 

 

2,276,139

 

 

 —

Lease Liability - Current

 

 

 1,482,441

 

 

 —

Deferred License Revenue - Current

 

 

2,238,450

 

 

2,252,868

Insurance Financing Note Payable

 

 

1,145,133

 

 

 —

Customer Deposits

 

 

86,435

 

 

205,303

 

 

48,163

 

 

63,143

Other Current Liability - Related Party

 

 

100,000

 

 

850,000

Total Current Liabilities

 

 

12,685,310

 

 

9,143,174

 

 

12,394,295

 

 

13,204,511

 

 

 

 

 

 

 

 

 

 

 

 

Deferred License Revenue

 

 

12,729,052

 

 

16,723,318

Lease Liability - Long-Term

 

 

1,589,098

 

 

 —

Deferred License Revenue - Long-Term

 

 

10,401,166

 

 

12,076,399

Total Liabilities

 

 

25,414,362

 

 

25,866,492

 

 

24,384,559

 

 

25,280,910

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (See Note 10)

 

 

 

 

 

 

Commitments and Contingencies (See Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares, no par value, 51,769,294 shares issued and outstanding at September 30, 2018 and 51,768,424 shares issued and outstanding at December 31, 2017

 

 

275,634,848

 

 

273,210,907

Preferred Shares, $.0001 par value, no shares issued and outstanding at September 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common Shares, $.0001 par value; 170,000,000 shares authorized; 63,887,384 and 57,034,154 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

6,389

 

 

5,703

Additional paid-in capital

 

 

322,837,353

 

 

299,596,257

Accumulated Deficit

 

 

(263,012,321)

 

 

(240,262,376)

 

 

(299,213,836)

 

 

(272,388,234)

Accumulated Other Comprehensive Income (Loss)

 

 

47,153

 

 

(35,383)

Accumulated Other Comprehensive Income

 

 

72,707

 

 

63,148

Total Shareholders’ Equity

 

 

12,669,680

 

 

32,913,148

 

 

23,702,613

 

 

27,276,874

Total Liabilities And Shareholders’ Equity

 

$

38,084,042

 

$

58,779,640

 

$

48,087,172

 

$

52,557,784

 

 

 

 

 

 

 

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

3


Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30, 2018

    

Three Months Ended September 30, 2017

    

Nine Months Ended September 30, 2018

    

Nine Months Ended September 30, 2017

 

    

Three Months Ended September 30, 2019

    

Three Months Ended September 30, 2018

    

Nine Months Ended September 30, 2019

    

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

16,672,416

 

$

14,626,904

 

$

46,534,358

 

$

42,462,265

 

Net Sales

 

$

15,407,248

 

$

16,672,416

 

$

45,812,475

 

$

46,534,358

 

 

Cost of Sales

 

 

14,703,606

 

 

13,555,853

 

 

49,303,048

 

 

37,535,454

 

 

 

15,423,612

 

 

14,703,606

 

 

44,085,298

 

 

49,303,048

 

 

Gross Profit (Loss)

 

 

1,968,810

 

 

1,071,051

 

 

(2,768,690)

 

 

4,926,811

 

 

 

(16,364)

 

 

1,968,810

 

 

1,727,177

 

 

(2,768,690)

 

 

Selling, General and Administrative

 

 

6,159,141

 

 

4,791,636

 

 

15,182,048

 

 

17,433,530

 

Settlement Expense, net of Reimbursement

 

 

 —

 

 

 —

 

 

1,030,000

 

 

 —

 

Selling and Marketing

 

 

1,827,473

 

 

121,874

 

 

7,148,848

 

 

716,414

 

 

General and Administrative

 

 

4,623,503

 

 

6,037,267

 

 

16,340,672

 

 

14,465,634

 

 

Settlement Expense

 

 

 —

 

 

 —

 

 

430,000

 

 

1,030,000

 

 

Research and Product Development

 

 

808,192

 

 

1,304,658

 

 

4,033,494

 

 

4,195,003

 

 

 

1,474,735

 

 

808,192

 

 

4,930,287

 

 

4,033,494

 

 

Operating Loss

 

 

(4,998,523)

 

 

(5,025,243)

 

 

(23,014,232)

 

 

(16,701,722)

 

 

 

(7,942,075)

 

 

(4,998,523)

 

 

(27,122,630)

 

 

(23,014,232)

 

 

Interest and Investment Income (Loss)

 

 

28,891

 

 

(31,751)

 

 

264,287

 

 

(180,279)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized Gain (Loss) on Investments

 

 

6,268

 

 

(97,027)

 

 

24,292

 

 

(222,014)

 

 

Interest Income, net

 

 

80,735

 

 

125,918

 

 

272,736

 

 

486,301

 

 

Total Other Income

 

 

87,003

 

 

28,891

 

 

297,028

 

 

264,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(4,969,632)

 

$

(5,056,994)

 

$

(22,749,945)

 

$

(16,882,001)

 

 

$

(7,855,072)

 

$

(4,969,632)

 

$

(26,825,602)

 

$

(22,749,945)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Net Loss per Share

 

$

(0.10)

 

$

(0.10)

 

$

(0.44)

 

$

(0.33)

 

 

$

(0.12)

 

$

(0.10)

 

$

(0.45)

 

$

(0.44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Shares Outstanding

 

 

51,288,537

 

 

51,260,975

 

 

51,288,462

 

 

50,995,079

 

 

 

63,796,723

 

 

51,288,537

 

 

59,728,446

 

 

51,288,462

 

 

 

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

 

4


Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30, 2018

    

Three Months Ended September 30, 2017

    

Nine Months Ended September 30, 2018

    

Nine Months Ended September 30, 2017

 

    

Three Months Ended September 30, 2019

    

Three Months Ended September 30, 2018

    

Nine Months Ended September 30, 2019

    

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(4,969,632)

 

$

(5,056,994)

 

$

(22,749,945)

 

$

(16,882,001)

 

 

$

(7,855,072)

 

$

(4,969,632)

 

$

(26,825,602)

 

$

(22,749,945)

 

Unrealized Gain on Available-for-Sale Investments

 

 

143,868

 

 

248,628

 

 

96,327

 

 

860,752

 

Unrealized Gain on Available-for-Sale Debt Instrument Investments

 

 

5,926

 

 

143,868

 

 

10,190

 

 

96,327

 

Foreign Currency Translation Adjustments

 

 

(6,402)

 

 

132

 

 

(13,791)

 

 

(142)

 

 

 

(776)

 

 

(6,402)

 

 

(631)

 

 

(13,791)

 

Comprehensive Loss

 

$

(4,832,166)

 

$

(4,808,234)

 

$

(22,667,409)

 

$

(16,021,391)

 

 

$

(7,849,922)

 

$

(4,832,166)

 

$

(26,816,043)

 

$

(22,667,409)

 

 

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

 

 

5


Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the three months ended September 30, 2019

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

ADDITIONAL

 

 

 

 

OTHER

 

TOTAL

 

 

COMMON SHARES

 

PAID-IN

 

ACCUMULATED

 

COMPREHENSIVE

 

SHAREHOLDER’S

 

    

SHARES

    

AMOUNT

    

CAPITAL

    

DEFICIT

    

INCOME

    

EQUITY

Balance as of July 1, 2019

 

63,398,704

 

$

6,340

 

$

320,876,606

 

$

(291,358,764)

 

$

67,557

 

$

29,591,739

Net Loss

 

 —

 

 

 —

 

 

 —

 

 

(7,855,072)

 

 

 —

 

 

(7,855,072)

Unrealized Gain on Available-for-Sale Investments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,926

 

 

5,926

Foreign Currency Translation Adjustments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(776)

 

 

(776)

Delivery of common stock underlying restricted stock units, net of tax

 

62,800

 

 

 6

 

 

(84,866)

 

 

 —

 

 

 —

 

 

(84,860)

Issuance of common stock, net of offering costs/Public offering

 

425,880

 

 

43

 

 

1,169,199

 

 

 —

 

 

 —

 

 

1,169,242

Stock-based Compensation

 

 —

 

 

 —

 

 

876,414

 

 

 —

 

 

 —

 

 

876,414

Balance as of September 30, 2019

 

63,887,384

 

$

6,389

 

$

322,837,353

 

$

(299,213,836)

 

$

72,707

 

$

23,702,613

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

6

Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the three months ended September 30, 2018

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

ADDITIONAL

 

 

 

 

OTHER

 

TOTAL

 

 

COMMON SHARES

 

PAID-IN

 

ACCUMULATED

 

COMPREHENSIVE

 

SHAREHOLDER’S

 

    

SHARES

    

AMOUNT

    

CAPITAL

    

DEFICIT

    

INCOME / (LOSS)

    

EQUITY

Balance as of July 1, 2018

 

51,768,424

 

$

5,177

 

$

275,017,065

 

$

(258,042,689)

 

$

(90,313)

 

$

16,889,240

Net Loss

 

 —

 

 

 —

 

 

 —

 

 

(4,969,632)

 

 

 —

 

 

(4,969,632)

Unrealized Gain on Available-for-Sale Investments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

143,868

 

 

143,868

Foreign Currency Translation Adjustments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,402)

 

 

(6,402)

Exercise of Employee Stock Options, Net of Tax

 

870

 

 

 —

 

 

(1,978)

 

 

 —

 

 

 —

 

 

(1,978)

Stock-based Compensation

 

 —

 

 

 —

 

 

614,584

 

 

 —

 

 

 —

 

 

614,584

Balance as of September 30, 2018

 

51,769,294

 

$

5,177

 

$

275,629,671

 

$

(263,012,321)

 

$

47,153

 

$

12,669,680

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

7

Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

For the nine months ended September 30, 2019

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

ADDITIONAL

 

 

 

 

OTHER

 

TOTAL

 

 

 

COMMON SHARES

 

PAID-IN

 

ACCUMULATED

 

COMPREHENSIVE

 

SHAREHOLDER’S

 

 

    

SHARES

    

AMOUNT

    

CAPITAL

    

DEFICIT

    

INCOME

    

EQUITY

 

Balance as of January 1, 2019

 

57,034,154

 

$

5,703

 

$

299,596,257

 

$

(272,388,234)

 

$

63,148

 

$

27,276,874

 

Net Loss

 

 —

 

 

 —

 

 

 —

 

 

(26,825,602)

 

 

 —

 

 

(26,825,602)

 

Unrealized Gain on Available-for-Sale Investments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,190

 

 

10,190

 

Foreign Currency Translation Adjustments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(631)

 

 

(631)

 

Exercise of Employee Stock Options

 

30,000

 

 

 3

 

 

147,897

 

 

 —

 

 

 —

 

 

147,900

 

Delivery of common stock underlying restricted stock units, net of tax

 

126,973

 

 

13

 

 

(180,302)

 

 

 —

 

 

 —

 

 

(180,289)

 

Issuance of common stock, net of offering costs/Public offering

 

6,259,214

 

 

626

 

 

17,289,296

 

 

 —

 

 

 —

 

 

17,289,921

 

Issuance of common stock, net of offering costs/At-the-market offering

 

437,043

 

 

44

 

 

2,089,164

 

 

 —

 

 

 —

 

 

2,089,208

 

Stock-based Compensation

 

 —

 

 

 —

 

 

3,895,041

 

 

 —

 

 

 —

 

 

3,895,041

 

Balance as of September 30, 2019

 

63,887,384

 

$

6,389

 

$

322,837,353

 

$

(299,213,836)

 

$

72,707

 

$

23,702,613

 

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

8

Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the nine months ended September 30, 2018

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

 

OTHER

 

TOTAL

 

 

 

 

 

 

 

ADDITIONAL

 

 

 

 

OTHER

 

TOTAL

 

COMMON SHARES

 

ACCUMULATED

 

COMPREHENSIVE

 

SHAREHOLDER’S

 

 

COMMON SHARES

 

PAID-IN

 

ACCUMULATED

 

COMPREHENSIVE

 

SHAREHOLDER’S

    

SHARES

    

AMOUNT

    

DEFICIT

    

INCOME / (LOSS)

    

EQUITY

 

    

SHARES

    

AMOUNT

    

CAPITAL

    

DEFICIT

    

(LOSS)

    

EQUITY

Balance as of December 31, 2017

 

51,768,424

 

$

273,210,907

 

$

(240,262,376)

 

$

(35,383)

 

$

32,913,148

 

Balance as of January 1, 2018

 

51,768,424

 

$

5,177

 

$

273,205,730

 

$

(240,262,376)

 

$

(35,383)

 

$

32,913,148

Net Loss

 

 —

 

 

 —

 

 

(22,749,945)

 

 

 —

 

 

(22,749,945)

 

 

 —

 

 

 —

 

 

 —

 

 

(22,749,945)

 

 

 —

 

 

(22,749,945)

Unrealized Gain (Loss) on Available-for-Sale Investments

 

 —

 

 

 —

 

 

 —

 

 

96,327

 

 

96,327

 

Unrealized Gain on Available-for-Sale Investments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

96,327

 

 

96,327

Foreign Currency Translation Adjustments

 

 —

 

 

 —

 

 

 —

 

 

(13,791)

 

 

(13,791)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,791)

 

 

(13,791)

Exercise of Employee Stock Options, Net of Tax

 

870

 

 

(1,978)

 

 

 —

 

 

 —

 

 

(1,978)

 

 

870

 

 

 —

 

 

(1,978)

 

 

 —

 

 

 —

 

 

(1,978)

Stock-based compensation

 

 —

 

 

2,425,919

 

 

 —

 

 

 —

 

 

2,425,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based Compensation

 

 —

 

 

 —

 

 

2,425,919

 

 

 —

 

 

 —

 

 

2,425,919

Balance as of September 30, 2018

 

51,769,294

 

$

275,634,848

 

$

(263,012,321)

 

$

47,153

 

$

12,669,680

 

 

51,769,294

 

$

5,177

 

$

275,629,671

 

$

(263,012,321)

 

$

47,153

 

$

12,669,680

 

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

 

 

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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the nine months ended September 30, 20182019 and 20172018

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(22,749,945)

 

$

(16,882,001)

 

$

(26,825,602)

 

$

(22,749,945)

Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

466,994

 

 

384,835

 

581,982

 

 

466,994

Stock-based Compensation

 

 

2,425,919

 

 

6,033,436

 

3,895,041

 

 

2,425,919

Increase in Inventory Reserves

 

 

3,442,547

 

 

 —

 

1,271,000

 

 

3,442,547

Loss on Disposal of Assets

 

 

4,030

 

 

4,084

Realized Loss on Sale of Investments Available-for-Sale

 

 

222,014

 

 

704,695

Amortization of Right of Use Asset

 

1,429,727

 

 

 —

(Gain) Loss on Disposal of Assets

 

(620)

 

 

4,030

Realized (Gain) Loss on Sale of Investments Available-for-Sale

 

(24,292)

 

 

222,014

Foreign Currency Translation Adjustment

 

(631)

 

 

(13,791)

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

(Increase) in Insurance Receivable

 

 

(500,000)

 

 

 -

(Increase) Decrease in Accounts Receivable

 

 

(1,226,133)

 

 

(149,429)

Decrease (Increase) in Inventory

 

 

3,669,233

 

 

(2,391,191)

Decrease (Increase) in Other Assets

 

 

75,570

 

 

224,635

(Decrease) in Accounts Payable

 

 

2,709,133

 

 

(1,669,651)

Increase in Settlement Payable

 

 

666,667

 

 

 —

(Decrease) in Other Liabilities

 

 

(2,109,802)

 

 

(863,034)

(Decrease) in Deferred License Revenue

 

 

(1,718,127)

 

 

(1,698,903)

Decrease (Increase) in Accounts Receivable, net

 

1,857,061

 

 

(1,226,133)

Decrease (Increase) in Insurance Receivable

 

371,217

 

 

(500,000)

Decrease in Inventory

 

293,326

 

 

3,669,233

Decrease in Other Assets

 

930,847

 

 

75,570

(Decrease) Increase in Accounts Payable

 

(1,298,031)

 

 

2,709,133

(Decrease) Increase in Settlement Payable

 

(146,668)

 

 

666,667

Decrease in Lease Liability

 

(1,369,994)

 

 

 —

Decrease in Other Liabilities

 

(1,228,671)

 

 

(2,109,802)

Decrease in Deferred License Revenue

 

 

(1,689,651)

 

 

(1,718,127)

Changes in Assets and Liabilities

 

 

1,566,541

 

 

(6,547,573)

 

 

(2,280,564)

 

 

1,566,541

Cash Used In Operating Activities

 

 

(14,621,900)

 

 

(16,302,524)

 

 

(21,953,959)

 

 

(14,635,691)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Purchase of Investments Available-for-Sale

 

 

(18,483,694)

 

 

(34,235,347)

 

(34,202,301)

 

 

(18,483,694)

Sale of Investments Available-for-Sale

 

 

29,596,315

 

 

40,122,266

 

30,479,252

 

 

29,596,315

Purchase of Equipment

 

 

(589,541)

 

 

(706,346)

 

(448,896)

 

 

(589,541)

Proceeds on Sale of Assets

 

 

 —

 

 

450

Cash Provided By Investing Activities

 

 

10,523,080

 

 

5,181,023

Purchase of Research and Development Licenses (Related Party)

 

 

(750,000)

 

 

 —

Cash (Used in) Provided By Investing Activities

 

 

(4,921,945)

 

 

10,523,080

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from Issuance of Common Shares

 

 

 —

 

 

116,105

Restricted Stock Retained in Satisfaction of Tax Liabilities

 

 

 —

 

 

(2,287,231)

Payments on Short Term Notes Payable

 

(763,422)

 

 

 —

Proceeds from the Issuance of Common Stock / Public Offering

 

18,777,642

 

 

 —

Offering Costs from the Issuance of Common Stock / Public Offering

 

(1,487,721)

 

 

 —

Proceeds from the Issuance of Common Stock / At-the Market Offering

 

2,296,235

 

 

 —

Offering Costs from the Issuance of Common Stock / At-the Market Offering

 

(207,027)

 

 

 —

Proceeds from the Exercise of Employee Stock Options

 

147,900

 

 

 —

Stock Retained in Satisfaction of Tax Liabilities

 

 

(1,978)

 

 

 —

 

 

(180,289)

 

 

(1,978)

Cash Used In Financing Activities

 

 

(1,978)

 

 

(2,171,126)

Cash Provided By (Used In) Financing Activities

 

 

18,583,318

 

 

(1,978)

 

 

 

 

 

 

 

 

 

 

 

Effects of Exchange Rate Changes

 

 

(13,791)

 

 

(44)

Decrease In Cash and Cash Equivalents

 

 

(4,114,589)

 

 

(13,292,671)

 

(8,292,586)

 

 

(4,114,589)

Cash At Beginning Of Period

 

 

8,406,917

 

 

17,180,594

 

 

22,713,980

 

 

8,406,917

Cash At End Of Period

 

$

4,292,328

 

$

3,887,923

 

$

14,421,394

 

$

4,292,328

 

 

 

 

 

Supplemental Disclosure of Noncash Investing and Financing Activities:

 

 

 

 

 

Insurance Financing Note Payable

 

$

1,145,133

 

$

 —

 

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

 

710


Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.  Description of Business

 

Rockwell Medical, Inc. and subsidiaries (collectively, “we”, “our”, “us”, or the “Company”), is a specialty pharmaceuticalbiopharmaceutical company targetingdedicated to improving outcomes for patients with anemia, with an initial focus on end-stage renal disease and chronic kidney disease with products for the treatment of iron deficiency, secondary hyperparathyroidism and hemodialysis.(ESRD).  We are also a manufacturer of hemodialysis concentrates/dialysatesconcentrates for 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 have been concentrate products and ancillary items.items, though we initiated commercial sales of our proprietary therapeutic, Triferic, during the second quarter of 2019.

 

Our business strategymission is developing unique, proprietary renal drug therapies thatto transform anemia management in a wide variety of disease states across the globe while improving patients’ lives. Accordingly, we can commercialize or out-license, while also expanding our dialysis products business. These renal drug therapies support disease management initiativesare building the foundation to improvebecome a leading medical and commercial organization in the qualityfield 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.dialysis.

 

Triferic® is a registered trademark of Rockwell Medical, Inc.

 

2.  Liquidity and Financial ConditionGoing Concern

 

As of September 30, 2018,2019, the Company had approximate balances of $4.3approximately  $14.4 million of cash and cash equivalents, $13.4$14.6 million of investments available-for-sale, working capital of $19.4$28.2 million and an accumulated deficit of $263.0$299.2 million. Net cash used in operating activities for the nine months ended September 30, 20182019 was approximately $14.6$21.9 million. On October 15, 2018,

The Company will require significant additional capital to sustain its operations and make the investments it needs to execute its longer-term business plan. The Company’s existing liquidity is not sufficient to fund its operations and anticipated capital expenditures within one year of the issuance of the accompanying condensed consolidated financial statements.

The Company’s recurring operating losses, net operating cash flow deficits, and an accumulated deficit, raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the accompanying condensed consolidated financial statements. The condensed consolidated financial statements have been prepared assuming the Company raised $22.0 million in capital fromwill continue as a going concern. The Company has not made any adjustments to the accompanying condensed consolidated financial statements related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

On June 20, 2019, the Company closed a public offering and sale of 5,541,5625,833,334 shares of common stock at a price of $3.97$3.00 per share, along with warrants to purchase up toshare. The aggregate proceeds from this public offering (net of the underwriters’ commissions and offering expenses) were approximately $16.1 million. On July 9, 2019, the underwriters of the public offering partially exercised their over-allotment option and purchased an additional 2,770,781425,800 shares of common stock at a price of $4.96$3.00 per share. (See Noteshare, which closed on July 11, – Subsequent Events).2019. The aggregate proceeds from the exercise of the over-allotment option (net of the underwriters’ discount and offering expenses) were approximately $1.2 million.

 

Based on the additional capital raised from the October 2018 offering, management currently believesOn March 22, 2019, the Company currently has sufficient fundsentered into a sales agreement with Cantor Fitzgerald & Co. (the “Agent”), pursuant to meet its operating requirementswhich the Company may offer and sell from time to time shares of the Company’s common stock through the Agent up to $40,000,000.  As of September 30, 2019, approximately $37.7 million remains available for issuance under this facility. We are not required to sell any shares at leastany time during the next twelve months fromterm of the datefacility.  Our ability to sell common stock under the facility may be limited by several factors including, among other things, the trading volume of report filing.our common stock and certain black-out periods that we may impose upon the facility, among other things.

 

The Company will require additional capital to sustain its short-term operations and make the investments it needs to execute upon its long-termlonger-term business plan, including the commercial launch of Dialysate Triferic and IV Triferic (if approved).I.V. Triferic. If the Company is unable to generate sufficient revenue from its existing long-term business plan, the Company will need to obtain additional equity

11

Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

or debt or equity financing. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available on favorable terms, if at all.

 

3.  Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements

 

At the 2019 Annual Meeting, the Company’s shareholders voted and approved to reincorporate the Company from the State of Michigan to the State of Delaware (the “Reincorporation”). The Reincorporation became effective on August 30, 2019 and was accomplished by the filing of (i) a certificate of conversion with the Bureau of Commercial Services of the Michigan Department of Labor & Economic Growth; (ii) a certificate of conversion with the Secretary of State of the State of Delaware; and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Certificate of Incorporation”).

The Company’s new authorized capital stock consists of 170,000,000 shares of common stock, $0.0001 par value per share, and 2,000,000 shares of preferred stock, $0.0001 par value per share.

Certain reclassifications have been made to the 2018 financial statements and notes to conform to the 2019 presentation. 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.

The results for the condensed consolidated statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period. The condensed consolidated balance sheet at September 30, 2019 has been derived from unaudited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements.  The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements, however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018 and notes thereto included in the Company’s annual report on Form 10-K filed on March 18, 2019.

The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

The accompanyingpreparation of the condensed consolidated financial statements have been prepared in accordanceconformity with GAAP requires management to make estimates and assumptions that may affect the accounting principles generally accepted inreported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the United States (“U.S.”) of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the U. S. Securities and Exchange Commission (“SEC”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The condensed consolidated balance sheet at September 30, 2018, condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017, and condensed consolidated statement of changes in shareholder’s equity for the nine months ended September 30, 2018 are unaudited, but include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentationdate of the financial position, operatingstatements and reported amounts of expenses during the reporting period. Actual results and cash flowscould differ from those estimates.

Significant Accounting Policies

With the exception of the adoption of ASU 2016-02 relating to accounting for leases, there have been no material changes in the periods presented. The results forCompany’s significant accounting policies as previously disclosed in the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expectedCompany’s Annual Report on Form 10-K for the year endingended December 31, 2018 or for any future interim period. The condensed consolidated balance sheet at December 31, 2017 has been derived from audited financial statements,2018.

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Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

however, it does not include all

Leases

Effective January 1, 2019, the Company accounts for its leases under Accounting Standards Codification (“ASC”) 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

The Company continues to account for leases in the prior period financial statements in accordance with ASC Topic 840.

Loss Per Share

ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”), with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that are then sharing in the earnings of the entity.

Basic net loss per share of common stock excludes dilution and is computed by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. The Company has only incurred losses, therefore, basic and diluted net loss per share is the same. Securities that could potentially dilute net income per share in the future that were not included in the computation of diluted loss per share were as follows:

 

 

 

 

 

 

As of September 30, 

 

2019

2018

Options to purchase common stock

 

8,170,382

 

8,048,105

Unvested restricted stock awards

 

146,800

 

146,800

Unvested restricted stock units

 

1,324,172

 

1,293,750

Warrants to purchase common stock

 

2,770,781

 

 -

 

 

12,412,135

 

9,488,655

Adoption of Recent Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a review to determine the consequences of the change to its consolidated financial statements and assures that there are sufficient controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amended the guidance on accounting for leases. The FASB issued this update to increase transparency and comparability among organizations. This update requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. The Company adopted this ASU effective January 1, 2019 using the additional (optional) approach by recording a right-of-use asset and notes required by GAAPa lease liability of approximately $3.5 million. Our adoption of

13

Table of Contents

ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

this ASU had no effect on opening retained earnings, and the Company continues to account for completeleases in the prior period consolidated financial statements.statements under ASC Topic 840. In adopting the new standard, the Company elected to apply the practical expedients regarding identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components.

       In June 2018, the FASB issued ASU 2018-17, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-17, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The accompanyingamendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. The Company adopted this new standard on January 1, 2019 and the adoption did not have amaterial impact on its condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as filed with the SEC (the “2017 Annual Report”). The Company’s consolidated subsidiaries consisted of its wholly-owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited.related disclosures.

 

Certain reclassifications have been made to the 2017 financial statements and notes to conform to the 2018 presentation.

 

4.  Revenue Recognition

 

The Company recognizes revenue under Accounting Standards Codification (“ASC”)ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

·

Step 1: Identify the contract with the customer

·

Step 2: Identify the performance obligations in the contract

·

Step 3: Determine the transaction price

·

Step 4: Allocate the transaction price to the performance obligations in the contract

·

Step 5: Recognize revenue when the company satisfies a performance obligation

 

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.

 

Shipping and handling costs associated with outbound freight related to contracts with customers are accounted for as a fulfillment cost and are included in cost of sales when control of the goods transfers to the customer.

 

Nature of goods and services

 

The following is a description of principal activities from which the Company generates its revenue.

 

Product sales –The Company accounts for individual products and services separately if they are distinct (i.e., if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. The stand-alone selling prices are determined based on the cost plus margin approach.

 

Drug and dialysis 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 the agreement to determine if the agreement creates a separate performance obligation from the underlying product sales.  For all existing distribution and license agreements, the distribution and license agreement is not a distinct performance obligation from the product sales.  In instances where regulatory approval of the product has not been established and the Company does not have sufficient experience with the foreign regulatory body to conclude that regulatory approval is probable, the revenue for the performance obligation is recognized over the term of the license agreement (over time recognition). Conversely, when regulatory approval already exists or is probable, revenue is recognized at the point in time that control of the product transfers to the customer.

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company received upfront fees under two distribution and license agreements that have been deferred as a contract liability.  The amounts received from Wanbang Biopharmaceuticals Co., Ltd. (“Wanbang”) are recognized as revenue over the estimated term of the distribution and license agreement as regulatory approval was not received and the Company did not have sufficient experience in China to determine that regulatory approval was probable as of the execution of the

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

agreement.  The amounts received from Baxter Healthcare Corporation (“Baxter”), are recognized as revenue at the point in time that the estimated product sales under the agreement occur. 

 

For the business under the Company’s distribution agreement with Baxter (the “Baxter Agreement”), and for the majority of the Company’s international customers, the Company recognizes revenue at the shipping point, which is generally the Company’s plant or warehouse. For other business, including the business under the Company’s distribution agreement with Baxter (the “Baxter Agreement”), the Company recognizes revenue based on when the customer takes control or receipt of the product. The amount of revenue recognized is based on the purchase order less returns and adjusted for any rebates, discounts, chargebacks or other amounts paid to customers. There were no such adjustments for the periods reported. Customers typically pay for the product based on customary business practices with payment terms averaging 30 days, while distributor payment terms average 45 days.

 

Disaggregation of revenue

 

Revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In thousands of US dollars ($)

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

Three Months Ended September 30, 2019

 

 

Nine Months Ended September 30, 2019

Products By Geographic Area

    Total

    

U.S.

    

Rest of World

 

    Total

    

U.S.

    

Rest of World

Drug Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales – Point-in-time

$

98

 

$

98

 

$

 -

 

$

112

 

$

112

 

$

 -

License Fee – Over time

 

68

 

 

 -

 

 

68

 

 

205

 

 -

 

205

Total Drug Products

 

166

 

 

98

 

 

68

 

 

317

 

 

112

 

 

205

Concentrate Products

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales – Point-in-time

 

14,746

 

13,353

 

1,393

 

 

44,010

 

39,100

 

4,910

License Fee – Over time

 

495

 

 

495

 

 

 -

 

 

1,485

 

 

1,485

 

 

 -

Total Concentrate Products

 

15,241

 

 

13,848

 

 

1,393

 

 

45,495

 

 

40,585

 

 

4,910

Net Revenue

$

15,407

 

$

13,946

 

$

1,461

 

$

45,812

 

$

40,697

 

$

5,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

Products By Geographic Area

    

    Total

    

U.S.

    

Rest of World

 

    Total

    

U.S.

    

Rest of World

 

Total

 

U.S.

 

Rest of World

 

 

Total

 

U.S.

 

Rest of World

Drug Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License Fee – Over time

 

$

68

 

$

 —

 

$

68

 

$

205

 

$

 —

 

$

205

$

68

 

 

 -

 

$

68

 

$

205

 

 

 -

 

$

205

Concentrate Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales – Point-in-time

 

 

16,099

 

 

13,208

 

 

2,891

 

 

44,815

 

 

38,536

 

 

6,279

 

16,099

 

 

13,208

 

 

2,891

 

 

44,815

 

 

38,536

 

 

6,279

License Fee – Point-in-time

 

 

505

 

 

505

 

 

 —

 

 

1,514

 

 

1,514

 

 

 —

License Fee – Over time

 

505

 

 

505

 

 

 -

 

 

1,514

 

 

1,514

 

 

 -

Total Concentrate Products

 

 

16,604

 

 

13,713

 

 

2,891

 

 

46,329

 

 

40,050

 

 

6,279

 

16,604

 

 

13,713

 

 

2,891

 

 

46,329

 

 

40,050

 

 

6,279

Net Revenue

 

$

16,672

 

$

13,713

 

$

2,959

 

$

46,534

 

$

40,050

 

$

6,484

$

16,672

 

$

13,713

 

$

2,959

 

$

46,534

 

$

40,050

 

$

6,484

For the three and nine months ended September 30, 2017, license fee revenue was $556 and $1,655 respectively.  For the three and nine months ended September 30, 2017 product sales revenue was $14,061 and $40,807 respectively.

 

Contract balances

 

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.

 

 

 

 

 

 

 

 

 

 

 

 

 

In thousands of US dollars ($)

    

September 30, 2018

    

December 31, 2017

    

September 30, 2019

    

December 31, 2018

Receivables, which are included in "Trade and other receivables"

 

$

7,593

 

$

5,544

 

$

5,122

 

$

6,980

Contract liabilities

 

$

15,005

 

$

16,723

 

$

12,640

 

$

14,329

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

There were no impairment losses recognized related to any receivables arising from the Company’s contracts with customers for the three and nine months ended September 30, 2019 and 2018.

 

For the three and nine months ended September 30, 20182019 and 2017,September 30, 2018, the Company did not recognize material bad-debt expense and there were no material contract assets recorded on the condensed consolidated balance sheet as of September 30, 2019 and December 31, 2018.  The Company does not generally accept returns of its concentrate products and no reserve for returns of concentrate products was established as of September 30, 20182019 or December 31, 2017.2018. 

 

The contract liabilities primarily relate to upfront payments and 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 and nine months ended September 30, 2018,2019, revenue recognized from performance obligations related to prior periods was not material.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 $15,005,000$10.4 million as of September 30, 2018.2019. The amount relates primarily to upfront payments and consideration received from customers that are received in advance of the customer assuming control of the related products. The Company applies the practical expedient in paragraph 606-10-50-14 and does 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 Baxter Agreement are product sales of $11,732,000,$9.6 million, which will be amortized through expiration of the agreement on October 2, 2024.

 

Use5.  Investments - Available-for-Sale

Investments available-for-sale consisted of Estimatesthe following as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Amortized Cost

 

Unrealized Gain

 

Unrealized Loss

 

Fair Value

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

$

14,549,799

 

$

26,401

 

$

(611)

 

$

14,575,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Amortized Cost

 

Unrealized Gain

 

Unrealized Loss

 

Fair Value

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

$

10,801,836

 

$

17,415

 

$

(1,192)

 

$

10,818,059

The fair value of investments available-for-sale are determined using quoted market prices from daily exchange-traded markets based on the closing price as of the balance sheet date and are classified as Level 1, as described in Note 3 on Form 10-K, Fair Value Measurement to our condensed consolidated financial statements.

As of September 30, 2019 and December 31, 2018, available-for-sale securities were due in one year or less.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

6.  Inventory

Components of inventory, net of reserves as of September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

Raw Materials

 

$

2,390,179

 

$

3,621,548

Work in Process

 

 

209,940

 

 

256,129

Finished Goods

 

 

1,511,333

 

 

1,798,101

Total

 

$

4,111,452

 

$

5,675,778

As of September 30, 2019 and December 31, 2018,  we classified $0.5 million and $1.6 million, respectively, of inventory as non-current, all of which was related to Triferic or the active pharmaceutical ingredient (API) for Triferic. As of September 30, 2019 and December 31, 2018, we had total Triferic inventory aggregating $3.5 million and $8.0 million respectively, against which we had reserved $2.8 million and $5.8 million respectively.

 

The preparation$0.7 million net value of Triferic inventory consisted of $0.1 million of Dialysate Triferic finished goods with expiration dates ranging from March 2020 to May 2021, and $0.6 million of Triferic API with estimated useful lives extending through 2023. The Company increased its inventory reserve for Triferic by $1.1 million as of September 30, 2019 due to, among other factors, the impact of the condensed consolidated financial statementsCenters for Medicare & Medicaid Services (“CMS”) Final Rule, which is discussed in conformity with GAAP requires management to make estimatesNote 17 below, and assumptions that may affectits current volume forecasts for Triferic across the reported amountsglobe. 

7.  Property and Equipment

As of assetsSeptember 30, 2019 and liabilitiesDecember 31 2018, the Company’s property and disclosure of contingent assets and liabilities at the dateequipment consisted of the financial statementsfollowing:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Leasehold Improvements

 

$

1,114,503

 

$

929,849

Machinery and Equipment

 

 

4,719,132

 

 

4,800,774

Information Technology & Office Equipment

 

 

1,810,246

 

 

2,459,832

Laboratory Equipment

 

 

653,075

 

 

668,977

 

 

 

8,296,956

 

 

8,859,432

Accumulated Depreciation

 

 

(5,790,863)

 

 

(6,221,139)

Net Property and Equipment

 

$

2,506,093

 

$

2,638,293

Depreciation expense for the three months ended September 30, 2019 and reported amounts of expenses during2018, totaled $0.2 million and $0.2 million, respectively. Depreciation expense for the reporting period. Actual results could differ from those estimates.nine months ended September 30, 2019 and 2018, totaled $0.58 million and $0.47 million, respectively.

 

Cash and Cash Equivalents8.  Accrued Liabilities

 

The Company considers all highly liquid investments purchased with original maturitiesAccrued liabilities as of 90 days or less at acquisitionSeptember 30, 2019 and December 31, 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Accrued Research & Development Expense

 

$

84,798

 

$

86,820

Accrued Compensation and Benefits

 

 

1,334,563

 

 

1,525,599

Accrued Legal Expenses

 

 

392,869

 

 

170,334

Accrued Marketing Expenses

 

 

206,649

 

 

5,000

Other Accrued Liabilities

 

 

1,897,190

 

 

3,342,008

Total Accrued Liabilities

 

$

3,916,069

 

$

5,129,761

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Notes to be cash equivalents. Cash and cash equivalents include cash held in banks, money market mutual funds and unrestricted certificates of deposit.Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value Measurement9.  Insurance Financing Note Payable

 

TheOn June 3, 2019, the Company appliesentered into a short-term note payable for $1.9 million, bearing interest at 4.65% per annum to finance various insurance policies. Principal and interest payments related to this note began on July 3, 2019 and are paid on a straight-line amortization over a 10-month period with the guidance issued with ASC 820, Fair Value Measurements, which provides guidancefinal payment due on April 3, 2020. As of September 30, 2019, the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.Company’s insurance note payable balance was $1.15 million.

 

The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

Level 3: Unobservable inputs which are supported by little or no market activity ad values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgement or estimation.

10.  Deferred Revenue

 

In October of 2014, the Company entered into a 10 year distribution agreement with Baxter and received an upfront fee of $20 million. The upfront fee was recorded as deferred revenue and is being recognized based on the proportion of product shipments to Baxter in each period, compared with total expected sales volume over the term of the DistributionBaxter Agreement. The Company recognized revenue of approximately $0.5 million each ofand $1.5 million during the three and nine months ended September 30, 2019 and 2018, respectively. Deferred revenue related to the Baxter Agreement totaled $9.6 million as of September 30, 2019 and 2017, respectively,$11.1 million as of December 31, 2018.

If a “Refund Trigger Event” occurs, we would be obligated to repay a portion of the upfront fee and $1.5any paid portion of the facility fee. In the event of a Refund Trigger Event occurring from January 1, 2019 to December 31, 2021, Baxter would be eligible for a 25% refund of the Agreement’s Upfront Payment. In addition, if Baxter terminates the Agreement because Baxter has been enjoined by a court of competent jurisdiction from selling in the United States any product covered by the Baxter Agreement due to a claim of intellectual property infringement or misappropriation relating to such product prior to the end of 2019, Baxter would be eligible for a partial refund of $6.6 million. In no event would more than one refund be required to be paid.

During the year ended December 31, 2016, the Company entered into a distribution and license agreement with Wanbang and received an upfront fee of $4.0 million. The upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term. The Company recognized revenue of approximately $0.1 million for eachand $0.2 million during the three and nine months ended September 30, 2019 and 2018, respectively. Deferred revenue related to the Wanbang agreement totaled $3.0 million as of September 30, 2019 and $3.2 million as of December 31, 2018.

11.  Shareholders’ Equity

At the 2019 Annual Meeting, the Company’s shareholders voted and approved to reincorporate the Company from the State of Michigan to the State of Delaware (the “Reincorporation”). The Reincorporation became effective on August 30, 2019 and was accomplished by the filing of (i) a certificate of conversion with the Bureau of Commercial Services of the Michigan Department of Labor & Economic Growth; (ii) a certificate of conversion with the Secretary of State of the State of Delaware; and (iii) a Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Certificate of Incorporation”).

The Company’s new authorized capital stock consists of 170,000,000 shares of common stock, $0.0001 par value per share, and 2,000,000 shares of preferred stock, $0.0001 par value per share.

Preferred Stock

As of September 30, 2019 and December 31, 2018, there were 2,000,000 shares of preferred stock authorized and no shares of preferred stock issued or outstanding.

Common Stock

As of September 30, 2019, the Company’s authorized shares of common stock was 170 million shares.  On June 6, 2019, the Company obtained shareholder approval to increase the number of authorized shares of the Company’s

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

common stock by 50 million shares from 120 million shares to 170 million shares.  On July 30, 2019, the Company amended its Articles of Incorporation to reflect this increase in authorized shares from 120 million to 170 million shares.

During the nine months ended September 30, 2019,  30,000 vested employee stock options were exercised for cash proceeds of $147,900, at a weighted average exercise price of $4.93.

Controlled Equity Offering

On March 22, 2019, the Company entered into a sales agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the Company may offer and sell from time to time shares of the Company’s common stock through the Agent. The offering and sale of up to $40,000,000 of the shares has been registered under the Securities Act of 1933, as amended, pursuant to the Company’s registration statement on Form S-3 (File No. 333-227363), which was originally filed with the SEC on September 14, 2018 and 2017, respectively.declared effective by the SEC on October 1, 2018.  The base prospectus contained within the registration statement, and a prospectus supplement was filed with the SEC on March 22, 2019.

Sales of the shares, if any, pursuant to the Sales Agreement, may be made in sales deemed to be a “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through the Nasdaq Global Market or on any other existing trading market for the Company’s common stock. The Company intends to use the proceeds from the offering for working capital and other general corporate purposes. The Company may suspend or terminate the Sales Agreement at any time.

In April 2019, the Company sold 437,043 shares of its common stock pursuant to the Sales Agreement for gross proceeds of $2,296,235, at a weighted average selling price of approximately $5.25. The Company paid $207,027 in commissions and offering fees related to the sale of the common shares. As of September 30, 2019, approximately $37.7 million remains available for issuance under this facility.

We are not required to sell any shares at any time during the term of the facility.  Our ability to sell common stock under the facility may be limited by several factors including, among other things, the trading volume of our common stock and certain black-out periods that we may impose upon the facility, among other things.

Public Offering of Common Stock

On June 17, 2019, the Company entered into a purchase agreement with Piper Jaffray & Co., and Cantor Fitzgerald & Co, pursuant to which the Company agreed to issue and sell up to 6,708,334 shares of common stock, which included 875,000 optional shares that may be sold pursuant to an option granted to the underwriters. 

On June 20, 2019, the Company closed the sale of 5,833,334 shares of its common stock for gross proceeds of $17,500,002 at the public offering price of $3.00 per share (the “Offering”). The Company paid $1,379,323 in underwriters’ commissions and fees related to the sale of the common shares. The Offering was made pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-227363), which was previously filed with the SEC. On July 9, 2019, the Underwriters exercised their over-allotment option to purchase an additional 425,800 shares of common stock at a price of $3.00 per share, which closed on July 11, 2019. The total proceeds to the Company (net of underwriting commissions and offering fees) from the exercise of the over-allotment option were approximately $1.2 million.

Restricted Common Stock

During the nine months ended September 30, 2019, 195,042 shares of common stock related to fully vested restricted stock units were delivered to an officer of the Company. The Company withheld 68,069 of these common shares at a fair value of $180,289 to cover the officer’s withholding taxes related to the vesting of restricted stock units.

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Research and Product Development

The Company recognizes research and product development expenses as incurred.  The Company incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products aggregating approximately $0.8 million and $1.3 million for the three months ended September 30, 2018 and 2017, respectively, and $4.0 million and $4.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Stock-Based Compensation

The Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards. For stock-based compensation awards to non-employees, the Company re-measures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards are recognized as compensation expense in the period of change. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgement. For the three and nine months ended September 30, 2018 and 2017, the Company recorded stock-based compensation expense on its options granted under the Company’s equity compensation plans to its directors and officers, and its employees.

Loss Per Share

ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”), with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issued common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net loss per share of common stock excludes dilution and is computed by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. The Company has only incurred losses, therefore, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

As of September 30,

 

2018

2017

Options to purchase common stock

 

8,048,105

 

7,326,501

Unvested restricted stock awards

 

 -

 

480,000

Unvested restricted stock units

 

1,293,750

 

 -

 

 

9,341,855

 

7,806,501

Adoption of Recent Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), as modified by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective approach with practical expedients, or a cumulative effect upon the adoption approach. The Company adopted the new standard on January 1, 2018, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 is effective for the Company in its first quarter 2020, and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of Topic 842 on its condensed consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon its adoption of Topic 842, which will increase its total assets and total liabilities that the Company reports relative to such amounts prior to adoption.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholder’s equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholder’s equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance and the ending balance of each period for which a statement of comprehensive income is required to be filed. This rule is effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

4. Investments - Available-for-Sale

Investments available-for-sale are short-term investments, consisting of investments in short-term notes and 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-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 $13,410,151 and $24,648,459 as of September 30, 2018 and December 31, 2017, respectively.  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 for the three months ended September 30, 2018 was $157,982. There were no unrealized gains for the three months ended September 30, 2018. Gross unrealized gains for the three months ended September 30, 2017 $248,628.  There were no unrealized losses for the three months ended September 30, 2017.  Realized gains were $2,411 and $57 for the three months ended September 30, 2018 and 2017 respectively.  Realized losses were $99,439 and $199,758 for the three months ended September 30, 2018 and 2017 respectively. There were no gross unrealized losses for the nine months ended September 30, 2018 and gross unrealized gains were $96,591 as of September 30, 2018. Gross unrealized losses were $76,399 and gross unrealized gains were $35,274 for the nine months ended September 30, 2017.  There were realized gains of $6,050 and $57 for the nine months ended September 30, 2018 and 2017 respectively.  There were realized losses of $228,064 and $704,752 during the nine months ended September 30, 2018 and 2017 respectively. 

The Company has evaluated the near term interest rate environment and the expected holding period of the investments along with the duration of the portfolio assets in assessing the severity and duration of potential impairments. Based on

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our evaluation, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

5.  Inventory

Components of inventory, net of reserves as of September 30, 2018 and December 31, 2017 are as follows:

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Raw Materials

 

$

4,122,432

 

$

10,604,232

Work in Process

 

 

203,498

 

 

212,505

Finished Goods

 

 

2,186,426

 

 

2,807,399

Total

 

$

6,512,356

 

$

13,624,136

As of September 30, 2018, we classified $1,865,834 of inventory as non-current all of which was related to Triferic or the active pharmaceutical ingredient for Triferic. As of September 30, 2018 and December 31, 2017, we had total Triferic inventory aggregating $9,467,795 and $13,424,779 respectively against which we had reserved $6,900,000 and $3,460,801 respectively.

For the three and nine months ended September 30, 2018, the Company increased its inventory reserve by $0.1 million and $7.8 million respectively.  For the three and nine months ended September 30, 2017 the Company increased its inventory reserve by $0.7 million and $0.8 million respectively.

6.  Property and Equipment

As of September 30, 2018 and December 31 2017, the Company’s property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

    

2017

Leasehold Improvements

 

$

909,846

 

$

824,087

Machinery and Equipment

 

 

4,882,489

 

 

7,893,566

Information Technology & Office Equipment

 

 

2,459,832

 

 

2,327,524

Laboratory Equipment

 

 

614,733

 

 

631,666

Transportation

 

 

 —

 

 

242,277

 

 

 

8,866,900

 

 

11,919,120

Accumulated Depreciation

 

 

(6,199,140)

 

 

(9,370,142)

Net Property and Equipment

 

$

2,667,760

 

$

2,548,978

Depreciation expense for the three months ended September 30, 2018 and 2017, totaled $185,579 and $125,839. Depreciation expense for the nine months ended September 30, 2018 and 2017, totaled $466,729 and $384,835.

7.  Shareholders’ Equity

Preferred Stock

As of September 30, 2018 and December 31, 2017, there were 2,000,000 shares of preferred stock authorized and no shares of preferred stock issued or outstanding.

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Common Stock

On September 19, 2018, an employee of the Company exercised 5,000 stock options at an exercise price of $15,450 or $3.09 per share. The Company withheld 4,130 of these common shares at a cost of $17,428 or $4.22 per share, to cover the employee withholding taxes and other expenses related to this exercise.

8.12.  Stock-Based Compensation

 

The Company recognized total stock-based compensation expense during the three and nine months ended September 30, 20182019 and 20172018 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2019

    

2018

    

2019

    

2018

Service based awards:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards

 

$

 -

 

$

20,222

 

$

 -

 

$

1,292,125

Restricted stock units

 

 

502,080

 

 

166,417

 

 

1,273,903

 

 

166,417

Stock option awards

 

 

596,657

 

 

427,944

 

 

1,795,819

 

 

967,377

 

 

 

1,098,737

 

 

614,583

 

 

3,069,722

 

 

2,425,919

Performance based awards:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

 

(332,389)

 

 

 -

 

 

468,814

 

 

 -

Stock option awards

 

 

110,065

 

 

 -

 

 

356,505

 

 

 -

 

 

 

(222,324)

 

 

 -

 

 

825,319

 

 

 -

Total

 

$

876,413

 

$

614,583

 

$

3,895,041

 

$

2,425,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2018

    

2017

    

2018

    

2017

Restricted stock awards

 

$

20,222

 

$

564,854

 

$

1,292,125

 

$

2,751,239

Stock option awards

 

 

427,944

 

 

1,071,653

 

 

967,377

 

 

3,275,339

Restricted stock units

 

 

166,417

 

 

 -

 

 

166,417

 

 

 -

 

 

$

614,583

 

$

1,636,507

 

$

2,425,919

 

$

6,026,578

The decrease in stock-based compensation associated with performance based awards for restricted stock units is the result of a change in vesting criteria from probable to improbable based on the CMS Final Rule as described in  Note 17 below. This change resulted in a reduction of stock-based compensation expense of $0.7 million for the three and nine months ended September 30, 2019.

 

Restricted Stock

A summary of the Company’s restricted stock awards during the nine months ended September 30, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

Number of Shares

 

 

Fair Value

Unvested at December 31, 2018

 

146,800

 

$

5.70

Unvested at September 30, 2019

 

146,800

 

$

5.70

 

A summary of the Company’s restricted stock awards during the nine months ended September 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

Number of Shares

 

 

Fair Value

Granted at December 31, 2017

 

1,380,000

 

$

7.27

Granted

 

 -

 

 

 -

Forfeited

 

(333,200)

 

 

5.70

Granted at September 30, 2018

 

1,046,800

 

$

7.77

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

Number of Shares

 

 

Fair Value

Unvested at December 31, 2017

 

480,000

 

$

7.27

Forfeited

 

(333,200)

 

 

5.70

Unvested at September 30, 2018

 

146,800

 

$

5.70

 

The fair value of restricted stock awards are measured based on their fair value on the date of grant and amortized over the vesting period.

During the nine months ended September 30, 2018, the Company granted 388,125 restricted stock units and 905,625 performance-based restricted stock units to an employee.  The Company did not record stock-based compensation expenses related to the performance-based grants, because vesting is not probable asperiod of 20 months. As of September 30, 2018. The2019 unvested restricted stock units are priced at $4.70 per share andawards of 146,800 were unvested at September 30, 2018.  The 388,125 restricted stock units have a three year time based vesting period and the 905,625 performance-based grants will be subjectrelated to the satisfaction of performance based conditions.awards.

 

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Service Based Restricted Stock OptionsUnits

 

A summary of the Company’s service based restricted stock option activity forunits during the nine months ended September 30, 20182019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Shares

 

 

Average

 

Remaining

 

 

 

 

 

Underlying

 

 

Exercise

 

Contractual

 

 

Aggregate

 

 

Options

 

 

Price

 

Term

 

 

Intrinsic Value

Outstanding at December 31, 2017

 

6,906,001

 

$

7.92

 

5.0

 

 

 

Granted

 

1,337,271

 

 

4.96

 

9.4

 

 

 

Exercised

 

(5,000)

 

 

6.59

 

 -

 

 

 

Forfeited

 

(190,167)

 

 

6.59

 

 -

 

 

 

Outstanding at September 30, 2018

 

8,048,105

 

$

7.46

 

5.2

 

$

365,135

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2018

 

6,248,160

 

$

7.90

 

4.1

 

$

365,135

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

Number of Shares

 

 

Fair Value

Unvested at December 31, 2018

 

472,959

 

$

4.32

Granted

 

222,497

 

 

4.26

Forfeited

 

(4,950)

 

 

4.81

Vested

 

(96,542)

 

 

4.70

Unvested at September 30, 2019

 

593,964

 

$

4.23

 

The aggregate intrinsicfair value inof service  based restricted stock units are measured based on their fair value on the table above representsdate of grant and amortized over the total intrinsic (the difference betweenvesting period. The vesting periods range from 1-3 years. Stock-based compensation expense of $0.5 million and $1.3 million was recognized during the three and nine months ended September 30, 2019.  Stock-based compensation expense of $0.2 million was recognized for each of three and nine months ended September 30, 2018. As of September 30, 2019, the unrecognized stock-based compensation expense was $1.3 million.

Performance Based Restricted Stock Units

A summary of the Company’s closingperformance based restricted stock price on September 30, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on September 30, 2018.

Duringunits during the nine months ended September 30, 2018,2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant-Date

 

 

Number of Shares

 

 

Fair Value

Unvested at December 31, 2018

 

988,958

 

$

4.48

Unvested at September 30, 2019

 

988,958

 

$

4.48

Stock-based compensation expense recognized for performance based restricted stock units was  ($0.3)  million and $0.5 million during the three and nine months ended September 30, 2019. The Company did not record stock-based compensation expenses related to the performance-based grants as of September 30, 2018. As of September 30, 2019, the unrecognized stock-based compensation expense related to performance based restricted stock options granted consistedunits was $1.0 million. The performance based restricted stock unit compensation was reduced by $0.7 million for the three and nine months ended September 30, 2019 due to a change in vesting criteria from probable to improbable for certain performance based awards. The Company will continue to review this performance award criteria and recognize compensation costs as it relates to the probability of 949,146 options granted to employees, and 388,125 performance-based options granted to an employee. The vested options were exercisable at an average price of $7.90 per share and the unvested options were exercisable at an average of $5.92 per share.vesting.

Service Based Stock Options

 

The fair value of the service based stock options granted for the nine months ended September 30, 2018 and 20172019 were based on the following assumptions:

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

Nine Months Ended September 30,

 

2018

2017

2019

 

2018

 

Exercise price

 

$4.52 - $5.75

 

$6.09

$2.39 - $6.21

 

$4.52 - $5.75

 

Expected stock price volatility

 

67.5%

 

66.3%

67.5% - 70.3%

 

67.5%

 

Risk-free interest rate

 

2.7% - 2.9%

 

2.2%

1.4% - 2.6%

 

2.7% - 2.9%

 

Term (years)

 

5.0 - 6.5

 

5.5 - 6.5

5.25 - 6.5

 

5.0 - 6.5

 

In accordance with the original terms of their employment agreements of the former Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) and in accordance with the terms of the Settlement Agreement (defined below), the Company accelerated the vesting of 258,334 and 71,667 unvested stock options on the termination date. As a result of this acceleration of stock options, the Company recorded additional stock-based compensation of approximately $162,000.

As of September 30, 2018, total stock-based compensation expense related to unvested options not yet recognized totaled approximately $2.2 million.

 

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9.  Settlement AgreementA summary of the Company’s service based stock option activity for the nine months ended September 30, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

Shares

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

Underlying

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

Options

 

 

Price

 

 

Term

 

 

Value

Outstanding at December 31, 2018

 

7,856,480

 

$

7.50

 

 

5.2

 

$

 -

Granted

 

576,477

 

 

4.17

 

 

9.2

 

 

12,074

Exercised

 

(30,000)

 

 

4.93

 

 

 -

 

 

 -

Forfeited

 

(620,700)

 

 

6.34

 

 

 -

 

 

 -

Outstanding at September 30, 2019

 

7,782,257

 

$

7.35

 

 

5.1

 

$

12,074

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2019

 

6,340,901

 

$

8.07

 

 

4.2

 

$

 -

A summary of the Company’s service based stock option activity for the nine months ended September 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

Shares

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

Underlying

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

Options

 

 

Price

 

 

Term

 

 

Value

Outstanding at December 31, 2017

 

6,906,001

 

$

7.92

 

 

5.0

 

$

976,335

Granted

 

1,337,271

 

 

4.96

 

 

9.4

 

 

 

Exercised

 

(5,000)

 

 

6.59

 

 

 -

 

 

 

Forfeited

 

(190,167)

 

 

6.59

 

 

 -

 

 

 

Outstanding at September 30, 2018

 

8,048,105

 

$

7.46

 

 

5.2

 

$

365,135

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2018

 

6,248,160

 

$

7.90

 

 

4.1

 

$

365,135

The aggregate intrinsic value in the table above is calculated as the difference between the closing price of our common stock and Related Director and Officer Insurance Receivablethe exercise price of the stock options that had strike prices below the closing price.

 

During the nine months ended September 30, 2019, the Company granted to certain employees stock options to purchase up to 576,477 shares of common stock.  During the nine months ended September 30, 2019, forfeitures were 620,700. Forfeitures are recorded in the period of occurrence; compensation expense is adjusted accordingly.

Stock-based compensation expense recognized for service based stock options was $0.6 million and $1.8 million for the three and nine months ended September 30, 2019 and $0.4 million and $1.0 million for the three and nine months ended September 30, 2018. As of September 30, 2019, total stock-based compensation expense related to unvested options not yet recognized totaled approximately $2.1 million. 

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Performance Based Stock Options

A summary of the performance based stock options for the nine months ended September 30, 2019, is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Exercise

 

 

Number of Shares

 

 

Price

Outstanding at December 31, 2018

 

388,125

 

$

4.70

Outstanding at September 30, 2019

 

388,125

 

$

4.70

 

 

 

 

 

 

Exercisable at September 30, 2019

 

 -

 

$

 -

Stock-based compensation expense recognized for performance based stock options was $0.1 million and $0.4 million during the three and nine months ended September 30, 2019. Stock-based compensation expense recognized for performance based stock options was $51,000 for each of the three and nine months ended September 30, 2018. As of September 30, 2019, the unrecognized stock-based compensation expense related to performance based stock options was $0.6 million.

13.  Related Party Transactions

Product License Agreements

The Company is a party to an in-license agreement for exclusive worldwide rights to certain patents and information related to our Triferic® product. On October 7, 2018, the Company entered into a Master Services and IP Agreement (the “Charak MSA”) with Charak, LLC and Dr. Ajay Gupta (collectively “Charak”), who serves as Executive Vice President and Chief Scientific Officer of the Company. Pursuant to the MSA, the parties entered into three additional agreements described below related to the license of certain soluble ferric pyrophosphate (“SFP”) intellectual property owned by Charak, as well as the Employment Agreement (defined below). The Charak MSA provides for a payment of $1.0 million to Dr. Gupta, payable in four quarterly installments of $250,000 each on October 15, 2018, January 15, 2019, April 15, 2019 and July 15, 2019, and reimbursement for certain legal fees incurred in connection with the Charak MSA. The Company recorded $1.1 million as Research and Development Expense – License Acquired (Related Party) for the twelve months ended December 31, 2018. As of September 30, 2019, the Company paid all four of the quarterly installments totaling $1.0 million and accrued $0.1 million for the reimbursement of certain legal expenses. As of September 30, 2019 and December 31, 2018, the Company accrued $0.1 million and $850,000, respectively, as a related party payable on the condensed consolidated balance sheet.

Pursuant to the Charak MSA, the aforementioned parties entered into an Amendment, dated as of October 7, 2018 (the “Charak Amendment”), to the Licensing Agreement between the Company and Charak, dated January 7, 2002, as amended (the “2002 Agreement”), under which Charak granted the Company an exclusive, worldwide, non-transferable license to commercialize SFP for the treatment of patients with renal failure. The Charak Amendment amends the royalty payments due to Charak under the 2002 Agreement such that the Company is liable to pay Charak royalties on net sales by the Company of products developed under the license, which includes the Company’s Triferic® product, at a specified rate until December 31, 2021 and thereafter at a reduced rate from January 1, 2022 until February 1, 2034. Additionally, the Company shall pay Charak a percentage of any sublicense income during the term of the agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sub-licensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and be no less than a lower rate of the net sales of the licensed products by the sub-licensee in jurisdictions where there exists no valid claim, on a country-by-country basis.

Also pursuant to the Charak MSA, the Company and Charak entered into a Commercialization and Technology License Agreement I.V. Triferic®, dated as of October 7, 2018 (the “IV Agreement”), under which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing certain

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

intravenous-delivered products incorporating SFP for the treatment of iron disorders worldwide for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. The Company is liable to pay Charak royalties on net sales by the Company of products developed under the license at a specified rate until December 31, 2021. From January 1, 2022 until February 1, 2034, the Company is liable to pay Charak a base royalty at a reduced rate on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the IV Agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sub-licensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sub-licensee in jurisdictions where there exists no valid claim, on a country-by-country basis.

Also pursuant to the Charak MSA, the Company and Charak entered into a Technology License Agreement TPN Triferic®, dated as of October 7, 2018 (the “TPN Agreement”), pursuant to which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing worldwide certain parenteral nutritional (TPN”) products incorporating SFP. The license grant under the TPN Agreement continues for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. During the term of the TPN Agreement, the Company is liable to pay Charak a base royalty on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the TPN Agreement, which amount shall not be less than a minimum royalty on net sales of the licensed products by the sub-licensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sub-licensee in jurisdictions where there exists no valid claim, on a country-by-country basis.

The transaction was accounted for as an asset acquisition pursuant to ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, as the majority of the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets did not have outputs or employees. The assets acquired under the MSA include a license of SFP. Because SFP has not yet received regulatory approval, the $1.1 million purchase price paid and accrued for these assets has been expensed in the Company’s statement of operations for the year ended December 31, 2018. In addition, the potential milestone payments are not yet considered probable, and no milestone payments have been accrued at September 30, 2019.

14.  Leases

We lease our production facilities and administrative offices as well as certain equipment used in our operations including leases on transportation equipment used in the delivery of our products. The lease terms range from monthly to seven years. We occupy a 51,000 square foot facility and a 17,500 square foot facility in Wixom, Michigan under a lease expiring in August 2021. We also occupy two other manufacturing facilities, a 51,000 square foot facility in Grapevine, Texas under a lease expiring in December 2020, and a 57,000 square foot facility in Greer, South Carolina under a lease expiring February 2020. In addition, we occupy a 1,408 square foot office space in Greer, South Carolina under a lease expiring April 2021 and on December 28, 2018 we executed a lease for 4,100 square feet of office space in Hackensack, New Jersey with a lease term commencing in July 2019 and expiring on July 1, 2024.

At September 30, 2019, the Company had operating lease liabilities of $3.0 million and right-of-use assets of $3.0 million, which are included in the consolidated balance sheet.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following summarizes quantitative information about the Company’s operating leases:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2019

 

 

September 30, 2019

Operating leases

 

 

 

 

 

  Operating lease cost

$

531,709

 

$

1,591,686

  Variable lease cost

 

90,411

 

 

258,492

Operating lease expense

 

622,120

 

 

1,850,178

Short-term lease rent expense

 

4,157

 

 

12,470

Total rent expense

$

626,277

 

$

1,862,648

 

 

 

 

 

 

Other information

 

 

 

 

 

Operating cash flows from operating leases

$

493,872

 

$

1,531,953

Right of use assets exchanged for operating lease liabilities

$

136,124

 

$

4,441,553

Weighted-average remaining lease term – operating leases

 

1.8

 

 

1.8

Weighted-average discount rate – operating leases

 

6.8%

 

 

6.8%

Future minimum rental payments under operating lease agreements are as follows:

 

 

 

 

 

Three months ended December 31, 2019

    

$

479,345

 

Year ending December 31, 2020

 

 

1,433,260

 

Year ending December 31, 2021

 

 

811,097

 

Year ending December 31, 2022

 

 

346,649

 

Year ending December 31, 2023

 

 

197,130

 

Year ending December 31, 2024

 

 

97,423

 

Total

 

$

3,364,904

 

Less present value discount

 

 

(293,365)

 

Operating lease liabilities

 

$

3,071,539

 

15.  Settlement Agreements

On August 7, 2018, the Company entered into a confidential settlement agreement and mutual release (the “Settlement Agreement”) with its former CEO, former CFO and a former and then current director.  For more details see Note 10. The Company accrued approximately $1.5 million related to this Settlement Agreement and as of September 30, 2018, the Company has paid $0.8 million. The Company is also entitled to a partial reimbursement for this accrual from the Company’s insurance company of approximately $0.5 million which was collected10 in October 2018.Form 10-K filed on March 18, 2019. This resulted in a net settlement expense of approximately $1.0 million for the nine month ended September 30, 2018.

On August 7, 2019, the Company entered into a settlement agreement relating to the class action lawsuits described below. This resulted in a settlement expense of approximately $0.4 million for the nine months ended September 30, 2018.2019. See Note 16 below for further details. The settlement is subject to court review and approval, which is scheduled for February, 2020.

10.16.  Commitments and Contingencies

Litigation

 

Circuit Court for Oakland County, MichiganSEC Investigation

 

FollowingAs a follow up to certain prior inquiries, the Company received a subpoena from the SEC during the Company’s  quarter ended September 30, 2018 requesting, among other things, certain information and documents relating to the status of the Company’s request to the CMS for separate reimbursement status for Dialysate Triferic, the Company’s reserving methodology for expiring Triferic inventory, and the basis for the Board’s termination of the Company’s former CEO on May 22, 2018, and in response to his continued assertion that he remained the duly appointed Chief Executive Officer of the Company, on May 23, 2018, the Company filed a complaint in the Oakland County Circuit Court in Michigan (“State Court”) seeking declaratory relief and a temporary restraining order. On May 24, 2018, the Board terminated its then-serving CFO. Following the State Court-ordered mediation, the Company, its former CEO, former CFO and a former and then current director, agreed to a term sheet (the “Term Sheet”) that outlined the terms of a withdrawal of the State Court proceeding while the parties continued to litigate their claims in the Federal Court actions described below. On July 11, 2018, the State Court entered a stipulated order permitting the Company to withdraw its complaint in accordance with the Term Sheet. On July 17, 2018, the lawsuit in the State Court action was dismissed and closed.

United States District Court for the Eastern District of Michigan

On June 13, 2018, the Company’s former CEO and CFO filed a complaint in the United States District Court for the Eastern District of Michigan (“Federal Court”) against theCFO. The Company and certain directors (collectively, the “Defendants”).  The complaint requested that the Federal Court reinstate the former CEO to his former position of Chief Executive Officer, reinstate the former CFO to his former position of Chief Financial Officer and order the Defendants to pay all costs associatedis cooperating with the matter.  The complaint alleged that the Defendants possibly violated their duties of loyaltySEC and careis responding to the Company; rules under Regulation Fair Disclosure;SEC’s requests for documents and various federal securities laws, including Section 10(b) of the Exchange Act and SEC Rule 10b-5. On July 2, 2018, the Company filed an answer and counterclaim against the Company’s former CEO, former CFO, a former director and a then-serving director. On August 7, 2018, the parties entered into the Settlement Agreement by which the parties agreed to dismiss the Federal Court action with prejudice.

Settlement Agreement

On August 7, 2018, the Company, the Company’s former CEO, former CFO, a former director and a then-serving director and the Defendants, entered into the Settlement Agreement, pursuant to which the parties agreed to dismiss the Federal Court action with prejudice and to enter into a broad mutual release of claims. The Company agreed to: (i) pay the Company’s former CEO, former CFO, a former director and a then-serving director a total of $1,500,000, one-half of which was paid at execution and the remainder of which will be paid in nine equal monthly installments of $83,333, (ii) pay $30,000 to the then-serving director (who then agreed to resign as a director); (iii) accelerate the vesting of options held by the Company’s former CEO and former CFO as of the date of their terminations; and (iv) grant an extended option exercise period for vested options. The Company’s former CEO, former CFO, a former director and the resigning director agreed to certain standstill covenants for a period of approximately five years and agreed to forfeit a total of 313,600 unvested shares of restricted common stock.

SEC Inquiry

information.

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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As a follow up to its prior inquiry letters, the Company received a subpoena from the SEC during the Company’s third quarter requesting, among other things, certain information and documents relating to the status of CMS’s determination of separate reimbursement status for Dialysate Triferic and the Board’s termination of our former CEO and CFO. The Company is actively cooperating and responding to these requests.

State Court and Federal Court Actions

As reported above, the State Court action was dismissed and closed on July 17, 2018 at the request of the parties. On August 7, 2018, the parties entered into the Settlement Agreement by which the parties agreed to dismiss the Federal Court action with prejudice. On August 15, 2018, the Federal Court action was dismissed and closed.

 

Shareholder Class Action Lawsuits

 

On July 27, 2018, Plaintiff Ah Kit Too filed a putative class action lawsuit in the United States District Court in the Eastern District of New York against the Company and former officers, Robert Chioini and
Thomas Klema. The complaint is a federal securities class action purportedly brought on behalf of a class consisting of all persons and entities, other than Defendants, who purchased or otherwise acquired the publicly traded securities of the Company between March 16, 2018 and June 26, 2018. The Complaint alleges that the Company and Messrs. Chioini and Klema violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, the Complaint alleges that defendants filed reports with the Securities and Exchange Commission that contained purported inaccurate and misleading statements regarding the potential for the Company’s drug, Triferic, to quality for separate reimbursement status by the Centers for Medicare and Medicaid Services.

 

On September 4, 2018, Plaintiff Robert Spock filed a similar putative class action lawsuit in the United States District Court in the Eastern District of New York against the Company and Messrs. Chioini and Klema. The Spock complaint is a federal securities class action purportedly brought on behalf of a class consisting of persons who purchased the Company’s securities between November 8, 2017 and June 26, 2018. This complaint alleges that the Company and Messrs. Chioini and Klema violated the Exchange Act in that the Company was aware the Centers for Medicare and Medicaid Services would not pursue the Company’s proposal for separate reimbursement for Triferic; misstated reserves in the Company’s quarterly report for the first quarter of 2018; had a material weakness its internal controls over financial reporting, which rendered those controls ineffective; Mr. Chioini withheld material information regarding Triferic from the Company’s auditor, corporate counsel, and independent directors of the Board; and, as a result of these alleged issues, statements about the Company’s business were  materially false and misleading.

 

On September 25, 2018, four Company stockholders filed motions to appoint lead plaintiffs, lead counsel, and to consolidate the Ah Kit Too v. Rockwell securities class action with the Spock v. Rockwell securities class action.  On October 10, 2018, the court issued an order consolidating the two actions, appointing co-lead plaintiffs and co-lead counsel.  The lawsuits seek damages sustained byOn December 10, 2018, lead Plaintiffs filed a consolidated amended complaint, which included the same allegations as the initial complaints and asserted claims on behalf of a putative class consisting of person who purchased the Company’s securities between November 8, 2017 and an award of plaintiffs’ costs and attorney fees.June 26, 2018, accordingly. 

11.  Subsequent Events

Related-Party Transaction

 

On OctoberAugust 7, 2018,2019, all parties to the Companyclass action entered into a Master Services and Intellectual Property (“IP”) Agreement (“MSA”) withsettlement of the Charak, LLC and Dr. Ajay Gupta (collectively “Charak”), who serves as the Company’s Executive Vice President and Chief Scientific Officer.consolidated class action.  Pursuant to the MSA,terms and conditions of the parties entered into three additional agreements related tosettlement agreement, the license of certain soluble ferric pyrophosphate IP owned by Charak, as well as an employment agreement with Dr. Gupta. The MSA providesCompany will pay the Plaintiffs $3.7 million (the “Settlement Amount’) in exchange for a paymentfull release of $1,000,000all liability as to Dr. Gupta, payableall defendants.  Of the Settlement Amount, the Company will be contributing approximately $0.4 million, which represents the remaining retention amount under the Company’s director and officer liability insurance policy. The remainder of the settlement amount will be funded by the Company’s director and officer insurance policy. The settlement is subject to court review and approval, which is scheduled for February, 2020.

Shareholder Derivative Actions

Two verified stockholder derivative complaints (the “Derivative Complaints”) entitled LeClair v Rockwell Medical, Inc., and Post v Rockwell Medical, Inc. were filed in four quarterly installmentsthe United States District Court in the Eastern District of $250,000 eachNew York, purportedly on October 15, 2018, January 15, 2019, April 15, 2019behalf of the Company (as nominal defendant) and July 15, 2019,against certain of the Company’s current and former directors (the “Individual Defendants”).  The Derivative Complaints assert causes of actions against the Individual Defendants for breach of fiduciary duty, waste of corporate assets, and unjust enrichment.  The Derivative Complaints allege the Individual Defendants breached duties by, among other things, permitting alleged misstatements to be made in public filings regarding the status of separate reimbursement for certain legal fees incurred in connection withTriferic from CMS, the MSA.adequacy of Rockwell’s reserves, and the adequacy of Rockwell’s internal controls. Recently, the Plaintiffs have amended their derivative complaints. These cases are at an early stage, and the Company anticipates filing a motion to dismiss the action.

 

Securities Purchase Agreement

The Company has tendered the above shareholder derivative actions to its D&O insurance carrier(s) for defense and indemnity under its applicable insurance policies. The Company maintains a $1.0 million self-insured retention under

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ROCKWELL MEDICAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

the applicable insurance policies, which will be exhausted upon payment of the Company’s share of the Settlement Amount from the settlement of the class action described above.

17.  Subsequent Events

On October 15, 2018, the Company entered into31, 2019, CMS issued a Securities Purchase Agreement with an institutional investor (the “Purchaser”), pursuantfinal rule to which the Company sold 5,541,562 units, with each unit (the “Units”) consisting of one share of common stock of the Company (the “Common Stock”)update payment policies and a warrant to purchase 50% of a share of Common Stock (the “Warrant”). The Units were sold at $3.97 per Unit, which was equivalent to the closing price of the Company’s common stock on October 12, 2018, the last trading day prior to entering into the Securities Purchase Agreement. The Warrants, which are not exercisable for six months from issuance, have an exercise price of $4.96 per full share of Common Stock and have a five-year term from issuance. The Purchaser had the right to purchase up to an additional $8.0 million in Units at the same price and on the same terms as set forth in the Securities Purchase Agreement. This additional purchase right expired unexercised on October 26, 2018. As a result, no additional Units were sold and the total gross proceeds for the offering were $22.0 million.

CMS Reimbursement Guidance

Also on November 1, 2018, the Centers for Medicare & Medicaid Services (“CMS”), issued interpretive guidance on the availability of Medicare reimbursement for certain products indicated to treat renal disease (the CMS Guidance. As set forth in the CMS Guidance, Dialysate Triferic would not be eligible for add-on reimbursementrates under the CMS Traditional Drug Add On Pricing Adjustment (“TDAPA”) program.  Accordingly, the Company is continuing its previously announced plansESRD Prospective Payment System for renal dialysis services furnished to commercially launch Dialysate Triferic “within the bundle,” with commercial launch for this product planned for the first half of 2019. However, based on the CMS Guidance, the Company believes that, if approved by the FDAbeneficiaries on or after January 1, 2020 IV(the “2020 Final Rule”). The Final Rule contains certain revisions to the eligibility requirements for the CMS Transitional Drug Add-on Payment Adjustment (“TDAPA”) program, which has the potential to provide two years of add-on reimbursement for certain qualifying new drugs. Under the revisions to the TDAPA rules, ESRD drugs approved by the FDA under the following types of New Drug Applications (an “NDA”) are ineligible for TDAPA, effective as of January 1, 2020: (a) NDA Types 3, 5, 7 and 8, (b) NDA Type 3 in combination with NDA Type 2 or NDA Type 4, (c) NDA Type 5 in combination with NDA Type 2, or (d) NDA Type 9, when the “parent NDA” is NDA Type 3, 5, 7 or 8.

As previously disclosed, we have filed an NDA for the intravenous formulation of Triferic. The FDA has informed the Company that the NDA for I.V. Triferic wouldwill be classified as Type 3. As a result, the Company believes that I.V. Triferic will not be eligible for separate sole source payment with a separate J-Code for a two-year timeframe. In accordance with the current guidance, separate TDAPA payments would last for two years following launch, after which IV Triferic would be priced inside the bundle. The Company is working with outside experts to optimize its New Drug Application (“NDA”) filing and PDUFA action dates to realize the benefits of separate payment, and is targeting a launch of IV Triferic in the first half of 2020, subject to receipt of FDA approval.TDAPA.

 

 

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

 

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes in “Item 1. Condensed Consolidated Financial Statements”. References in this report to 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,” “could,” “plan,” “potential,” “predict,” “forecast,” “project,” “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 liquidity and capital resources; our plans relating to the commercialization of our products; our timing and ability to obtain add-on reimbursement for our products; our ability to obtain FDA and EMA approval for IVI.V. Triferic; whether we can successfully execute on our business strategy; and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.

 

While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed in this report, “Item 1A — Risk Factors” in our Form 10-K for the year ended December 31, 20172018 and from time to time in our other reports filed with the SEC, including in this Form 10-Q.

 

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.  Forward-looking statements speak only as of the date of this report and we expressly disclaim any intent to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

 

Overview and Recent Developments

 

We are a specialty pharmaceutical company targeting end-stage renal disease and chronic kidney disease with products for the treatment of iron deficiency secondary hyperparathyroidism and hemodialysis. We are also a manufacturer of 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.  To date, substantially all of our sales have been concentrate products and related ancillary items.items, though we initiated commercial sales of our proprietary therapeutic, Triferic, during the second quarter of 2019.

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 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 

Triferic is the Company’s proprietary iron therapy that replaces iron and maintains hemoglobin in dialysis patients without increasing iron stores. The Company has developed Dialysate Triferic (Ferric Pyrophosphate Citrate) as the only FDA approved product indicated to replace iron and maintain hemoglobin concentration in adult HDD-CKD hemodialysis patients, and is in the process of developing and seeking FDA approval for IVI.V. Triferic, a novel intravenous formulation of Triferic that would be used for the same indication, if approved. A description of Dialysate Triferic and IVI.V. Triferic is set forth below.

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Our objective for Triferic is to transform anemia management in a wide variety of disease states across the globe while improving patients’ lives. Accordingly, we are building the foundation to become a leading medical and commercial organization in the field of dialysis, which we believe will enable Triferic to become the standard of care for ESRD patients. Specifically, we are investing in our medical capabilities to, among other things, generate real-world data, provide medical education to the dialysis community regarding the potentinal benefits of Triferic, and engage with key opinion leaders and centers of excellence to guide the delveopment and commercialization of Triferic.

Dialysate Triferic

Our dialysate formulation of Triferic (“Dialysate Triferic”) received FDA approval in 2015 and remains the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. Dialysate Triferic received a Centers for Medicare & Medicaid Services (“CMS”)CMS reimbursement J-code on January 1, 2016, providing that Dialysate Triferic would be reimbursed for administration to dialysis patients within the existing fixed-price “bundle” of payments that CMS provides to dialysis providers.  Because Dialysate Triferic reimbursement would be included in this bundled payment, we commenced efforts in early 2016 to seek so-called “add-on” or “separate” reimbursement for Dialysate Triferic, which is sometimes available for certain new, innovative therapies. 

Following receipt of the reimbursement J-code in early 2016 until June 2018, (following a partial turnover in the Board of Directors and the Company’s senior leadership team), the Company’s commercialization strategy for Dialysate Triferic was primarily focused on obtaining add-on reimbursement status from CMS for Dialysate Triferic, at which point the Company planned to commence commercializing the drug.

In June 2018, our Board of Directorsthe Company determined, based on feedback provided earlier in 2018 from CMS’s Innovation Center (“CMMI”), that Dialysate Triferic was unlikely to obtain add-on reimbursement in the near term. As a result, the Company changed its commercialization strategy to plan for the commercial launch of Dialysate Triferic with initial reimbursement within the bundle of payments to dialysis providers, while continuing to pursue add-on reimbursement, if possible, and while continuing to develop IVI.V. Triferic (discussed below). At the present time, we expectAs part of our strategy to commercially launch Dialysate Triferic within the bundle, we requested that CMS provide us with a separate J-code for our powder packet formulation of Dialysate Triferic to distinguish it from our liquid formulation of Dialysate Triferic. On April 26, 2019, pursuant to a request we submitted earlier in 2019, we were notified of a preliminary recommendation by CMS to grant our powder packet formulation of Dialysate Triferic a separate J-Code, effective July 1, 2019. On May 6, 2019, we announced the first halfcommencement of 2019.commercial sales of Dialysate Triferic.

While the Company was pursuing the earlier strategy of delaying commercialization until receipt of add-on reimbursement approval, we built up significant inventory of active pharmaceutical ingredient (“API”) and Dialysate Triferic.Triferic finished goods.  However, due to the delays in launching Triferic and the negativetaking into account feedback received from CMMI in March 2018 regarding the prospects for near-term approval of add-on reimbursement for Triferic, we wrote offincreased our inventory reserves for Triferic by a total of $7.8$8.1 million during 2018 from $3.5 million as of December 31, 2017 to $11.6 million as of December 31, 2018. For the nine months ended September 30, 2019, Triferic inventory reserves increased by approximately $0.9 million. After deducting inventory destroyed or used for samples, as of September 30, 2019 we had $0.5 million of our inventory investment in Dialysate Triferic through September 30, 2018.Finished Goods inventory with $0.4 million reserved leaving a net value of $0.1 million. As of September 30, 2018,2019, we also had $5.4approximately $3.0 million of Dialysate Triferic finished goods inventory that could expire within the next 12 months andAPI against which we have reserved $4.8$2.0 million leaving a net value of $1.0 million. As of September 30, 2018, we also had approximately $4.1 million of Dialysate Triferic Active Pharmaceutical Ingredient (“API”) against which we have reserved $2.1 million and classified $1.9 million of Dialysate Triferic API as non-current inventory. Depending on the timing and success of our commercial launch of Dialysate Triferic in 2019 and the degree of uptake of the drug commercially, additional amounts or all of our current investment in Dialysate Triferic finished goods inventory and some or all of our Dialysate Triferic API inventory will likelymay need to be written off.off in future periods. Additional  write-offs of existing Triferic inventory write-offs will not have a material negative impact on our cash flow, but wouldcould potentially have a material adverse impact on our reported results of operations and financial position.    

IVI.V. Triferic

 

We are also developing an intravenous injection of Triferic (“IVI.V. Triferic”) for use by hemodialysis patients in the United States as well as international markets. A clinical equivalence study of IVI.V. Triferic infusion presentation has been completed and, on the basis of the clinical and non-clinical data prepared by the Company, we intend to submitsubmitted a New Drug Application (“NDA”) seeking FDA approval to market IVI.V. Triferic in the United States for the clinical indication of replacing iron and maintaining hemoglobin in adult hemodialysis patients.patients on May 28, 2019.  The NDA for I.V. Triferic was accepted for filing by the FDA on August 2, 2019 with a Prescription Drug User Fee Act (“PDUFA”) date of March 28, 2020.  

TheIn November 2018 CMS Guidance provided interpretative guidance (“CMS Guidance”) regarding the CMS Transitional Drug Add On Pricing Adjustment (“TDAPA”)TDAPA program and its potential application to IVI.V. Triferic. Based on the CMS Guidance, the Company believesbelieved that, if approved by the

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FDA on or after January 1, 2020, IVI.V. Triferic would possibly be eligible for separate sole source payment with a separate J-Codeadd-on reimbursement under CMS’s TDAPA program for a two-year timeframe. In accordance with the current guidance, separate TDAPA payments would last forperiod of two years following launch, after which IV Triferic would be priced insideOn October 31, 2019, CMS issued its final rule to update payment policies and rates under the bundle.  In lightESRD Prospective Payment System (PPS) for 2020 (the “2020 Final Rule”). The 2020 Final Rule included updates to TDAPA program eligibility, specifically excluding from eligibility for  TDAPA, effective as of these timing considerations, we are assessingJanuary 1, 2020: (a) NDA Types 3, 5, 7 and 8, (b) NDA Type 3 in combination with NDA Type 2 or NDA Type 4, (c) NDA Type 5 in combination with NDA Type 2, or (d) NDA Type 9, when the impact“parent NDA” is NDA Type 3, 5, 7 or 8.

As previously disclosed, the Company has submitted an NDA for the intravenous formulation of Triferic.  The FDA has informed the CMS Guidance on the planned timing for our NDA submission and may file the NDA in a time period suchCompany that the PDUFA action date would be inclassification for the I.V. Triferic NDA is Type 3. Accordingly, the Company believes that I.V. Triferic is adversely impacted by the 2020 withFinal Rule, because it is not eligible for TDAPA reimbursement under the expectation that we would be able to commence commercializing IV Triferic in 2020. Upon filing of the NDA, we will be required to pay a filing fee to the FDA of approximately $1.2 million.2020 Final Rule.

 

While we intend to market and sell Dialysate Triferic and IVI.V. Triferic directly in the United States, our globalinternational strategy is to partner with and license these products to established companies in other regions of the world to assist in the further development (primarily clinical trials and regulatory activities), if necessary, and commercialize in those regions. We continue to pursue international licensing opportunities in a number of countries and specific regions.

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Dialysis Concentrates

 

We manufacture, sell, deliver and distribute hemodialysis concentrates, along with a full line of ancillary dialysis products abroad.  We use Baxter as our exclusive marketer and distributor in the United States and in select foreign markets.  Dialysate concentrates accounted for approximately 96%97% of our revenues for the ninethree months ended September 30, 2018,2019, with ancillary products and Triferic accounting for most of the remainder.  We receive a pre-defined gross profit margin on our concentrate products sold pursuant to the Baxter Agreement, subject to an annual true-up of costs.

  On August 1, 2019, we entered into a Products Purchase Agreement with DaVita (the “DaVita Agreement”).   The Davita Agreement supersedes and replaces that certain First Amended and Restated Products Purchase Agreement, effective as of May 8, 2013 (as subsequently amended) by and between the Company and DaVita, which agreement expired effective as of July 31, 2019 (the “Prior Agreement”). The DaVita Agreement is effective from July 1, 2019 through December 31, 2023.  Generally, the DaVita Agreement is similar to the Prior Agreement, except that it provides for an increase in the product sale prices relative to the prices charged for these products under the Prior Agreement.

Calcitriol (Active Vitamin D) Injection

 

Calcitriol, an active Vitamin D injection for the management of hypocalcemia in patients undergoing chronic hemodialysis, is FDA approved under an Abbreviated New Drug Application which is manufactured for us through a contract manufacturing organization.Application.  To date, we have not commercially launched Calcitriol and we are currently assessing businessCalcitriol. Following a strategic decisions forreview of this product, including pricing, commercial distribution and marketing, manufacturing efficiencies and capacity (including potential capital investment). We do, we have determined commercialization of Calcitriol in the U.S. would not anticipatebe viable at this time. The decision was based, in part, on the fact that prevailing market prices for similar Vitamin D products are lower than our cost to produce Calcitriol sales (if any) will haveon a material impact ondose-equivalent basis, and as a result it would be difficult for us to market Calcitriol profitably. As a result of this decision, we recorded an inventory reserve reflecting the remainder of our total revenue for 2018.

Calcitriol inventory.  As of December 31, 2018 and September 30, 2019, this reserve totaled $0.7 million.  

Clinical Development

 

Although Dialysate Triferic is approved for commercial sale in the United States, itTriferic is not approved for sale in other major markets globally.  We have received regulatory guidance from the European Medicines Agency (“EMA”) regarding the clinical studies that are needed to file for approval of IVI.V. Triferic in Europe.  At the present time, we do not intend to commence these clinical studies, absent finding a development partner in Europe or raising additional capital. In conjunction with our licensee in the People’s Republic of China, Wanbang Biopharmaceutical (“Wanbang”), two clinical pharmacology studies were completed earlier in 2019 and Wanbang has requested a meeting with the National Medical Products Administration (NMPA) (formerly, China Food and Drug Administration or CFDA) to review the results of these studies and discuss whether these studies are planned, onesufficient to support a submission for regulatory approval for Dialysate Triferic. Pursuant to our license agreement with Wanbang, we are entitled to up to $35 million of which has been initiatedregulatory and sales-based milestones, including an $8 million milestone payment upon regulatory approval of Triferic in China. We will supply the otherfinished dosage form of which is expectedTriferic to commence enrollmentWanbang at a transfer price comprising cost of goods sold, a mark-up and a percentage of net sales in early 2019.the low-to-mid 20% range.

 

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As a post-approval requirement under the Pediatric Research Equity Act, we are required to conduct a further clinical study of the effectiveness of Dialysate Triferic in a pediatric patient population. We have reached agreement with the FDA on the design of this study, which we intend to commence in 2019, assuming we have the liquidity and capital resources to do so. In April 2019, we entered into a contract with a CRO for the conduct of the pediatric study and prepaid approximately $0.8 million for future work under the contract.  We expect to begin enrollment of patients in the pediatric study in the first half of 2020.  We expect that the data from this study could be used as part of the overall clinical data package to support approval by the EMA, if and when we are able to complete the other clinical trials needed to support making such a filing.

 

Additionally, we believe that Dialysate Triferic and IVI.V. Triferic have potential to be developed for use in other iron deficiency anemia indications, as well as other product presentations and other clinical applications, including peritoneal dialysis and total parenteral nutrition.

 

Results of Operations for the three months ended September 30, 20182019 and September 30, 20172018

 

Net Sales

 

During the third quarter of 2018three months ended September 30, 2019, our net sales were $15.4 million compared to sales of $16.7 million which is $2.0 million, or 14%, higher thanduring the third quarterthree months ended September 30, 2018. Net sales of 2017. The increase of $2.0 million was primarily duehemodialysis concentrates to higher domestic dialysis concentrate sales primarily due to increased pass through delivery costs billed to Baxter. Our international sales increased by approximately $1.2 million, or 71.4%, overproviders and distributors in the third quarter of 2017, primarily due to increased purchases from our largest international customers. Revenue recognized from licensing fees was $0.6U.S. and abroad were $15.2 million for the three months ended September 30, 2019 compared to $16.6 million for the three months ended September 30, 2018.  The decrease of $1.4 million was primarily due to lower sales to international customers offset by an increase in sales pursuant to the Company’s contract with DaVita Inc.  Net sales of Triferic were $166,000 for the three months ended September 30, 2019 compared to $68,000 for the three months ended September 30, 2018. For each of the three months ended September 30, 2019 and September 30, 2018, and 2017, respectively.Triferic net sales included approximately $68,000 of deferred revenue recognized under the Company’s license in the People’s Republic of China with Wanbang Biopharmaceutical. Triferic net sales for the three months ended September 30, 2019 also included approximately $98,000 of Triferic product sales to U.S. customers..

.

Gross Profit (Loss)

 

Cost of sales during the third quarterthree months ended September 30, 2019 was $15.4 million, resulting in gross loss of 2018 was$16,000 during the three months ended September 30, 2019, compared to cost of sales of $14.7 million resulting inand a gross profit of $2.0 million primarily all from our dialysisduring the three months ended September 30, 2018. Cost of sales for the three months ended September 30, 2019 included $14.3 million of manufacturing and distribution costs associated with the Company’s concentrates products and increased$1.1 million of inventory reserve expenses and product costs for Triferic, compared to $14.6 million and $0.1 million, respectively, for the three months ended September 30, 2018. Gross profit decreased by $0.4$2.0 million in the third quarter of 20182019 compared to the third quarter of 2017. 2018, due primarily to a  decrease in sales of $1.3 million; an increase in inventory reserve expense of $1.1 million; increase in labor, maintenance and recruiting of $0.4 million; offset by a decrease in distribution and materials and overhead of $0.7 million. 

Selling and Marketing Expense

Selling and marketing expenses were $1.8 million during the three months ended September 30, 2019 compared with $0.1 million during the three months ended September 30, 2018. The increase of $1.7 million was largely due to increased international revenue.  Additionally, includedthe investments the Company made in developing a commercial platform to support the gross profit are chargescommercial launch of approximately $0.1 million in the third quarter of 2018, compared to $0.6 million in the third quarter of 2017, attributed to inventory write-offs for Dialysate Triferic. 

 

General and Administrative Expense

General and administrative expenses were $4.6 million during the three months ended September 30, 2019 compared with $6.0 million during the three months ended September 30, 2018. The decrease of $1.4 million is primarily due to a decrease in legal and related costs associated with various matters, including litigation activities, related to the departure of certain executives and directors during 2018, partially offset by increases in insurance premiums.

Settlement Expense

Settlement expense was nil for each of the three months ended September 30, 2019 and 2018, respectively.

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Selling, General and Administrative Expense

Selling, general and administrative expenses were $6.1 million during the third quarter of 2018 compared with $4.8 million during the third quarter of 2017.  The $1.3 million increase was primarily due to increased expenses, including legal fees, professional fees, recruiting fees, insurance costs, and settlement charges associated with the changes in executive management (CEO and CFO) and certain directors and related litigation that was settled in August 2018. While we expect these fees to decrease in future periods, overall selling, general and administrative expenses are expected to increase in 2019 as the Company prepares for the U.S. commercial launch of Dialysate Triferic and IV Triferic, if approved, and invests in the necessary infrastructure to support these commercial plans. 

 

Research and Product Development Expense

 

Research and product development expenses were $0.8$1.5 million for the third quarter 2018three months ended September 30, 2019 compared with $1.3$0.8 million of expenses incurred during the third quarterthree months ended September 30, 2018. The increase of 2017. We incurred research$0.7 million was due to the Company’s commitment to investing in and product development costs duebuilding its medical capabilities mentioned above, including generating data from studies and real-world use of Triferic to our investment in future product development, intellectual property and regulatory activities primarily for Dialysate and IV Triferic. Research and product development expenses incurred in the third quarter of 2018 were largely related to Triferic testingsupport medical education and development costsefforts for use in other clinical indications and delivery presentationsTriferic, as well as the expansion of the Company’s internal medical scientific and technical staffing costs, consulting expenses. We expect ouraffairs staff. The Company expects its research and product development expenses to increase in the future due to additional clinical development of Dialysate and IVI.V. Triferic, including the conduct of the pediatric clinical trial described above, assumingfor Triferic, and investments we haveare making in our medical platform to support medical education efforts and the liquiditycollection and capital resources to do so.analysis of real-world data for Triferic  

 

Interest and InvestmentOther Income, Net

 

Interest and investmentOther income was approximately $29,000 for the quarterthree months ended September 30, 2019 was $0.1 million, consisting primarily of interest income. Other income for the three months ended September 30, 2018 andwas $29,000, consisting of $0.13 million of interest and investment loss in the third quarterincome, offset by $0.1 million of 2017 totaled approximately $32,000.realized gains on investments. 

 

Results of Operations for the nine months ended September 30, 20182019 and September 30, 20172018

 

Net Sales

 

Sales during During the nine months ended September 30, 20182019, our net sales were $46.5$45.8 million compared to sales of $42.5$46.5 million during the nine months ended September 30, 2017. The increase2018. Net sales of $4.0hemodialysis concentrates to dialysis providers and distributors in the U.S. and abroad were $45.5 million was primarily due to higher domestic dialysis concentrate sales primarily due to increased pass through delivery costs billed to Baxter.  Our international sales increased by approximately $1.4 million or 27.8% overfor the nine months ended September 30, 2017 primarily due2019 compared to increased purchases from our largest international customers.  Revenue recognized from licensing fees was $1.7$46.3 million for the nine months ended September 30, 2019. The decrease of $0.7 million was primarily due to lower sales to international customers offset by an increase in sales pursuant to the Company’s contract with DaVita Inc.  Net sales of Triferic were $0.3 million for the nine months ended September 30, 2019 compared to $0.2 million for the nine months ended September 30, 2018. For each of the nine months ended September 30, 2019 and September 30, 2018, and 2017, respectively.Triferic net sales included approximately $0.2 million of deferred revenue recognized under the Company’s license in the People’s Republic of China with Wanbang Biopharmaceutical. Triferic net sales for the nine months ended September 30, 2019 also included approximately $112,000 of Triferic product sales to U.S. customers.

 

Gross Profit (Loss)

 

Cost of sales during the nine months ended September 30, 20182019 was $49.3$44.1 million, resulting in a gross loss of $2.8 million in 2018, compared to a gross profit of $4.9 million in the same nine-month period in 2017. Gross profit was negatively impacted by $8.0 million in additional year-over-year costs, primarily consisting of an increase in our Dialysate Triferic inventory reserve of $7.0 million and a gross profit decrease of $0.5 million in our dialysis concentrates products, which was primarily attributable to increased dialysis concentrate distribution costs and lower pricing under our distribution agreement with Baxter, which was partially offset by increased unit volume growth. Recently implemented government regulation in the 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 shipping costs for our dialysis concentrate products in the near term.

Selling, General and Administrative Expense

Selling, general and administrative expenses during the nine months ended September 30, 2018 were $15.2 million, compared to $17.4$1.7 million during the nine months ended September 30, 2017.2019, compared to cost of sales of $49.3 million and a gross loss of $2.8 million during the nine months ended September 30, 2018. Gross profit increased by $4.5 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, due primarily to a non-cash charge taken for an inventory reserve for Triferic of $8.3 million for the nine months ended September 30, 2018, partially offset by a gross profit decrease of $1.2 million in our dialysis concentrates products. The $2.2 million decrease in gross profit for our dialysis concentrates products was primarily attributable to year-over-year decreasesincreased labor, materials and overhead costs. 

Selling and Marketing Expense

Selling and Marketing Expenses were $7.2 million during the nine months ended September 30, 2019 compared with $0.7 million during the nine months ended September 30, 2018. The increase of $6.5 million was due to the investments the Company made in stock-baseddeveloping a commercial platform to support the commercial launch of Triferic, which included $3.4 million in marketing costs and $2.8 million in hiring, training and educating new employees.

General and Administrative Expense

General and administrative expenses were $16.3 million during the nine months ended September 30, 2019 compared with $14.5 million during the nine months ended September 30, 2018. The $1.8 million increase was driven primarily by increases to stock compensation, insurance premium expense, ($3.6 million)annual reporting and salary-related expense ($1.9 million), partiallyconsulting fees; offset by a year-over-year increase in decrease legal and professional services fees of $3.0 million, which primarilyrelated costs associated with various matters, including litigation activities, related to expenses incurred in connection with changes in executive management (CEOthe departure of certain executives and CFO) and certain directors as well as the related litigation that was settled in August 2018, and legal and settlement expenses associatedduring 2018.

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with the contested proxy campaign and related litigation that was settled in March 2018. Legal and professional services fees in 2017 were higher than prior periods due to increased expenses incurred in connection with a contested proxy campaign and related litigation expense. While we expect these fees to decrease in future periods, overall selling, general and administrative expenses are expected to increase in 2019 as the Company prepares for the U.S. commercial launch of Dialysate Triferic and IV Triferic, if approved, and invests in the necessary infrastructure to support these commercial plans.

 

Research and Product Development Expense

 

Research and product-developmentproduct development expenses were $4.0$4.9 million for the nine months ended September 30, 2018,2019 compared with $4.2$4.0 million of expenses incurred during the same period in 2017. We incurred research and product development costs due to our investment in future product development, intellectual property and regulatory activities primarily for Dialysate and IV Triferic. Research and product development expenses incurred during the nine months ended September 30, 2018 were largely related2018. The increase of $0.9 million was due to the Company’s commitment to investing in and building its medical capabilities mentioned above, including generating data from studies and real-world use of Triferic testingto support medical education and development costsefforts for use in other clinical indications and delivery presentations,Triferic, as well as the expansion of the Company’s internal medical scientific and technical staffing costs and consulting expenses. We expect ouraffairs staff. The Company expects its research and product development expenses to increase in the future due to additional clinical development of Dialysate and IVI.V. Triferic, including the conduct of the pediatric clinical trial described above, assumingfor Triferic, and investments we haveare making in our medical platform to support medical education efforts and the liquiditycollection and capital resources to do so.analysis of real-world data for Triferic.  

 

Interest and Investment Income, NetSettlement Expense

 

Interest and investment incomeSettlement Expense was $0.4 million for the nine months ended September 30, 2019, compared to $1.0 million in for the nine months ended September 30, 2018. Settlement Expense for the nine months ended September 30, 2018 was $0.3 million as comparedreflected the terms of the confidential settlement agreement and mutual release entered into with the Company’s former CEO, former CFO and a former and then current director. Settlement Expense for the third quarter of 2019 reflected the Company’s contribution of the Settlement Amount relating to $0.2 millionthe consolidated class action. See Note 16 on the condensed consolidated financial statements herein for more detail.

Other Income, Net

Other income for each of loss during the nine months ended September 30, 2017.2019 and 2018 was $0.3 million, respectively. The amounts consist primarily of interest income. 

 

Liquidity and Capital Resources

 

As of September 30, 2018,2019, we had approximately $17.7$29.0 million of cash, cash equivalents and investments available-for-sale, and working capital of $19.4$28.2 million. Net cash used in operating activities for the nine months ended September 30, 20182019 was approximately $14.6$21.9 million.   In October 2018,On June 20, 2019, the Company raised $22.0 million in capital from theclosed a public offering and sale of 5,541,5625,833,334 shares of common stock at a price of $3.97$3.00 per share, along with warrantsshare.  On July 9, 2019, the underwriters of the public offering partially exercised their over-allotment option to purchase up to an additional 2,770,781425,800 shares of common stock at a price of $4.96$3.00 per share. (See Noteshare, which closed on July 11, included in2019. 

On March 22, 2019, the Company entered into a sales agreement with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the Company may offer and sell from time to time shares of the Company’s common stock through the Agent up to $40,000,000. In April 2019, the Company sold 437,043 shares of its common stock pursuant to the Sales Agreement for gross proceeds of $2,296,235, at a weighted average selling price of approximately $5.25. The Company did not issue an shares of common stock pursuant to the Sales Agreement during the third quarter of 2019. As of September 30, 2019, approximately $37.7 million was available for issuance under the Sales Agreement. We are not required to sell any shares at any time during the term of the facility.  Our ability to sell common stock under the facility may be limited by several factors, including, among other things, the trading volume of our condensedcommon stock and certain black-out periods that we may impose upon the facility, among other things.

The Company’s recurring operating losses, net operating cash flow deficits, and an accumulated deficit, raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements).statements. The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not made any adjustments to the accompanying consolidated financial statements related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Based on theThe Company will require additional capital raised fromto sustain its operations and make the October 2018 offering described above, management believesinvestments it needs to execute upon its longer-term business plan, including the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months from the date of report filing. However, the Company anticipates that it will need to raise additional capital in the future to help support the launchcommercialization of Dialysate Triferic and IVI.V. Triferic, (if approved), particularly in lightif approved, and executing plans for enhancing its medical capabilities and generating additional data for Triferic. If the Company is unable to generate sufficient revenue from its existing long-term business plan, the Company will need to obtain additional

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equity or debt financing. If the CMS Guidance andCompany attempts to obtain additional debt or equity financing, the expectationCompany cannot assume that Dialysate Trifericsuch financing will not receive add-on reimbursement prior to the end of 2019,be available on favorable terms, if at all, and that IV Triferic would not be eligible to receive add-on reimbursement until 2020.all.

 

General

 

The actual amount of cash that we will need to execute our business strategy is subject to many factors, including, but not limited to, the expenses and revenue associated with the commercial launch ofcommercialization and investments we are making in our medical capabilities to support Dialysate Triferic and IVI.V. Triferic, if approved, in the United States; the timing and magnitude of cash received from drug product sales; and the timing and expenditures associated with the development of IV Triferic for international markets; and the costs associated with ongoing litigation and investigatory matters. 

 

We may elect to raise capital in the future through one or more of the following: (i) equity and debt raises through the equity and capital markets, though there can be no assurance that we will be able to secure additional capital or funding on acceptable terms, of if at all; and (ii) strategic transactions, including potential alliances and collaborations focused on markets outside the U.S., as well as potential combinations (including by merger or acquisition) or other corporate transactions.  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 be able to, or we may find it difficult, to obtain secured debt financing without the consent of Baxter. 

 

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We believe that our ability to fund our activities in the long term will be highly dependent upon our ability to successfully launchcommercialize Dialysate Triferic and to obtain regulatory approval for, and successfully launch, IVI.V. Triferic. Our commercialization of Dialysate Triferic and IVI.V. Triferic (if approved) is subject to significant risks and uncertainties, such that there can be no assurance thatincluding risks we will be successful in completing the commercialization of Triferic in accordance with our plans, or at all.plans. If our commercialization of Dialysate Triferic and/or IVI.V. Triferic should be delayed for any reason or not proceed in accordance with our plans, we may be forced to implement cost-saving measures that may potentially have a negative impact on our activities and potentially the results of our research and development programs. Even if we begin commercializationIf our launch of Dialysate Triferic is unsuccessful or our commercial launch does not proceed as planned, if the results are unsuccessful, we may be unable to secure the additional capital that we will require to continue our research and development activities and operations, which could have a material adverse effect on our businessbusiness. If we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of shareholders’ interests and, in such event, the market price of our common stock may decline.

 

Cash Used in Operating Activities

Net cash used in operating activities was $21.9 million for the nine months ended September 30, 2019. The net loss for this period was higher than net cash used in operating activities by $4.9 million, which was primarily attributable to non-cash expenses of $7.2 million, consisting primarily of $3.9 million of stock-based compensation, $1.4 million of amortization of the right to use assets, $1.3 million of inventory reserves,  $0.6 million of depreciation and amortization, and a  $2.3 million net change in assets and liabilities.

Net cash used in operating activities was $14.6 million for the nine months ended September 30, 2018. The net loss for this period was higher than net cash used in operating activities by $8.1 million, which was primarily attributable to non-cash expenses of $6.6 million, consisting of $3.4 million of inventory reserves,  $2.4 million of stock-based compensation,  $0.5 million of depreciation and amortization, and $0.2 million of realized losses on sale of investments available-for-sale, offset by a  decrease of  $3.7 million in inventory related to the destruction of Dialysate Triferic finished goods inventory,  a decrease of $2.1 million decrease in other liabilities related to related to athe reduction in bonus and other payroll accruals, a decrease of $1.7 million in deferred revenue relatedrelating to the recognition of revenue from our licensing agreements, an increase of $1.2 million in accounts receivable related to increases in revenuesrevenue related to our international sales, an increase in accounts payable of $2.7 million, as well as increased legal feesfee accrued, an increase of $0.7 million related to a settlement payable, comprised of the $1.5 million accrued in the secondthird quarter of 2018 for the settlement fee related to the Settlement Agreement between the Company and its former directors and officers, offset by settlement payments of $0.8 million, and a $0.5 million increase due to an insurance settlement  receivable related to the Settlement Agreement.

 

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Cash (Used in) Provided by Investing Activities

Net cash used in operatinginvesting activities was $16.3$4.9 million forduring the nine months ended September 30, 2017.2019. The decreasenet cash used was primarily due to the purchase of $1.7investments available-for-sale of $34.2 million, in cash expensesoffset by $30.5 million sale of our available-for-sale investments, $0.4 million for the nine months ended September 30, 2018 was primarily attributable topurchase of equipment and $0.8 million for the timingpurchase of vendor payments which, onresearch and development licenses acquired from a net basis, were further extended in 2018 as compared to the prior period in 2017.

Cash Provided by Investing Activitiesrelated party.

Net cash provided by investing activities was $10.5 million during the nine months ended September 30, 2018. The net cash provided was primarily due to the sale of our available-for-sale investments of $29.6 million, offset by $18.5 million used for the purchase of investments available-for-sale and $0.6 million for the purchase of equipment.

Cash Provided by (Used in) Financing Activities

Net cash provided by investingfinancing activities was $5.2$18.5 million during the nine months ended September 30, 2017.2019. The net cash provided was primarily due to net proceeds of $17.3 million and $2.1 million from the sale of our available-for-sale investments of $40.1 million, offset by $34.2 million used for the purchase of investments available-for-salecommon stock,  related to our public offering and $0.7 million for the purchase of equipment.

Cash Used in Financing Activities

our at-the market offering, respectively. Net cash used in financing activities was $1,978 during the nine months ended September 30, 2018, for the repurchase of common stock to pay the employee withholding taxes on a stock option exercise in September 2018.

Net cash used in financing activities was $2.2 million during the nine months ended September 30, 2017. The net cash used was related to $2.3 million of restricted stock retained in satisfaction of tax liabilities offset by $0.1 million of proceeds from the issuance of common shares.

Critical Accounting Policies and Significant Judgements and Estimates

Our critical accounting policies and significant estimates are detailed in our 2017 Annual Report on Form 10-K.10-K for the year ended December 31, 2018. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 20172018 Annual Report, except for those subjects mentioned in the section of the notes to the condensed consolidated financial statements titled Adoption of Recent Accounting Pronouncements.

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Recently issued and adopted accounting pronouncements:

We have evaluated all recently issued accounting pronouncements and believe such pronouncements do not have a material effect our financial statements. See Note 3 of the condensed consolidated financial statements at September 30, 2018.

2019.

Item 3.  Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

We have invested $13.4 million in available for sale securities that are invested in short-term bonds which typically yield higher returns than the interest realized in money market funds. While these bonds are 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.Not applicable.

 

Item 4.  Disclosure Controls and Procedures

 

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure thatmaterial information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and our principal financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, managementwe recognized that any controls and procedures,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 reasonableabsolute assurance that all control issues and instances of achieving the desired control objectives, and in reachingfraud, if any, within a reasonable level of assurance, managementcompany have been detected. Management necessarily was required to apply its judgment in evaluating the cost-benefitcost‑benefit relationship of possible controls and procedures.

Under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer and Principal AccountingChief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2018.2019. Based upon that evaluation, our Chief Executive Officer and Principal AccountingChief Financial Officer concluded that, because of the material weaknesses in our internal controls over financial reporting described below,in our December 31, 2018 Annual Report, our disclosure controls and procedures were not effective for the reasons described below.effective. Notwithstanding the material weaknesses, described below, the Company’s management, including the Chief Executive Officer and Principal AccountingChief Financial Officer, hashave concluded that the condensed consolidated financial statements included in this Quarterly Reportas of September 30, 2019, are fairly stated, in all material respects, in accordance with generally acceptingaccepted accounting principles in the United States for each of the periods presented herein.

During the nine months ended September 30, 2018, we, together with our independent registered public accounting firm, identified material weaknesses in our internal control over financial reporting, as described below. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As of September 30, 2018, our material weaknesses in internal control over financial reporting are: 

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·

Insufficient segregation of duties, oversight of work performed and lack of compensating controls in our finance and accounting functions due to limited personnel;

In connection with the material weaknesses, management has taken a number of steps with the intention of remediating the control deficiencies. We continue to implement enhanced procedures and controls to remediate our material weaknesses in internal control over financial reporting. 

Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. We maintain internal control over financial reporting designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

We continue to make further improvements to our internal controls over financial reporting, in addition to the improvements developed in 2018. During nine months ended September 30, 2019 and through the date of this report, we implemented the following:   

·

Management has not performed a proper evaluation of ourHired staff required to address and improve financial and information technology environmentcapabilities, including (i) a Vice President, Corporate Controller and the related disclosure controlsPrincipal Accounting Officer; (ii) an internal audit consultant; and procedures and internal control over financial reporting;(iii) a Manager of Information Technology.

·

Management did not designDeveloped our preliminary 2019 audit program, which includes an in-house audit of entity level and maintain effective controls related to developing an appropriate methodology to record discretionary bonuses and stock-based compensation, including an on-going review of the assumptions within the methodology to determine the completeness and accuracy of such compensatory amounts; andIT general controls.

·

We concluded that errors occurred in establishingImplemented new programs and policies to provide improved control over the accounting for discretionary bonuses and stock-based compensation.

·

Updated our process of obtaining information for calculation of our inventory reserves, asincluding a comprehensive sales and operations planning process.

·

Migrated the hosting of March 31, 2018 due to a design deficiency in our controls overERP system and performed testing of the computationsystem before and recordingafter the completion of such reserves. Our methodthe migration.

·

Preparation of calculating inventory reserves resulted inour SEC reporting on Form 10-Q for the misapplication of U.S. GAAP, which caused us to restatequarter ended September 30, 2019, was completed by our March 31, 2018 condensed consolidated financial statements. Specifically, due to the lack of communication amongst certain former employees, we concluded our controls were not adequately designed to ensure that we were accurately calculating inventory reserves based on the consideration of overall demand assumptionsPrincipal Accounting Officer, supported by internal and for our inventory.external resources.

Changes in Internal Control over Financial Reporting

In connection withThe remediation of the resignationmaterial weaknesses is among our highest priorities. Our Audit Committee continually assesses the progress and sufficiency of Plante & Moran, PLLC (“Plante”)these initiatives and make adjustments as and when necessary. As of the restatementdate of our financial statements for the quarter ended March 31, 2018, Plante andthis report, our management identified abelieves that our efforts, when completed, will remediate the material weaknessweaknesses in our internal control over financial reporting. Our Board andHowever, there can be no assurance that our management team determined that control deficiencies existed with respect to oversightefforts will result in remediation of our former Chief Executive Officer and Chief Financial Officer with respect to the quarter ended March 31, 2018. Accordingly, our Board and management team have concluded that management’s reports related to the effectiveness of internal and disclosure controls as of such date may not have been correct. 

Accordingly, while our Board’s Audit Committee believes that we have already directly and promptly addressed the cause of any material weaknessweaknesses in its internal control over financial reporting identified by Plante by terminating both our former Chief Executive Officer and Chief Financial Officer, the Audit Committee also directed our management to implement additional processes and procedures to further ensure the accuracy of our periodic SEC reports, registration statements and related financial statements. Additionally, we formed a Disclosure Committee comprised of Company officers and other important employees and advisors who would be in possession of material information with respect to our operations and financial statements (“Key Persons”).  Each Key Person is required to participate in the preparation and review, and to certify that he or she has provided all material information to the Chief Executive and Chief Financial Officer in connection with the preparation, review and filing, of our periodic SEC reports, registration statements and related financial statements.  The Disclosure Committee is chaired by our external General Counsel, with dual-reporting responsibility to both our Chief Executive Officer and the Board as a whole. reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The disclosure set forth above in Note 1016  (Commitments and Contingencies – Litigation) to our unaudited condensed consolidated financial statements is incorporated herein by reference.

 

Additionally, 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.

 

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Item 1A. Risk Factors

 

Other than those set forth below, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 20172018 under “Item 1A — Risk Factors”.

 

We may not be successful in commercializing Dialysate Triferic, which will impede our development and growth and may limit our long-term prospects.

In June 2018, we announced plans to commence initial steps to prepare for the commercial launch of Dialysate Triferic without waiting to receive separate reimbursement status.  We will need to add to our sales and marketing infrastructure in order to successfully launch Dialysate Triferic.  We do not know whether we will be able to successfully implement our commercialization strategy for Dialysate Triferic or whether our new business strategy will ultimately be successful.  Additionally, the ultimate timing for our commercial launch, as well as the initial demand for the product, will impact our ability to utilize existing product inventory prior to expiration.  If the actual or projected commercial launch is later or slower than currently anticipated, we may need to write off additional inventory reserves, which could result in material accounting charges in future periods.  Additionally, the expiration of existing product inventory could limit the total inventory available for commercial sales while we ramp-up commercial production and attempt to manage production in light of anticipated demand.

In assessing our ability to meet these challenges, a potential investor should take into account our recent management turnover, limited cash position, limited sales and marketing personnel and their limited commercialization experience, the competitive conditions existing in our industry and general economic conditions. Our future success is largely dependent on our ability to successfully implement our Dialysate Triferic commercialization business strategy. Our revenues may be adversely affected if we fail to implement our Dialysate Triferic commercialization business strategy.

If we are unable to develop and maintain sales, marketing and distribution capabilities to sell and market Dialysate Triferic or any other products we may develop, our product sales may be hindered.

We are in the process of establishing an internal sales organization for the sale, marketing and distribution of Dialysate Triferic, as well as IV Triferic (if approved). In order to successfully commercialize Dialysate Triferic, IV Triferic and any other product we may develop, we must establish and/or increase our sales, marketing, distribution and other non-technical capabilities. The development of a sales organization to market Dialysate Triferic, IV Triferic, or any other product we may develop, is expensive and time-consuming, and we cannot be certain that we will be able to successfully develop this capacity or that this function will execute as expected. If we are unable to establish adequate sales, marketing and distribution capabilities, we may not be able to generate product revenue and our business and results of operations will suffer.

We are and may become the target of additional securities litigation, which is costly and time-consuming to defend.

In addition to the purported shareholder class action lawsuits filed against us as described in Note 10 “Commitments and Contingencies – Litigation” in the accompanying condensed consolidated financial statements for the quarter ended September 30, 2018, it is possible that other class action securities litigation and derivative lawsuits could be brought against us in the future. The results of complex legal proceedings are difficult to predict. These lawsuits assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of these lawsuits, or any future lawsuits, could have a material adverse effect on our business, financial condition, results of operations and/or stock price. Even if any future lawsuits are not resolved against us, the costs of defending such lawsuits may be material to our business and our operations. Moreover, these lawsuits may divert our Board and our management’s attention from the operation of our business. For more information on our legal proceedings, see Note 10 “Commitments and Contingencies – Litigation” in the accompanying condensed consolidated financial statements for the quarter ended September 30, 2018.

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We have limited capital resources and will likely need additional funding before we are able to achieve profitabilityIf we are unable to raise additional capital on attractive terms, or at all, we may be unable to sustain our operations.

 

We have limited capital resources, a cumulative deficit of approximately $263$299.2 million since inception and expect to incur further losses for the foreseeable future.  AlthoughAs of September 30, 2019, we recently raised $22.0had approximately $29.0 million of cash, cash equivalents and investments available-for-sale, and working capital of $28.2 million. Net cash used in operating activities for the nine months ended September 30, 2019 was approximately $21.9 million.   On June 20, 2019, the company closed a private placementpublic offering of equity securities, our5,833,334 shares of common stock at a price of $3.00 per share.  On July 9, 2019, the underwriters of the public offering partially exercised their over-allotment option to purchase an additional 425,800 shares of common stock at a price of $3.00 per share, which closed on July 11, 2019. 

On March 22, 2019, the Company entered into a sales agreement with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the Company may offer and sell from time to time shares of the Company’s common stock through the Agent up to $40,000,000. We are not required to sell any shares at any time during the term of the facility.  Our ability to sustainsell common stock under the facility may be limited by several factors, including, among other things, the trading volume of our operations is dependentcommon stock and certain black-out periods that we may impose upon generating positivethe facility, among other things.

The Company’s recurring operating losses, net operating cash flow deficits, and an accumulated deficit, raise substantial doubt about the Company’s ability to continue as a going concern for one year from commercialthe issuance of the accompanying consolidated financial statements. The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not made any adjustments to the accompanying consolidated financial statements related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company will require additional capital to sustain its operations and/and make the investments it needs to execute upon its longer-term business plan, including the launch of dialysate Triferic and I.V. Triferic. If the Company is unable to generate sufficient revenue from its existing long-term business plan, the Company will need to obtain additional equity or obtainingdebt financing. If the Company attempts to obtain additional funding through the sale of debt or equity securities.  If we cannot generate sufficient revenues from our operations or obtain funding on attractive terms (if at all) then we may be forced to curtail our operations and limit our growth.  Any of these events could have a materially negative impact on our stock price and our long-term prospects.

We recently hired a new Chief Executive Officer and announced the hiring of a new Chief Financial Officer.  Our inability to successfully manage the transition and integration into our Company of these key executives may have a material adverse impact on our business, results of operations and financial condition.

We hired a new Chief Executive Officer in September 2018 and recently announced the hiring of a new Chief Financial Officer, who is expected to joinfinancing, the Company in late 2018.  This leadership transition maycannot assume that such financing will be difficult to manage and may cause operational and administrative inefficiencies, added costs, decreased productivity among our employees, and loss of personnel with deep institutional knowledge, which could result in significant disruptions to our operations. In addition, we must successfully integrate our new management team members within our organization in order to achieve our operating objectives, and these changes in key management positions may temporarily affect our financial performance and results of operations as our new management becomes familiar with our businesses. These changes could also increase the volatility of our stock price. If we are unable to mitigate these or other similar risks, our businesses, results of operations, and financial condition may be adversely affected.available on favorable terms, if at all.

 

Because we may be unable to complete our development, manufacturing and commercialization of our products, we could face significant harm to our business plans, prospects, results of operations, financial condition and liquidity.

 

Commercializing Dialysate Triferic and Calcitriol depends on a number of factors, including but not limited to:

 

·

further product and manufacturing process development;

 

·

completion, refinement and management of our supply chain;chain and distribution channels;

 

·

regulatory requirements for clinical information;

 

·

completion, refinement, and managementdifferentiation of our distribution channels;products from competitive therapies, including those in development by other companies;

 

·

demonstration of efficiencies that will make our products attractively priced; and

 

·

development of an adequate sales force and sales channels necessary to distribute our products and achieve

·

our desired revenue goals.

 

We cannot commercialize IVI.V. Triferic unless and until we receive FDA approval of our planned NDA submission for this drug. Even if the FDA approves IVI.V. Triferic for commercialization, the degree of success in

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commercializing this drug will depend significantly onupon our ability to receive add-on reimbursement status, such as through the TDAPA program. If IVUnder the 2020 Final Rule published by CMS in October 2019, it appears that I.V. Triferic is not considered by CMS to qualify as a new drug (i.e., in light of the prior approval of Dialysate Triferic), then we may be deemed ineligible to participate in the TDAPA program, in which case IVeligible for add-on reimbursement, meaning I.V. Triferic may alsowould be required

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to be sold within the bundled payment for dialysis treatment.treatment, if approved. This wouldcould significantly limit the overall commercial opportunity in the United States for IVI.V. Triferic.

 

We cannot assure investors that the strategies we intend to employ will enable us to support the manufacture, distribution and selling of Dialysate Triferic Calcitriol or IVI.V. Triferic (if approved).  If we are unable to implement the necessary steps of our business plan, our prospects, results of operations and financial condition will suffer.

 

The restatementOur business and operations would suffer in the event of a security breach, system failure, invasion, corruption, destruction or interruption of our previously issued financial statements containedor our business partners’ critical information technology systems or infrastructure.

In the ordinary course of business, we and our business partners store sensitive data, including intellectual property and proprietary information related to our business, our customers and our business partners, on our information technology systems. Despite the implementation of security measures, these systems are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, terrorism, war and telecommunication, electrical and other system failures due to employee error, malfeasance or other disruptions. We could experience a business interruption, intentional theft of confidential information or reputational damage, including damage to key customer and partner relationships, from system failures, espionage attacks, malware, ransomware or other cyber-attacks. Such cyber-security breaches may compromise our system infrastructure or lead to data leakage, either internally or at our contractors or consultants. In particular, system failures or cyber-security breaches could result in the loss of nonclinical or clinical trial data from completed, ongoing or planned trials, which could cause delays in our Quarterly Reportregulatory approval efforts and significantly increase our costs to recover or reproduce the data.

The risk of a security breach or disruption, particularly through cyber-attacks, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. We have experienced cyber-security attacks in the past, including attacks targeting our e-mail systems, which to date have not had a material impact on Form 10-Q forour operations or development programs; however; there is no assurance that such impacts will not be material in the quarter ended March 31, 2018 may leadfuture.

To the extent that any disruption or security breach were to additional risks and uncertainties, including regulatory, shareholder or other actions,result in a loss of, investor confidence and negative impacts onor damage to, our stock price.

Our Audit Committee, after consultation with management and discussing with outside counsel, external auditors and third-party consultants, concluded on August 12, 2018 that our previously issued consolidated financial statements for the quarter ended March 31, 2018 should be restated for the reasons described in “Explanatory Note” preceding Part I, Item 1 and Note 3 - Restatementdata or applications, or inappropriate disclosure of Unaudited Condensed Consolidated Financial Statementsconfidential or proprietary information, including protected health information or personal data of the Notes to Consolidated Financial Statements in Part I, Item 1 of the amended Form 10-Q for the quarter ended March 31, 2018. Our amended Form 10-Q for the quarter ended March 31, 2018 includes restated unaudited financial statements and selected financial data (and related disclosures). Financial information included in our previously filed Form 10-Q for the quarter ended March 31, 2018, and all earnings press release and similar communications issued by us, for the period, should not be relied upon and are superseded in their entirety by our amended Form 10-Q for the quarter ended March 31, 2018. The amended Form 10-Q for the quarter ended March 31, 2018 amends and restates, in its entirety, our Form 10-Q for the quarter ended March 31, 2018.

As a result of this restatement and associated non-reliance on previously issued financial information,employees or former employees, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the restatement and the remediation of our ineffective disclosure controls and procedures and material weakness in internal control over financial reporting. Likewise, the attention of our Board and our management team has been diverted by these efforts. In addition, we could also be subject to additional shareholder, governmental, regulatorylegal claims or other actions or demands in connection withproceedings, liability under laws and regulations governing the restatement or other matters. Any such proceedings will, regardlessprotection of the outcome, consume a significant amount of the Board’s and management’s time and attention and may result in additional legal, accounting, insurancehealth and other costs. If we do not prevail inpersonally identifiable information and related regulatory penalties.  In any such proceedings, we could be required to pay damages or settlement costs. In addition, the restatement and related matters could impair our reputation or could cause our customers, shareholders, or other counterparties to lose confidence in us. Any of these occurrences could have a material adverse effect onevent, our business, results of operations, financial conditionposition and stock price.cash flows could be materially adversely affected.

 

Our plan to remediate the identified material weaknesses in our internal control over financial reporting and the restatement of our previously issued financial statements contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 may not be sufficient to correct all material weaknesses and deficiencies.

On June 22, 2018, we announced the resignation of our registered independent public accounting firm, Plante & Moran, PLLC (“Plante”).  Plante’s reports on the Company’s financial statements for the years ended December 31, 2016 and December 31, 2017 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles and during the two most recent years ended December 31, 2016 and December 31, 2017 and through June 22, 2018 (the date of Plante’s resignation), the Company had no disagreements with Plante on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Plante’s satisfaction, would have caused it to make reference to the subject matter of the disagreements in connection with its reports. 

In connection with Plante’s resignation and the restatement of our financial statements for the quarter ended March 31, 2018, Plante and our management team identified a material weakness in our internal control over financial reporting with respect to the quarter ended March 31, 2018.  Accordingly, the Board and management have concluded that management’s reports related to the effectiveness of internal and disclosure controls for the quarter ended March 31, 2018 may not have been correct, as described in Item 4, “Control and Procedures” of this Form 10-Q. Subsequently, we identified several additional material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Although our Audit Committee and management are implementing improvements to our internal controls to remediate the identified material weaknesses, these

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improvements may not be effective to fully remediate such material weakness or prevent a material misstatement of our annual or interim financial statements in the future.

Item 6. Exhibits

 

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

 

 

 

 

Exhibit No.

 

Description

 

 

 

10.853.1

 

Confidential SettlementRestated Articles of Incorporation, as amended as of August 28, 2019 (Company’s Form 8-K filed August 30, 2019)

3.2

Amended and Restated Bylaws (Company’s Form 8-K filed August 30, 2019)

10.1§

Davita Agreement and Release, dated August 7, 2018, by and among by and among Rockwell Medical, Inc., Robert Chioini, Thomas Klema, Patrick Bagley and Ronald Boyd*

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

31.2

 

Certification of Principal AccountingChief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Database

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

*   Confidential treatment requested for

§Certain confidential portions of this exhibit. exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

ROCKWELL MEDICAL, INC.

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

Date:  November 9, 201812, 2019

 

/s/ Stuart Paul

 

 

 

Stuart Paul

 

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: November 9, 201812, 2019

 

/s/ David KullAngus Smith

 

 

 

David KullAngus Smith

 

 

 

ControllerChief Financial Officer (Principal AccountingFinancial Officer)

 

 

 

 

 

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