United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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)
|
|
Michigan |
38-3317208 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
|
|
30142 Wixom Road, Wixom, Michigan |
48393 |
(Address of principal executive offices) |
(Zip Code) |
(248) 960-9009
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
|
Large accelerated filer ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐ |
Smaller reporting company ☒ |
|
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
|
Trading Symbol |
|
Name of each exchange on which registered: |
Common Stock, no par value |
|
RMTI |
|
Nasdaq Global Market |
The number of shares of common stock outstanding as of May 8, 2019 was 57,565,370.
Rockwell Medical, Inc. and Subsidiaries
2
PART I – FINANCIAL INFORMATION
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
|
|
|
(Unaudited) |
|
|
|
ASSETS |
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
20,919,518 |
|
$ |
22,713,980 |
Investments Available-for -Sale |
|
|
6,876,221 |
|
|
10,818,059 |
Accounts Receivable, net of a reserve of $2,240 in 2019 and $2,104 in 2018 |
|
|
6,711,410 |
|
|
6,979,514 |
Insurance Receivable |
|
|
— |
|
|
371,217 |
Inventory |
|
|
4,001,570 |
|
|
4,038,778 |
Prepaid and Other Current Assets |
|
|
1,680,818 |
|
|
1,903,682 |
Total Current Assets |
|
|
40,189,537 |
|
|
46,825,230 |
Property and Equipment, net |
|
|
2,572,680 |
|
|
2,638,293 |
Inventory, Non-Current |
|
|
1,501,000 |
|
|
1,637,000 |
Right of Use Assets, net |
|
|
3,005,792 |
|
|
— |
Goodwill |
|
|
920,745 |
|
|
920,745 |
Other Non-current Assets |
|
|
555,310 |
|
|
536,516 |
Total Assets |
|
$ |
48,745,064 |
|
$ |
52,557,784 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
Accounts Payable |
|
$ |
4,522,225 |
|
$ |
4,492,071 |
Accrued Liabilities |
|
|
6,272,040 |
|
|
5,129,761 |
Settlement Payable |
|
|
166,669 |
|
|
416,668 |
Lease Liability - Current |
|
|
1,680,475 |
|
|
— |
Deferred License Revenue - Current |
|
|
2,248,062 |
|
|
2,252,868 |
Customer Deposits |
|
|
240,239 |
|
|
63,143 |
Other Current Liability - Related Party |
|
|
600,000 |
|
|
850,000 |
Total Current Liabilities |
|
|
15,729,710 |
|
|
13,204,511 |
|
|
|
|
|
|
|
Lease Liability - Long-Term |
|
|
1,336,319 |
|
|
— |
Deferred License Revenue - Long-Term |
|
|
11,517,988 |
|
|
12,076,399 |
Total Liabilities |
|
|
28,584,017 |
|
|
25,280,910 |
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
Preferred Shares, no par value, no shares issued and outstanding at March 31, 2019 and December 31, 2018 |
|
|
— |
|
|
— |
Common Shares, no par value, 57,128,327 and 57,034,154 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
|
|
301,171,733 |
|
|
299,601,960 |
Accumulated Deficit |
|
|
(281,066,581) |
|
|
(272,388,234) |
Accumulated Other Comprehensive Income |
|
|
55,895 |
|
|
63,148 |
Total Shareholders’ Equity |
|
|
20,161,047 |
|
|
27,276,874 |
Total Liabilities And Shareholders’ Equity |
|
$ |
48,745,064 |
|
$ |
52,557,784 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended March 31, 2019 |
|
Three Months Ended March 31, 2018 |
|
||
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
15,559,439 |
|
$ |
14,948,579 |
|
Cost of Sales |
|
|
14,549,047 |
|
|
15,669,072 |
|
Gross Profit (Loss) |
|
|
1,010,392 |
|
|
(720,493) |
|
Selling and Marketing |
|
|
3,102,378 |
|
|
215,083 |
|
General and Administrative |
|
|
6,220,499 |
|
|
3,116,872 |
|
Research and Product Development |
|
|
497,276 |
|
|
1,666,356 |
|
Operating Loss |
|
|
(8,809,761) |
|
|
(5,718,804) |
|
|
|
|
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
Realized Gain (Loss) on Investments |
|
|
13,888 |
|
|
(2,892) |
|
Interest Income |
|
|
117,526 |
|
|
175,307 |
|
Other Income |
|
|
— |
|
|
(3,132) |
|
Total Other Income (Expense) |
|
|
131,414 |
|
|
169,283 |
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(8,678,347) |
|
$ |
(5,549,521) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per Share |
|
$ |
(0.15) |
|
$ |
(0.11) |
|
|
|
|
|
|
|
|
|
Basic and Diluted Weighted Average Shares Outstanding |
|
|
57,098,947 |
|
|
51,288,424 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
|
Three Months Ended March 31, 2019 |
|
Three Months Ended March 31, 2018 |
|
||
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(8,678,347) |
|
$ |
(5,549,521) |
|
Unrealized Loss on Available-for-Sale Debt Instrument Investments |
|
|
(7,161) |
|
|
(189,995) |
|
Foreign Currency Translation Adjustments |
|
|
(92) |
|
|
(2,485) |
|
Comprehensive Loss |
|
$ |
(8,685,600) |
|
$ |
(5,742,001) |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2019
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER |
|
TOTAL |
|
||
|
|
COMMON SHARES |
|
ACCUMULATED |
|
COMPREHENSIVE |
|
SHAREHOLDER’S |
|
||||||
|
|
SHARES |
|
AMOUNT |
|
DEFICIT |
|
INCOME / (LOSS) |
|
EQUITY |
|
||||
Balance as of December 31, 2018 |
|
57,034,154 |
|
$ |
299,601,960 |
|
$ |
(272,388,234) |
|
$ |
63,148 |
|
$ |
27,276,874 |
|
Net Loss |
|
— |
|
|
— |
|
|
(8,678,347) |
|
|
— |
|
|
(8,678,347) |
|
Unrealized Loss on Available-for-Sale Investments |
|
— |
|
|
— |
|
|
— |
|
|
(7,161) |
|
|
(7,161) |
|
Foreign Currency Translation Adjustments |
|
— |
|
|
— |
|
|
— |
|
|
(92) |
|
|
(92) |
|
Exercise of Employee Stock Options |
|
30,000 |
|
|
147,900 |
|
|
— |
|
|
— |
|
|
147,900 |
|
Delivery of common stock underlying restricted stock units, net of tax |
|
64,173 |
|
|
(95,429) |
|
|
— |
|
|
— |
|
|
(95,429) |
|
Stock-based Compensation |
|
— |
|
|
1,517,302 |
|
|
— |
|
|
— |
|
|
1,517,302 |
|
Balance as of March 31, 2019 |
|
57,128,327 |
|
$ |
301,171,733 |
|
$ |
(281,066,581) |
|
$ |
55,895 |
|
$ |
20,161,047 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER |
|
TOTAL |
||
|
|
COMMON SHARES |
|
ACCUMULATED |
|
COMPREHENSIVE |
|
SHAREHOLDER’S |
||||||
|
|
SHARES |
|
AMOUNT |
|
DEFICIT |
|
INCOME / (LOSS) |
|
EQUITY |
||||
Balance as of December 31, 2017 |
|
51,768,424 |
|
$ |
273,210,907 |
|
$ |
(240,262,376) |
|
$ |
(35,383) |
|
$ |
32,913,148 |
Net Loss |
|
— |
|
|
— |
|
|
(5,549,521) |
|
|
— |
|
|
(5,549,521) |
Unrealized Loss on Available-for-Sale Investments |
|
— |
|
|
— |
|
|
— |
|
|
(189,995) |
|
|
(189,995) |
Foreign Currency Translation Adjustments |
|
— |
|
|
— |
|
|
— |
|
|
(2,485) |
|
|
(2,485) |
Stock-based Compensation |
|
— |
|
|
446,003 |
|
|
— |
|
|
— |
|
|
446,003 |
Balance as of March 31, 2018 |
|
51,768,424 |
|
$ |
273,656,910 |
|
$ |
(245,811,897) |
|
$ |
(227,863) |
|
$ |
27,617,150 |
7
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2019 and 2018
(Unaudited)
|
|
2019 |
|
2018 |
||
|
|
|
|
|
|
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
Net Loss |
|
$ |
(8,678,347) |
|
$ |
(5,549,521) |
Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities: |
|
|
|
|
|
|
Depreciation and Amortization |
|
|
187,527 |
|
|
129,076 |
Stock-based Compensation |
|
|
1,517,302 |
|
|
446,003 |
Increase in Inventory Reserves |
|
|
11,000 |
|
|
2,046,954 |
Amortization of Right of Use Asset |
|
|
478,442 |
|
|
— |
Loss on Disposal of Assets |
|
|
— |
|
|
3,083 |
Realized (Gain) Loss on Sale of Investments Available-for-Sale |
|
|
(13,888) |
|
|
2,892 |
Foreign Currency Translation Adjustment |
|
|
(92) |
|
|
(2,446) |
Changes in Assets and Liabilities: |
|
|
|
|
|
|
Decrease in Accounts Receivable |
|
|
268,104 |
|
|
295,973 |
Decrease in Insurance Receivable |
|
|
371,217 |
|
|
— |
Decrease in Inventory |
|
|
162,208 |
|
|
59,427 |
Decrease in Other Assets |
|
|
203,982 |
|
|
238,438 |
Increase (Decrease) in Accounts Payable |
|
|
30,154 |
|
|
(209,208) |
Decrease in Settlement Payable |
|
|
(249,999) |
|
|
— |
Decrease in Lease Liability |
|
|
(467,440) |
|
|
— |
Increase (Decrease) in Other Liabilities |
|
|
1,319,375 |
|
|
(1,494,969) |
Decrease in Deferred License Revenue |
|
|
(563,217) |
|
|
(572,709) |
Changes in Assets and Liabilities |
|
|
1,074,384 |
|
|
(1,683,048) |
Cash Used In Operating Activities |
|
|
(5,423,672) |
|
|
(4,607,007) |
Cash Flows From Investing Activities: |
|
|
|
|
|
|
Purchase of Investments Available-for-Sale |
|
|
(8,812,954) |
|
|
(1,416,665) |
Sale of Investments Available-for-Sale |
|
|
12,761,519 |
|
|
1,050,554 |
Purchase of Equipment |
|
|
(121,826) |
|
|
(155,712) |
Purchase of Research and Development Licenses (Related Party) |
|
|
(250,000) |
|
|
— |
Cash Provided By (Used In) Investing Activities |
|
|
3,576,739 |
|
|
(521,823) |
Cash Flows From Financing Activities: |
|
|
|
|
|
|
Proceeds from the Exercise of Employee Stock Options |
|
|
147,900 |
|
|
— |
Repurchase of Common Shares to Pay Employee Withholding Taxes |
|
|
(95,429) |
|
|
— |
Cash Provided By Financing Activities |
|
|
52,471 |
|
|
— |
|
|
|
|
|
|
|
Decrease In Cash and Cash Equivalents |
|
|
(1,794,462) |
|
|
(5,128,830) |
Cash At Beginning Of Period |
|
|
22,713,980 |
|
|
8,406,917 |
Cash At End Of Period |
|
$ |
20,919,518 |
|
$ |
3,278,087 |
|
|
|
|
|
|
|
Supplemental Disclosure of Noncash Investing Activities: |
|
|
|
|
|
|
Change in Unrealized Loss on Marketable Securities Available-for-Sale |
|
$ |
(7,161) |
|
$ |
(189,995) |
Delivery of Common Stock Underlying Restricted Stock Units |
|
$ |
273,830 |
|
$ |
— |
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Rockwell Medical, Inc. and subsidiaries (collectively, “we”, “our”, “us”, or the “Company”), is a specialty pharmaceutical company targeting end-stage renal disease and chronic kidney disease with products for the treatment of iron deficiency and hemodialysis. We are also a manufacturer of hemodialysis concentrates for dialysis providers and distributors in the United States and abroad. We supply the 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.
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® is a registered trademark of Rockwell Medical, Inc.
2. Going Concern
As of March 31, 2019, the Company had approximate balances of $20.9 million of cash and cash equivalents, $6.9 million of investments available-for-sale, working capital of $24.5 million and an accumulated deficit of $281.1 million. Net cash used in operating activities for the three months ended March 31, 2019 was approximately $5.4 million.
The Company will require significant additional capital to sustain its operations and make the investments it needs to execute upon 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. 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, no par value, 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 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. The Company intends to seek additional equity or debt financing; however, there are currently no commitments in place for further financing nor is there any assurance that such financing will be available to the Company on favorable terms, if at all.
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 will 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.
3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements
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.
9
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 March 31, 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 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.
Certain reclassifications have been made to the 2018 financial statements and notes to conform to the 2019 presentation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
Other than leases, there have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
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 issued common stock were exercised or converted into common stock or resulted in the issuance of common stock that are 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
10
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 months ended March 31, 2019 and 2018 were as follows:
|
As of March 31, |
|||
|
2019 |
2018 |
||
Options to purchase common stock |
|
8,289,605 |
|
6,881,001 |
Unvested restricted stock awards |
|
146,800 |
|
480,000 |
Unvested restricted stock units |
|
1,461,917 |
|
- |
|
|
9,898,322 |
|
7,361,001 |
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 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 a lease liability of approximately $3.5 million; there was no effect on opening retained earnings, and the Company continues to account for leases in the prior period consolidated financial 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 amendments 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 a material impact on its condensed consolidated financial statements and related disclosures.
4. Revenue Recognition
The Company recognizes revenue under 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.
11
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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 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, the Company recognizes revenue based on when the customer takes control of the product. The amount of revenue recognized is based on the purchase order less returns and adjusted for any rebates, discounts, chargebacks or other amounts paid to customers. 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.
12
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 March 31, 2019 |
||||||
Products By Geographic Area |
Total |
|
U.S. |
|
Rest of World |
|||
Drug Revenues |
|
|
|
|
|
|
|
|
License Fee – Over time |
$ |
68 |
|
$ |
— |
|
$ |
68 |
Concentrate Products |
|
|
|
|
|
|
|
|
Product Sales – Point-in-time |
|
14,996 |
|
|
12,923 |
|
|
2,073 |
License Fee – Point-in-time |
|
495 |
|
|
495 |
|
|
— |
Total Concentrate Products |
|
15,491 |
|
|
13,418 |
|
|
2,073 |
Net Revenue |
$ |
15,559 |
|
$ |
13,418 |
|
$ |
2,141 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018 |
||||||
Products By Geographic Area |
|
Total |
|
|
U.S. |
|
|
Rest of World |
Drug Revenues |
|
|
|
|
|
|
|
|
License Fee – Over time |
$ |
68 |
|
|
— |
|
$ |
68 |
Concentrate Products |
|
|
|
|
|
|
|
|
Product Sales – Point-in-time |
|
14,376 |
|
|
12,472 |
|
|
1,904 |
License Fee – Point-in-time |
|
504 |
|
|
504 |
|
|
— |
Total Concentrate Products |
|
14,880 |
|
|
12,976 |
|
|
1,904 |
Net Revenue |
$ |
14,948 |
|
$ |
12,976 |
|
$ |
1,972 |
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
In thousands of US dollars ($) |
|
March 31, 2019 |
|
December 31, 2018 |
||
Receivables, which are included in "Trade and other receivables" |
|
$ |
6,711 |
|
$ |
6,980 |
Contract liabilities |
|
$ |
13,766 |
|
$ |
14,329 |
There were no impairment losses recognized related to any receivables arising from the Company’s contracts with customers for the three months ended March 31, 2019 and 2018.
For the three months ended March 31, 2019 and March 31, 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 March 31, 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 March 31, 2019 or December 31, 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 months ended March 31, 2019, revenue recognized from performance obligations related to prior periods was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is
13
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, totaled $13.8 million as of March 31, 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 $10.6 million, which will be amortized through expiration of the agreement on October 2, 2024.
5. Investments - Available-for-Sale
Investments available-for-sale consisted of the following as of March 31, 2019 and December 31, 2018:
|
|
March 31, 2019 |
||||||||||
|
|
Amortized Cost |
|
Unrealized Gain |
|
Unrealized Loss |
|
Fair Value |
||||
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
6,869,060 |
|
$ |
7,210 |
|
$ |
(49) |
|
$ |
6,876,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, Fair Value Measurement to our condensed consolidated financial statements.
As of March 31, 2019 and December 31, 2018, the amortized cost and estimated fair value of our available-for-sale securities were due in one year or less.
6. Inventory
Components of inventory, net of reserves as of March 31, 2019 and December 31, 2018 are as follows:
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
Raw Materials |
|
$ |
3,344,878 |
|
$ |
3,621,548 |
Work in Process |
|
|
240,402 |
|
|
256,129 |
Finished Goods |
|
|
1,917,290 |
|
|
1,798,101 |
Total |
|
$ |
5,502,570 |
|
$ |
5,675,778 |
As of March 31, 2019 and December 31, 2018, we classified $1.5 million and $1.6 million, respectively, of inventory as non-current, all of which was related to Triferic or the active pharmaceutical ingredient for Triferic. As of March 31, 2019 and December 31, 2018 we had total Triferic inventory aggregating $5.5 million and $8.0 million respectively, against which we had reserved $3.4 million and $5.8 million respectively.
The $2.1 million net value of Triferic inventory consisted of $0.4 million of Dialysate Triferic finished goods sellable through 2020, and $1.7 million of Triferic API with estimated useful lives extending through 2023.
14
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Property and Equipment
As of March 31, 2019 and December 31 2018, the Company’s property and equipment consisted of the following:
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
Leasehold Improvements |
|
$ |
1,040,890 |
|
$ |
929,849 |
Machinery and Equipment |
|
|
4,723,090 |
|
|
4,800,774 |
Information Technology & Office Equipment |
|
|
1,664,568 |
|
|
2,459,832 |
Laboratory Equipment |
|
|
668,977 |
|
|
668,977 |
|
|
|
8,097,525 |
|
|
8,859,432 |
Accumulated Depreciation |
|
|
(5,524,845) |
|
|
(6,221,139) |
Net Property and Equipment |
|
$ |
2,572,680 |
|
$ |
2,638,293 |
Depreciation expense for the three months ended March 31, 2019 and 2018, totaled $0.2 million and $0.1 million.
8. Accrued Liabilities
Accrued liabilities as of March 31, 2019 and December 31, 2018 consisted of the following:
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
Accrued Research & Development Expense |
|
$ |
99,259 |
|
$ |
86,820 |
Accrued Compensation and Benefits |
|
|
1,810,456 |
|
|
1,525,599 |
Accrued Legal Expenses |
|
|
1,054,924 |
|
|
170,334 |
Accrued Marketing Expenses |
|
|
771,656 |
|
|
5,000 |
Other Accrued Liabilities |
|
|
2,535,745 |
|
|
3,342,008 |
Total Accrued Liabilities |
|
$ |
6,272,040 |
|
$ |
5,129,761 |
9. 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 Distribution Agreement. The Company recognized revenue of approximately $0.5 million during the three months ended March 31, 2019 and 2018, respectively. Deferred revenue related to the Baxter agreement totaled $10.6 million as of March 31, 2019 and $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 any 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 Distribution Agreement because Baxter has been enjoined by a court of competent jurisdiction from selling in the United States any product covered by the Distribution 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 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 during the three months ended March 31, 2019 and 2018. Deferred revenue related to the Wanbang agreement totaled $3.1 million as of March 31, 2019 and $3.2 million as of December 31, 2018.
15
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Shareholders’ Equity
Preferred Stock
As of March 31, 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
During the three months ended March 31, 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, no par value, 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 declared effective by the SEC on October 1, 2018. The base prospectus contained within the registration statement, and a prospectus supplement that 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)(14) 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.
During the three months ended March 31, 2019, the Company did not sell any shares of common stock under the Sales Agreement. As of March 31, 2019, $40 million of common stock remained available to be sold under this facility.
Subsequent to March 31, 2019, the Company sold 437,043 shares of its common stock for gross proceeds of $2,296,235, at a weighted average selling price of approximately $5.25. The Company paid $57,406 in commissions related to the sale of the common shares.
Restricted Common Stock
During the three months ended March 31, 2019, 98,500 shares of common stock related to fully vested restricted stock units were delivered to an officer of the Company. The Company withheld 34,327 of these common shares at a fair value of $95,429 to cover the officer’s withholding taxes related to the vesting of restricted stock units.
16
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Stock-Based Compensation
The Company recognized total stock-based compensation expense during the three months ended March 31, 2019 and 2018 as follows:
|
|
Three Months Ended |
||||
|
|
March 31, |
||||
|
|
2019 |
|
2018 |
||
Service based awards: |
|
|
|
|
|
|
Restricted stock awards |
|
$ |
- |
|
$ |
240,827 |
Restricted stock units |
|
|
344,351 |
|
|
- |
Stock option awards |
|
|
652,024 |
|
|
205,176 |
|
|
|
996,375 |
|
|
446,003 |
Performance based awards: |
|
|
|
|
|
|
Restricted stock units |
|
|
398,388 |
|
|
- |
Stock option awards |
|
|
122,539 |
|
|
- |
|
|
|
520,927 |
|
|
- |
Total |
|
$ |
1,517,302 |
|
$ |
446,003 |
Restricted Stock
A summary of the Company’s restricted stock awards during the three months ended March 31, 2019 is as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Grant-Date |
|
|
Number of Shares |
|
|
Fair Value |
Unvested at December 31, 2018 |
|
146,800 |
|
$ |
5.70 |
Unvested at March 31, 2019 |
|
146,800 |
|
$ |
5.70 |
A summary of the Company’s restricted stock awards during the three months ended March 31, 2018 is as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Grant-Date |
|
|
Number of Shares |
|
|
Fair Value |
Unvested at December 31, 2017 |
|
480,000 |
|
$ |
7.27 |
Unvested at March 31, 2018 |
|
480,000 |
|
$ |
7.27 |
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 of 20 months. As of March 31, 2019 unvested restricted stock awards of 146,800 were related to performance based awards.
Service Based Restricted Stock Units
A summary of the Company’s service based restricted stock units during the three months ended March 31, 2019 is as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Grant-Date |
|
|
Number of Shares |
|
|
Fair Value |
Unvested at December 31, 2018 |
|
472,959 |
|
$ |
4.32 |
Unvested at March 31, 2019 |
|
472,959 |
|
$ |
4.32 |
17
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The fair value of service based restricted stock units are measured based on their fair value on the date of grant and amortized over the vesting period. The vesting periods range from 1-3 years. Stock-based compensation expense of $0.3 million was recognized during the three months ended March 31, 2019. No stock-based compensation was recognized during the three months ended March 31, 2018, since there were no service based restricted stock units granted during that period. As of March 31, 2019, the unrecognized stock-based compensation expense was $1.3 million.
Performance Based Restricted Stock Units
A summary of the Company’s performance based restricted stock units during the three months ended March 31, 2019 is as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Grant-Date |
|
|
Number of Shares |
|
|
Fair Value |
Unvested at December 31, 2018 |
|
988,958 |
|
$ |
4.48 |
Unvested at March 31, 2019 |
|
988,958 |
|
$ |
4.48 |
Stock-based compensation expense recognized for performance based restricted stock units was $0.4 million during the three months ended March 31, 2019. No stock-based compensation was recognized during the three months ended March 31, 2018, since there were no performance based restricted stock units granted during that period. As of March 31, 2019, the unrecognized stock-based compensation expense related to performance restricted stock units was $2.3 million.
Service Based Stock Options
The fair value of the service based stock options granted for the three months ended March 31, 2019 were based on the following assumptions:
|
March 31, |
|
2019 |
Exercise price |
$3.08 - $6.21 |
Expected stock price volatility |
67.5% - 68.4% |
Risk-free interest rate |
2.5% - 2.6% |
Term (years) |
5.5 -6.5 |
A summary of the Company’s service based stock option activity for the three months ended March 31, 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 |
|
75,000 |
|
$ |
3.49 |
|
|
9.8 |
|
|
|
Exercised |
|
(30,000) |
|
$ |
4.93 |
|
|
- |
|
|
|
Outstanding at March 31, 2019 |
|
7,901,480 |
|
$ |
7.47 |
|
|
5.0 |
|
$ |
1,959,736 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019 |
|
6,707,693 |
|
$ |
8.05 |
|
|
4.2 |
|
$ |
206,872 |
18
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of the Company’s service based stock option activity for the three months ended March 31, 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 |
|
|
5.1 |
|
$ |
976,335 |
Forfeited |
|
(25,000) |
|
$ |
8.23 |
|
|
- |
|
|
|
Outstanding at March 31, 2018 |
|
6,881,001 |
|
$ |
7.92 |
|
|
4.8 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018 |
|
6,323,160 |
|
$ |
7.90 |
|
|
4.5 |
|
$ |
738,740 |
The aggregate intrinsic value in the table above is calculated as the difference between the closing price of our common stock and the exercise price of the stock options that had strike prices below the closing price.
During the three months ended March 31, 2019, the Company granted to certain employees stock options to purchase up to 75,000 shares of common stock. The vested options were exercisable at an average price of $8.05 per share and the unvested options were exercisable at an average of $4.23 per share.
As of March 31, 2019 and 2018, stock-based compensation expense of $0.7 million and $0.2 million was recognized, respectively. As of March 31, 2019, total stock-based compensation expense related to unvested options not yet recognized totaled approximately $2.2 million.
Performance Based Stock Options
A summary of the performance based stock options for the three months ended March 31, 2019, is as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Exercise |
|
|
Number of Shares |
|
|
Price |
Outstanding at December 31, 2018 |
|
388,125 |
|
$ |
4.70 |
Outstanding at March 31, 2019 |
|
388,125 |
|
$ |
4.70 |
|
|
|
|
|
|
Exercisable at March 31, 2019 |
|
- |
|
$ |
- |
Stock-based compensation expense recognized for performance based stock options was $0.1 million during the three months ended March 31, 2019. No stock-based compensation was recognized during the three months ended March 31, 2018, since there were no performance based stock options granted during that period. As of March 31, 2019, the unrecognized stock-based compensation expense related to performance based stock options was $0.8 million.
19
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. 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 March 31, 2019, the Company paid two of the quarterly installments totaling $500,000 and accrued $100,000 for the reimbursement of certain legal expenses. As of March 31, 2019 and December 31, 2018, the Company accrued $600,000 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 sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and be no less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Commercialization and Technology License Agreement IV 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 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 sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
20
ROCKWELL MEDICAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and not be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
The 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 a