Rockwell Medical, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes in “Item 1. Condensed Consolidated Financial Statements”. References in this report to “Rockwell,” the “Company,” “we,” “our” and “us” are references to Rockwell Medical, Inc. and its subsidiaries.

Forward-Looking Statements

We make forward-looking statements in this report and may make such statements in future filings with the U.S. Securities and Exchange Commission ("SEC"). We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our current expectations and possible or assumed future results of our operations. When we use words such as “may,” “might,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “could,” “plan,” “potential,” “predict,” “forecast,” “project,” “intend,” “is focused on” or similar expressions, or make statements regarding our intent, belief, or current expectations, we are making forward-looking statements. Our forward looking statements also include, without limitation, statements about our liquidity and capital resources; our ability to successfully integrate acquisitions; the size of the hemodialysis concentrates market opportunity; our ability to successfully execute on our business strategy; our ability to raise additional capital; our ability to successfully implement certain cost containment and cost-cutting measures; our ability to maintain profitability and statements regarding our anticipated future financial condition, operating results, cash flows and business plans.

While we believe our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which are based on information available to us on the date of this report or, if made elsewhere, as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed in this report, “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and from time to time in our other reports filed with the SEC.

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flow and financial position. There can be no assurance future results will meet expectations. Forward-looking statements speak only as of the date of this report and we expressly disclaim any intent to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

Rockwell Medical is a healthcare company that develops, manufactures, commercializes, and distributes a portfolio of hemodialysis products for dialysis providers worldwide.

Rockwell is the largest supplier of liquid bicarbonate concentrates and the second largest supplier of acid and dry bicarbonate concentrates for dialysis patients in the United States. Hemodialysis is the most common form of end-stage kidney disease treatment and is usually performed at freestanding outpatient dialysis centers, at hospital-based outpatient centers, at skilled nursing facilities, or in a patient’s home. This represents a large market opportunity for which we believe Rockwell's products are well-positioned to meet the needs of patients.

Rockwell delivers the majority of its hemodialysis concentrates products and mixers to dialysis clinics throughout the United States and internationally utilizing its own delivery trucks and third-party carriers. Rockwell has developed a core expertise in manufacturing and delivering hemodialysis concentrates, and has built a longstanding reputation for reliability, quality, and excellent customer service.

Rockwell provides the hemodialysis community with products controlled by a Quality Management System regulated by the U.S. Food and Drug Administration ("FDA"). Rockwell is ISO 13485 Certified and adheres to current Good Manufacturing Practices ("cGMP") and Association for Advancement of Medical Instrumentation ("AAMI") standards. Rockwell manufactures hemodialysis concentrates at its facilities in Michigan, South Carolina, and Texas totaling approximately 175,000 square feet, and manufactures its dry acid concentrate mixers at its facility in Iowa. In addition, the Company manufactures hemodialysis concentrates in Minnesota under a contract manufacturing agreement with a contract

manufacturing organization. (See Note 4 of the accompanying condensed consolidated interim financial statements for further detail). On February 12, 2024, the Company entered into an amendment to its contract manufacturing agreement to extend the term to December 31, 2024. The Company plans to transfer the manufacturing of the former Evoqua product line to one of its own manufacturing facilities by the end of 2024, which the Company believes will reduce production costs for these products.

During the three months ended September 30, 2024, Rockwell Medical received the Notice of Extension of Term (the "Extension") of the Amended and Restated Products Purchase Agreement (the "Amended Agreement"), dated September 21, 2023, which amended and restated the Products Purchase Agreement, dated July 1, 2019, with DaVita. The Extension extends the term of the Amended Agreement through December 31, 2025 (the "Extension Term"), during which Extension Term product pricing will be increased. DaVita has indicated to Rockwell that DaVita expects volumes to decline during the Extension Term as DaVita works to diversify its supplier base. Rockwell believes that net sales to DaVita in 2025 will decline between approximately $31 million and $37 million. DaVita is required to provide Rockwell with a twelve-month binding forecast on or before December 15, 2024, at which time the Company will be able to determine the actual impact on net sales in 2025. Under the terms of the Amended Agreement, DaVita is committed to purchasing at least the amount provided in the binding forecast. DaVita's product purchases have historically ranged between a gross loss to single digit gross margin, excluding the special large order of premium-priced product described below.

Results of Operations for the Three Months Ended September 30, 2024 and 2023

The following table summarizes our operating results for the periods presented below (dollars in thousands):

Net Sales

During the three months ended September 30, 2024, net sales were $28.3 million compared to net sales of $23.8 million during the three months ended September 30, 2023. The increase of $4.5 million was due to $6.7 million from product revenue, partially offset by a decrease of $2.2 million from non-product revenue. Overall, product revenue for the three months ended September 30, 2024 was $28.3 million compared to product revenue of $21.6 million for the three months ended September 30, 2023. The increase of $6.7 million was driven by $4.5 million from a special large order of premium-priced product, as well as $2.5 million of increased sales and price increases to existing customers. Net sales of non-product revenue were not material during the three months ended September 30, 2024 compared to non-product revenue of $2.2 million during the three months ended September 30, 2023, which was the result of deferred license revenue recognition related to the termination of the Wanbang Agreement.

Gross Profit

Cost of sales for the three months ended September 30, 2024 was $22.1 million, resulting in gross profit of $6.2 million for the three months ended September 30, 2024, compared to cost of sales of $21.6 million and a gross profit of $2.2 million for the three months ended September 30, 2023. Gross profit increased by $4.0 million driven by $1.5 million from a special large order of premium-priced product, as well as $2.5 million from increased sales and price increases to existing customers and $1.1 million of lower costs, partially offset by a decrease of $1.1 million associated with the termination of the Wanbang agreement for the three months ended September 30, 2023.

Research and Product Development Expense

Research and product development expenses were nil and $0.5 million for the three months ended September 30, 2024 and 2023, respectively. The decrease of approximately $0.5 million was driven by severance cost in the three months ended September 30, 2023.

Selling and Marketing Expense

Selling and marketing expenses were $0.7 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively.

General and Administrative Expense

General and administrative expenses were $3.6 million for the three months ended September 30, 2024, compared with $2.9 million for the three months ended September 30, 2023. The increase of $0.6 million was primarily due to increased compensation expense related to bonuses.

Other Expense

Total other expense of $0.3 million and $0.1 million for the three months ended September 30, 2024 and 2023, respectively, was primarily driven by interest expense related to our debt facility (See Note 15 to the condensed consolidated financial statements included elsewhere in this Form 10-Q). For the three months ended September 30, 2023, the interest expense is partially offset by $0.2 million of realized gains on available-for-sale investments.

Results of Operations for the Nine Months Ended September 30, 2024 and 2023

The following table summarizes our operating results for the periods presented below (dollars in thousands):

Net Sales

During the nine months ended September 30, 2024, our net sales were $76.8 million compared to net sales of $61.5 million during the nine months ended September 30, 2023. Product revenue for the nine months ended September 30, 2024 was $76.8 million compared to product revenue of $57.7 million for the nine months ended September 30, 2023. The increase of $19.1 million was primarily due to $6.4 million from customers added through the Evoqua asset acquisition, $5.4 million from a special large order of premium-priced product, as well as $7.2 million of increased sales and price increases to existing customers. Net sales of non-product revenue were not material during the nine months ended September 30, 2024 compared to $3.8 million during the nine months ended September 30, 2023, which was the result of $2.3 million and $1.5 million of deferred license revenue recognition related to the terminations of the Wanbang Agreement and Baxter Distribution Agreement, respectively.

Gross Profit

Cost of sales for the nine months ended September 30, 2024 was $63.0 million, resulting in gross profit of $13.9 million for the nine months ended September 30, 2024, compared to cost of sales of $55.7 million and a gross profit of $5.8 million for the nine months ended September 30, 2023. Gross profit increased by $8.0 million driven by $7.1 million of price increases to existing customers, $1.6 million from a special large order of premium-priced product and $1.4 million of lower costs, partially offset by $1.5 million and $1.1 million of gross profit for the nine months ended September 30, 2023 associated with deferred license revenue recognition related to the terminations of the Baxter Distribution Agreement and the Wanbang agreement, respectively.

Research and Product Development Expense

Research and product development expenses were immaterial and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease of approximately $0.9 million is due to the decision to pause all research and development related to Triferic in 2023.

Selling and Marketing Expense

Selling and marketing expenses were $1.9 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively. The increase of $0.3 million is primarily due to higher employee compensation expenses.

General and Administrative Expense

General and administrative expenses were $10.8 million for the nine months ended September 30, 2024, compared with $9.4 million for the nine months ended September 30, 2023. The increase of $1.4 million was primarily due to increased compensation expense related to bonuses, additional administrative costs and amortization of intangible assets.

Other Expense

Total other expense of $0.9 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively, was driven by interest expense of $1.0 million and $1.2 million, respectively, related to our debt facility (See Note 15 to the condensed consolidated financial statements included elsewhere in this Form 10-Q), partially offset by $0.1 million and $0.2 million of interest income, respectively, as well as realized gains on available-for-sale of investments of $0.1 million and $0.2 million, respectively.

Liquidity and Capital Resources

As of September 30, 2024, we had approximately $18.3 million of cash, cash equivalents and investments available-for-sale, and working capital of $20.0 million. Based on the currently available working capital along with the expectation of management of its ability to execute on its operational plans as discussed below, management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months from the date of the filing of this report.

Additionally, the Company's operational plans include raising capital, if needed, by using the $4.5 million remaining availability under its at-the-market ("ATM") facility or other methods or forms of financings, subject to existing limitations. Under the ATM, we have the ability to control the timing and price at which capital is raised.

The actual amount of cash that we will need to execute our business strategy is subject to many factors, including, but not limited to, the costs associated with our manufacturing and transportation operations related to our concentrate business.

We may elect to raise capital in the future through one or more of the following: (i) equity and debt raises through the equity and capital markets, though there can be no assurance we will be able to secure additional capital or funding on acceptable terms, or if at all; and (ii) strategic transactions, including potential alliances and collaborations focused on markets outside the United States, as well as potential combinations (including by merger or acquisition) or other corporate transactions.

We believe our ability to fund our activities in the long term will be highly dependent upon (i) our ability to execute on the growth strategy of our hemodialysis concentrates business and maintain sales with existing customers, (ii) our ability to achieve sustained profitability, and (iii) our ability to identify, develop, in-license, or acquire new products in developing our renal care product portfolio. All of these strategies are subject to significant risks and uncertainties such that there can be no assurance we will be successful in achieving them. If we are unsuccessful in executing our business plan and we are unable to raise the required capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise sufficient capital, such financings may only be available on unattractive terms, or result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline.

If the Company attempts to obtain additional debt or equity financing, the Company cannot assume such financing will be available on favorable terms, if at all. In addition, any debt financing is limited by the terms of our Securities Purchase Agreement with DaVita. Specifically, until DaVita owns less than 50% of its investment, the Company may only incur additional debt in the form of a purchase money loan, a working capital line of up to $5 million or to refinance existing debt, unless DaVita consents.

The Company is subject to certain covenants and cure provisions under its Loan Agreement with Innovatus. As of September 30, 2024, the Company is in compliance with all covenants. On January 2, 2024, the Company's Loan Agreement was amended to include, among other things, an interest-only period for 30 months, or up to 36 months if certain conditions are met, and extend the maturity date to January 1, 2029 (See Note 15 to the accompanying condensed consolidated financial statements).

The global macroeconomic environment is uncertain, and could be negatively affected by, among other things, increased U.S. trade tariffs and trade disputes with other countries, instability in the global capital and credit markets, recent bank failures in the United States, supply chain weaknesses, and instability in the geopolitical environment, including as a result of the Russian invasion of Ukraine, the Middle East conflict and other political tensions, and the occurrence of natural disasters and public health crises. Such challenges have caused, and may continue to cause, recession fears, rising interest rates, foreign exchange volatility and inflationary pressures. At this time, the Company is unable to quantify the potential effects of this economic instability on our future operations. Due to the rapidly evolving nature of the global situation, it is not possible to predict the extent to which these conditions could adversely affect the Company's liquidity and capital resources in the future.

Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $3.3 million for the nine months ended September 30, 2024 compared to net cash used in operating activities of $9.4 million for the nine months ended September 30, 2023. The change in cash provided by operating activities during the current period as compared to cash used in operating activities in the prior period was primarily due to (i) an increase in net income of approximately $7.2 million, (ii) an increase in cash provided by changes in current balance sheet accounts in the ordinary course of business of approximately $5.9 million, primarily due to increases of $5.1 million of accounts receivable, net and $3.8 million of deferred license revenue, partially offset by decreases of $1.8 million of accounts payable and $1.2 million of inventory, partially offset by (iii) a decrease in cash provided from non-cash adjustments primarily related to a decrease of $0.8 million in inventory reserves.

Cash Used In Investing Activities

Net cash used in investing activities was $4.5 million during the nine months ended September 30, 2024 compared to net cash used in investing activities of $5.1 million for the nine months ended September 30, 2023. Net cash used in investing activities during the nine months ended September 30, 2024 was driven primarily by (i) net cash payments from purchases and sales of our available-for-sale investments of $3.9 million during the period. Net cash used in investing activities during the nine months ended September 30, 2023 was primarily due to the cash paid in connection with the Evoqua Asset Acquisition of $12.4 million, partially offset by the net cash proceeds from sales and purchase of available-for-sale investments during the period of $7.5 million.

Cash Provided By Financing Activities

Net cash provided by financing activities was $4.6 million during the nine months ended September 30, 2024 compared to net cash provided by financing activities of $12.1 million for the nine months ended September 30, 2023. Net cash provided by financing activities during the nine months ended September 30, 2024 was primarily due to the gross proceeds from the issuance of common stock in connection with the ATM facility of $6.4 million, partially offset by the cash paid in

connection with the Evoqua Asset Acquisition of $1.0 million. Net cash provided by financing activities for the nine months ended September 30, 2023 was primarily due to the gross proceeds from the issuance of common stock in connection with the exercise of the Prior Warrant and Pre-Funded Warrants of $13.8 million.

Contractual Obligations and Other Commitments

See Note 13 to the condensed consolidated financial statements included elsewhere in this Form 10-Q for additional disclosures. There have been no other material changes from the contractual obligations and other commitments disclosed in Note 14 and 15 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Critical Accounting Policies and Significant Judgments and Estimates

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Recently issued and adopted accounting pronouncements:

We have evaluated all recently issued accounting pronouncements and believe such pronouncements do not have a material effect our financial statements. See Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Per §229.305 of Regulation S-K, the Company, designated a Smaller Reporting Company as defined in §229.10(f)(1) of Regulation S-K, is not required to provide the disclosure required by this Item.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure material information required to be disclosed in our reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management was required to apply its judgment in evaluating the cost‑benefit relationship of possible controls and procedures.

Under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2024. Based upon that evaluation, our Chief Executive Officer concluded our disclosure controls and procedures were effective as of September 30, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business is subject to various risks, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023 under "Item 1A - Risk Factors."