Rockwell Medical (RMTI) 10-K2019 FY Annual report

We make, or incorporate by reference, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in this Annual Report on Form 10-K. 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”, “projected,” “intend” or similar expressions, or make statements regarding our intent, belief, or current expectations, we are making forward-looking statements. Our forward looking statements also include, without limitation:

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows, business, prospects and financial position. We do not undertake, and expressly disclaim, any obligation to update or alter any statements whether as a result of new information, future events or otherwise except as required by law.

We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates and dialysates to dialysis providers and distributors in the United States and abroad. We manufacture, sell and distribute hemodialysis concentrates and other medical products and supplies used in the treatment of patients with ESRD. As one of the two major suppliers in the United States, our dialysis concentrate products are used to maintain human life by removing toxins and replacing critical nutrients in the dialysis patient’s bloodstream.  In 2019, we estimate that we supplied approximately 25% of the United States domestic market with dialysis concentrates, with the majority of our sales being made in the United States.  We also supply dialysis concentrates to distributors serving a number of foreign countries, primarily in the Americas and the Pacific Rim.

We believe that Triferic is an innovative treatment for iron replacement and has the potential to be developed in other disease states where iron replacement is required. We are actively evaluating additional indications for potential development. If we determine that a new indication demonstrates the potential for a sufficient return on investment, we will evaluate initiating clinical development of Triferic for such indication(s), provided we have the funding to do so. 

We are regulated by the FDA under the Federal Food, Drug and Cosmetics Act, as well as by other federal, state and local agencies. We hold several FDA product approvals including for both drugs and medical devices.

As of December 31, 2019, we had approximate balances of $11.8 million of cash and cash equivalents, $14.3 million of investments available-for-sale, working capital of $24.5 million and an accumulated deficit of $306.5 million. Net cash used in operating activities for the twelve months ended December 31, 2019 was approximately $27.3 million. We will require significant additional capital to sustain our operations and make the investments needed to execute our longer-term business plan.

Hemodialysis is the primary treatment modality for ESRD employed in the United States with approximately 90% of all dialysis patients receiving in-center hemodialysis. We do not currently compete in the peritoneal or home dialysis segments. Hemodialysis treatments are primarily performed in freestanding clinics, as well as in some hospitals. The majority of dialysis services are performed by national and regional for-profit dialysis chains. Based on data published by the United States Renal Data Systems (“USRDS”) we estimate that there are approximately 7,300 Medicare-certified hemodialysis treatment clinics in the United States. The two largest national for-profit dialysis chains service approximately 73% of the domestic in-center hemodialysis market. According to the most recent statistics published by USRDS, there were approximately 523,000 dialysis patients in the United States as of the end of 2017, of which approximately 468,000 were receiving hemodialysis.

Based on a global market study published by a major dialysis products manufacturer, the global ESRD population receiving some form of treatment was estimated to be over 3.2 million patients at the end of 2017 with the overall global patient population growing approximately 6% annually. Data from USRDS and the European Renal Association indicates that there are more than two million patients undergoing hemodialysis globally. According to the National Kidney Foundation, 10% of the worldwide population is affected by chronic kidney disease and millions die each year because they do not have access to affordable treatments. We have observed that the ESRD patient population in the United States has grown steadily over the past several decades and we expect the United States dialysis population to grow approximately 3% annually over the next several years. The Asia-Pacific market is projected to experience rapid growth in both the incidence of kidney disease and total treatment in the ESRD population over the next decade. One common side-effect of dialysis treatments is iron deficiency anemia.

The great majority of hemodialysis patients receive dialysis treatment three times per week, or approximately 150 times per year. Most patients have their dialysis treatment performed at a free-standing clinic for permanent loss of kidney function; these are called “chronic” patients. Some have their treatment performed at hospitals for temporary loss of kidney function; these are called “acute” patients. A small percentage of chronic patients receives their treatment at home; these are called “home” dialysis patients. In each setting, a dialysis machine dilutes concentrated solution, such as Rockwell’s concentrate products, with purified water. The resulting solution is called dialysate. Dialysate is pumped through an artificial kidney or filter (called a dialyzer) while the patient’s blood is pumped through a semi-permeable membrane inside the dialyzer in the opposite direction the dialysate is flowing. The dialysate can exchange bicarbonate, sodium, calcium, magnesium and potassium into the patient’s blood while removing fluid and waste. Dialysate generally contains dextrose, sodium chloride, calcium, potassium, magnesium, sodium bicarbonate and citric acid or acetic acid. The patient’s physician chooses the proper concentrations required for each patient based on each particular patient’s needs.

In addition to using concentrate products during every in-center treatment, a dialysis provider also uses other products such as blood tubing, fistula needles, dialyzers, drugs, specialized component kits, dressings, cleaning agents, filtration salts and other supplies, some of which we sell.

Triferic is the first and only FDA-approved iron replacement product indicated for the replacement of iron to maintain hemoglobin in adult patients with hemodialysis-dependent chronic kidney disease ("HDD-CKD"). Each hemodialysis treatment results in a small amount of blood loss due to trapping of red blood cells in the extracorporeal blood circuit and blood loss from vascular access.  This blood loss, when combined with repeated blood draws, increased blood losses from the gastrointestinal (“GI”) tract and stimulation of erythropoiesis by use of erythropoiesis stimulating agents (“ESAs”), frequently results in iron deficiency and anemia in hemodialysis patients. In total, hemodialysis-related and GI iron losses amount to about 1 g - 1.5 g of elemental iron annually, not taking into consideration possible blood losses from dialyzer clotting or bleeding from surgical procedures related to vascular access.

We believe Triferic addresses an important unmet need in the treatment of ongoing iron losses and anemia in ESRD patients. Triferic’s unique mode-of-action distinguishes it from conventional I.V. iron products because Triferic donates iron to transferrin, immediately, and completely, as soon as it enters the blood, providing bioavailable iron to the body. The iron bound to transferrin is transported to the bone marrow to make hemoglobin.  Triferic delivers approximately 5 – 7 mg of iron with every hemodialysis treatment to the bone marrow and maintains hemoglobin without increasing iron stores (ferritin). In addition to the unique mechanism of action of Triferic, our first formulation of the drug is delivered via the dialysate, which is an innovative mode of delivery that we believe adds a convenience factor for the dialysis units.

We developed Dialysate Triferic as the first and only FDA-approved product indicated to replace iron and maintain hemoglobin concentration in adult hemodialysis patients. We developed I.V. Triferic, a novel intravenous (“IV”) formulation of Triferic that would be used for the same indication, if approved, and we have a PDUFA date of March 28, 2020. Descriptions of Dialysate Triferic and I.V. Triferic are set forth below.

Dialysate Triferic received FDA approval in January 2015 and remains the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. In May 2019, we commenced commercial sales of Dialysate Triferic in the United States.

In 2013, we successfully completed two pivotal Phase 3 efficacy trials, called CRUISE-1 and CRUISE-2, for Dialysate Triferic. The CRUISE studies were identical single-blind, placebo controlled, parallel group, multi-center studies comparing Triferic delivered via hemodialysis bicarbonate concentrate to placebo group receiving standard hemodialysis solution, with approximately 600 subjects split evenly between the two studies and treatment arms. Oral or IV iron supplementation was prohibited, and ESA doses were held constant. Both CRUISE studies successfully met their primary endpoint, demonstrating a statistically significant mean change in hemoglobin from baseline to end-of-treatment. Triferic also met key secondary endpoints including maintenance of hemoglobin, maintenance of reticulocyte hemoglobin and increase in serum iron pre-to-post treatment without an increase in ferritin.

In January 2014, we completed our long-term safety study for Triferic which was a prospective, randomized, double-blinded, placebo-controlled, crossover, multicenter, multinational, Phase 3 study with an enrollment of 718 hemodialysis patients in the United States and Canada. This large-scale long-term safety study, coupled with the successful Phase 3 CRUISE studies, dosed over 100,000 Triferic administrations and demonstrated a safety profile similar to placebo.

Dialysate Triferic received a reimbursement J-code on January 1, 2016 from the Centers for Medicare & Medicaid Services (“CMS”), providing that Dialysate Triferic would be reimbursed for administration to dialysis patients within the existing fixed-

In June 2018, the Company determined, based on feedback provided 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 reimbursement within the bundle of payments to dialysis providers, while continuing to develop I.V. Triferic (discussed below). We commercially launched Dialysate Triferic in May 2019. 

We are also developing I.V. Triferic, an intravenous formulation of Triferic, for use by hemodialysis patients in the United States as well as international markets. I.V. Triferic was developed pursuant to a Special Protocol Assessment (“SPA”) with the FDA.  As part of the SPA, the FDA agreed that an equivalence approach would be acceptable for I.V. Triferic. In other words, rather than conducting additional safety and efficacy trials, the FDA agreed that our NDA would be acceptable if we are able to show equivalence between I.V. Triferic and Dialysate Triferic by comparing pharmacokinetic (“PK”) parameters of total iron and transferrin-bound iron of I.V. Triferic to Dialysate Triferic. The formal equivalence study was completed during 2018, and I.V. Triferic met bioequivalence criteria compared with Dialysate Triferic. Because I.V. Triferic is a new formulation and new method of administration, the FDA advised us that it requires a new 505(b)1 NDA. We held a pre-NDA meeting with the FDA during which the FDA agreed that the equivalence study was adequate for submission of an NDA. No other material issues were raised regarding our studies and a potential NDA filing. Based on the data from the equivalence study and feedback received during the pre-NDA meeting, on May 28, 2019, we submitted a NDA seeking FDA approval to market I.V. Triferic in the United States for the clinical indication of replacing iron and maintain hemoglobin in adult dialysis patients. We have a PDUFA date of March 28, 2020.

On November 1, 2018, 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 reimbursement under the CMS Transitional Drug Add On Pricing Adjustment (“TDAPA”) program.  However, based on the CMS Guidance, we believed that, if approved by the FDA on or after January 1, 2020, I.V. Triferic would be eligible for separate sole source payment with a separate J-Code for a two-year timeframe. However, on October 31, 2019, CMS finalized revised guidance regarding the TDAPA program that significantly limited the eligibility of new products for TDAPA to only certain NDA types, as classified by the FDA. Pursuant to the revised guidance, I.V. Triferic will not be eligible for TDAPA.

The current standard of care for treating anemia in HDD-CKD patients includes injectable ESAs and IV iron products. ESAs and IV iron products are often used together to address the two primary causes of anemia in dialysis patients: low erythropoietin (“EPO”) levels and iron deficiency.  EPO is a hormone that is produced by the kidneys and stimulates red blood cell production in the bone marrow. In patients with CKD, the kidneys do not make enough EPO and as a result the bone marrow makes fewer red blood cells, causing anemia. ESAs are synthetic recombinant versions of human EPO that are administered to CKD patients to stimulate EPO production. Administration of ESAs creates a significant demand for iron in the bone marrow, since iron is a critical building block for hemoglobin that is contained in red blood cells. CKD patients often have deficient serum iron levels, which can be caused by a number of factors including, but not limited to, blood lost during hemodialysis treatments and related lab testing, the limited diets of CKD patients, and iron sequestration and reduced absorption of dietary iron which are caused by elevated levels of hepcidin, a hormone that regulates iron metabolism. Since iron is a critical component of hemoglobin production, reduced levels of iron can cause iron deficiency anemia.  IV iron is used to support anemia management in dialysis patients to achieve or maintain an iron replete state prior to, during and following initiation of ESA therapy. IV iron products are macromolecular complexes which are taken up by macrophages where iron gets stored. Iron complexes are metabolized within the macrophages to release iron so that it can bind to transferrin in plasma - the iron carrier in the circulation. Transferrin carries the iron to the bone marrow for hemoglobin generation during red cell production. Due to the inflammation present in hemodialysis patients, hepcidin, the master molecule responsible for regulation of iron absorption from the GI tract and export of recycled iron from the macrophages is released, thereby blocking the release of iron from macrophages, which is referred to as iron sequestration.  This reduces the efficiency of iron delivery to the bone marrow for erythropoiesis, leading to a state of functional iron deficiency. Since IV iron finds a depot in macrophages it can be administered in large doses and is therefore ideally suited as a replacement therapy in iron depleted patients. Consistent with this mechanism of action, IV iron products were approved as large dose injection/infusion to replenish and restore iron stores in iron-depleted patients (serum ferritin level < 200 ng/mL) with iron deficiency anemia. However, since IV iron has been the only therapy available for hemodialysis patients for over 30 years it has been commonly used off-label

Triferic is structurally and functionally different from IV iron and is specifically FDA-approved to treat the small amounts of iron losses that all dialysis patients experience. Triferic is unique in molecular structure, mode-of-action (bypassing the hepcidin induced block to iron release from the macrophages) and the FDA-approved clinical indication (to replace iron and maintain hemoglobin in adult hemodialysis patients).  All components of Triferic are physiologic and present in all mammals. Triferic is used proactively in hemodialysis patients to maintain iron homeostasis such that the amount delivered to the patient and to the bone marrow for erythropoiesis closely approximates the amount lost.  Consequently, tissue iron overload is avoided, unlike when iron-carbohydrate complexes are administered proactively. Triferic delivers iron and maintains hemoglobin without increasing iron stores (ferritin) and thus addresses an unmet need.  Finally, Triferic has demonstrated an excellent safety profile in clinical trials and in the Company’s sample demonstration program. No reported instances of anaphylaxis have been received during more than 1,000,000 doses administered and Triferic can be administered even to patients with history of allergic reactions to IV iron.

We manufacture, sell, deliver and distribute hemodialysis concentrates, along with certain ancillary products. As one of the two major suppliers in the United States, our dialysis concentrate products, as more fully described below, are used to maintain human life by removing toxins and replacing critical nutrients in the dialysis patient’s bloodstream.  We use Baxter Healthcare

Dialysate concentrates accounted for approximately 96% of our 2019 revenue. Approximately 89% of our 2019 sales were to distributors and customers for use in the United States.  All of our concentrate products are manufactured according to Association for the Advancement of Medical Instrumentation guidelines and current good manufacturing practices (“cGMP”) established pursuant to Title 21 of the Code of Federal Regulations, Part 820 (“21 CFR 820”). Our concentrate products are diluted with purified water on-site at the clinic in the dialysis machine, creating dialysate, which works to clean the patient’s blood.

Our Dri-Sate Concentrate is our original acetic acid-based product.  Dri-Sate is packaged as a dry powder acid concentrate for use with our Dry Acid Concentrate Mixer.  Dri-Sate is packaged as dry acid concentrate in 25 gallon cases.

Our RenalPure Liquid Concentrate is our original acetic acid-based product and is packaged in 55 gallon drums and four one gallon jugs to a case. 

Our Dry Acid Concentrate Mixer is designed for our CitraPure and Dri-Sate Dry Acid products and enables the clinic to mix acid concentrate on-site.  Clinics using our Dry Acid Concentrate products realize numerous advantages, including lower cost per treatment, reduced storage space requirements, reduced number of deliveries and more flexibility in scheduling deliveries, while enabling us to reduce distribution and warehousing costs.

We offer certain ancillary products to selected customers including cleaning agents, filtration salts and other supplies used by hemodialysis providers.

In 2016, we licensed the commercialization rights for Dialysate Triferic for the Chinese market to Wanbang, a subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd. ("Fosun Pharma").  The People’s Republic of China is expected to become the largest ESRD market in the world over the next several years. Commercial sales activity in this market will commence following regulatory or registration approval. Under the terms of the Wanbang Agreement, we received an upfront payment of $4 million, which we are recognizing as revenue over the term of the agreement. Rockwell may also receive milestone payments of up to an additional $35 million over the life of the agreement in regulatory and revenue milestone payments, beginning with regulatory approval. We are also entitled to a transfer price on product sold to Wanbang that includes a double digit royalty, and Wanbang is responsible for the cost of the clinical trials and regulatory approval program in China. We retain manufacturing responsibilities for Dialysate Triferic for China. In March 2019, we entered into an amendment to the Wanbang Agreement that provided Wanbang with rights to I.V. Triferic in China.

We have also executed a distribution agreement to market our Triferic products in Canada with RMC Health Care Inc. We expect to file for regulatory approval of I.V. Triferic in 2020, and if approved, we are entitled to receive a transfer price based on our partner’s sales price in Canada. Further, in 2017, we licensed the liquid formulation of Dialysate Triferic to Commercializadora Biorenal SpA in Chile and Quimica Europea in Peru. These distributors are responsible for obtaining regulatory approvals, and we are entitled to receive a fixed transfer price for sales of Dialysate Triferic in those markets. In January 2019, we received regulatory approval for Dialysate Triferic in Peru, representing the first approval of a Triferic product outside the United States, and we expect our partner to commercialize the product beginning in 2020.  

Dialysate Triferic is approved for commercial sale in the United States and Peru, and 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 I.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, we completed two clinical pharmacology studies in 2019, which demonstrated no ethnic difference in Triferic PK in Chinese subjects compared to U.S. subjects. In December 2019, we and Wanbang met with the National Medical Products Administration ("NMPA"), China’s equivalent of the FDA, to discuss the results of the PK studies and whether they would be sufficient to support a regulatory submission for Dialysate Triferic in China. During the meeting, we and Wanbang received guidance from NMPA that an additional clinical study would be required to support a regulatory submission, and accordingly we are working with Wanbang to determine the scope and timing of such clinical study. Under our agreement with Wanbang, Wanbang is responsible for all clinical development costs required to support the approval of Triferic in China.

Pursuant to the Distribution Agreement, Baxter is our exclusive agent for commercializing our hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years ending October 2, 2024. We retain sales, marketing and distribution rights for our hemodialysis concentrate products for our international customers and in those countries in which we have an established commercial presence. During the term of the Distribution Agreement, Baxter has agreed not to manufacture or sell any competitive concentrate products in the United States hemodialysis market, other than specified products. The Distribution Agreement does not include any of the Company’s drug products. In June 2017, we entered into the First Amendment to Exclusive Distribution Agreement with Baxter (the “Amendment”) (See “Item 3 – Legal Proceedings”).  The terms of the Amendment included, among other things, reduced pricing on certain accounts.  While reducing pricing, the Amendment provided incentives to Baxter to pursue new customers and increase future sales.

Under the Distribution Agreement, Baxter purchases concentrate-related products from us at pre-determined gross margin-based prices per unit adjusted each year during the term and subject to an annual true up. The Distribution Agreement also requires Baxter to meet minimum annual purchase levels, subject to a cure period and certain other relief, in order to maintain its exclusive distribution rights. The minimum purchase levels increase each year over the term of the Distribution Agreement. Purchases in any calendar year that exceed the minimum may be carried forward and applied to future years’ minimum requirements. The Distribution Agreement also contains provisions governing the operating relationship between the parties, our obligations to maintain specified manufacturing capacity and quality levels, remedies, as well as representations, warranties and indemnification obligations of the parties. We continue to manage customer service, transportation and certain other functions for our current customers. Baxter pays us an amount equal to our related costs plus a slight mark-up for these services.

Upon the mutual determination of us and Baxter, the Distribution Agreement also provides that Baxter will pay us up to $10 million to build a new manufacturing facility in the Pacific time-zone that will serve customers in the western United States. The fee payable in connection with building the facility will be reduced to the extent that the facility is not operational within 12 months after the start of construction. Except for any leased components, we will own and operate the facility when completed.

Either party may terminate the Distribution Agreement upon the insolvency or material breach of the other party or in the event of a force majeure. In addition, Baxter may also terminate the Distribution Agreement at any time upon 270 days’ prior written notice to us or if (i) prices increase beyond certain thresholds and notice is provided within 45 days after the true up payment is due for the year in which the price threshold is exceeded, (ii) a change of control of the Company occurs and 270 days’ notice is provided, or (iii) upon written notice that 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. If Baxter terminates the Distribution Agreement under the discretionary termination or the price increase provisions, it would be subject to a limited non-compete obligation in the United States with respect to certain products for a period of two years.

Pursuant to the Distribution Agreement, we received an upfront fee of $20 million. 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. A “Refund Trigger Event” means any of the following: (i) a change of control of the Company involving any of certain specified companies; (ii) a termination by Baxter due to the Company’s bankruptcy or breach, or due to price increases that exceed the stated thresholds; (iii) a termination by either party due to a force majeure; (iv) settlement or adjudication of any claim, action or litigation relating to a covered product that materially and adversely affects Baxter’s commercialization of the product; and (v) any regulatory action or ruling relating to a covered product that materially and adversely affects Baxter’s commercialization of the product. 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 Distribution Agreement’s upfront fee.

The Distribution Agreement may be extended an additional five years by Baxter if Baxter achieves a specified sales target and pays an extension fee of $7.5 million. If the first extension occurs, the Distribution Agreement term may later be extended an additional five years at Baxter’s option at no additional cost.

The majority of our domestic dialysis concentrate products are delivered through our subsidiary, Rockwell Transportation, Inc., which operates a fleet of trucks used to deliver products to our customers.  Rockwell distribution and delivery will continue to operate under the Distribution Agreement on behalf of Baxter for domestic business.   We perform delivery services that are generally not available from common carriers or our competitors, such as stock rotation, non-loading-dock delivery and drum pump-off service.  As a result, we believe we offer a higher level of service than other providers.  Dialysate Triferic is generally delivered to our customers by our third-party logistics provider in the United States.

The top ten dialysis providers treat approximately 426,000 hemodialysis patients in their centers according to an article published by Nephrology News in 2019.  We believe this constitutes approximately 91% of the in-center hemodialysis patients in the United States as of 2019.  We market and sell Dialysate Triferic, and intend to market and sell I.V. Triferic, directly to these customers and independent clinics in the United States. Our global 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.

During the fourth quarter of 2018 and throughout 2019, we assembled sales and marketing leadership and a field-based sales team to support the commercialization of Dialysate Triferic in the United States. The team consists of sales and marketing leaders who have extensive experience selling and marketing products within the ESRD marketplace. This leadership is supported by experienced sales representatives responsible for effectively promoting the product within the United States and clinical nurse educators responsible for supporting the integration of Triferic into United States dialysis clinics. We believe this sales force is appropriately sized for marketing Triferic to the nephrology community within the United States This infrastructure will be leveraged for the launch of I.V. Triferic, if approved.

In the United States, the principal competitor for our concentrate products is Fresenius Medical Care NA (“Fresenius”), a vertically integrated manufacturer and marketer of dialysis devices, drugs and supplies and dialysis clinic operator, which has substantially greater financial, technical, manufacturing, marketing, and research and development resources than us.  Fresenius, through its Fresenius Kidney Care division, operates approximately 2,600 clinics and treats approximately 37% of the in-center hemodialysis patients in the United States.  Fresenius also manufactures and sells a full range of renal products, including dialysis machines, dialyzers, concentrates and other supplies used in hemodialysis.  Fresenius also services clinics owned by others with its products where it commands a market leading position in its key product lines. Fresenius manufactures its concentrate in its own regional manufacturing facilities. Fresenius and Rockwell are the two major dialysis concentrate suppliers in the United States.

We expect to differentiate Triferic for iron maintenance therapy for hemodialysis patients based on its unique mode of action, clinical benefits, ability to lower treatment cost for providers, ease of administration and excellent safety profile.

We are also aware of a class of drugs, known as hypoxia-inducible factor ("HIF") prolyl hydroxylases inhibitors ("PHIs"), or HIF-PHIs, that are in development for a variety of indications, including the treatment of anemia for patients with chronic kidney disease. HIF-PHIs are designed to stimulate erythropoiesis and manage iron utilization and can be administered orally. Certain HIF-PHI compounds, including roxadustat and vadadustat, have reached or completed Phase 3 development in the United States, and a NDA for roxadustat was submitted in the United States in December 2019. If successfully developed and approved, HIF-PHIs could potentially offer a more convenient, more effective and/or safer alternative to injectable ESAs for treatment of anemia in CKD patients while potentially increasing iron availability for hemoglobin synthesis. However, we believe iron replacement therapies, such as Triferic, will continue to be required to address ongoing iron losses in hemodialysis patients as disclosed in the recent roxadustat phase III dialysis study results, where approximately half of the patients on roxadustat were administered IV iron.

The markets for drug products are highly competitive.  Competition in drug delivery systems is generally based on marketing strength, product performance characteristics (i.e., reliability, safety, patient convenience) and product price. Acceptance by dialysis providers and nephrologists is also critical to the success of a product.  The first product on the market in a particular therapeutic area typically is able to obtain and maintain a significant market share. In a highly competitive marketplace and with

Prior to 2011, CMS had paid providers for dialysis treatments under the Medicare program in two parts: the composite rate and separately reimbursed drugs and services.  The composite rate was a payment for the complete dialysis treatment except for physicians’ professional services, separately billed laboratory services and separately billed drugs.  CMS implemented a bundled reimbursement rate in 2011. The bundled rate is a single payment per treatment, thereby eliminating reimbursement for individual drugs and services to providers. Regulations provide that the rate is recalculated each year.  As a result, dialysis drugs are now viewed by providers as an additional cost rather than as a source of revenue. 

We utilize Contract Manufacturing Organizations (“CMOs”)  to manufacture and package our drug products for sale. These contract manufacturers are FDA registered drug manufacturing establishments. We follow defined procedures to qualify manufacturers of our products and to review and approve all manufactured products to ensure compliance with FDA cGMP regulations. We ensure our contract manufactures have established robust quality systems and employ validated processes to ensure the quality and compliance of our drug products to their specifications prior to distribution.

If human clinical trials of a device are required, whether for a 510(k) submission or a PMA application, and the device presents a “significant risk,” the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an investigational device exemption (“IDE”) application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards (“IRBs”), the device may be shipped for the purpose of conducting the investigations without compliance with all of the requirements of the FD&C Act and human clinical trials may begin. The FDA will specify the number of investigational sites and the number of patients that may be included in the investigation. If the device does not present a “significant risk” to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval.

Any devices manufactured or distributed by us pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA and certain state agencies. As a manufacturer of medical devices for marketing in the United States, we are required to adhere to regulations, including 21 CFR 820, which is commonly referred to as the Quality System Regulation, setting forth detailed cGMP requirements, which include testing, control and documentation requirements. We must also comply with medical device reporting regulations which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Under such a scenario, our products may be subject to voluntary recall by us or required recall by the FDA. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. The FD&C Act prohibits the marketing of approved medical devices for unapproved uses.

We are subject to routine inspection by the FDA and certain state agencies for compliance with cGMP requirements and other applicable quality system regulations. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, transportation and disposal of hazardous or potentially hazardous substances.

We have 510(k) clearance from the FDA to market hemodialysis concentrates in both liquid and powder form. In addition, we have received 510(k) clearance for our Dry Acid Concentrate Mixer.

We must comply with the FD&C Act and related laws and regulations, including cGMP, to retain 510(k) clearances. We cannot assure you that we will be able to maintain our 510(k) clearances from the FDA to manufacture and distribute our products. If we fail to maintain our 510(k) clearances, we may be required to cease manufacturing and/or distributing our products, which would have a material adverse effect on our business, financial condition and results of operations. If any of our FDA clearances are denied or rescinded, sales of our products in the United States would be prohibited during the period we do not have such clearances.

The marketing of pharmaceutical products in the United States, such as Triferic, requires the approval of the FDA. The FDA has established regulations, guidelines and safety standards which apply to the pre‑clinical evaluation, clinical testing, manufacturing and marketing of our new iron maintenance therapy product and other pharmaceutical products. The steps required before a pharmaceutical product can be produced and marketed for human use include: (i) pre‑clinical studies; (ii) submission to the FDA of an Investigational New Drug Application (“IND”), which must become effective before human clinical trials may commence in the United States; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of an NDA; and (v) review and approval of the NDA by the FDA. An NDA generally is required for products with new active ingredients, new indications, new routes of administration, new dosage forms or new strengths. An NDA requires that complete clinical studies of a product’s safety and efficacy be submitted to the FDA, the cost of which is substantial. The costs are often less, however, for new delivery systems, which utilize already approved drugs than for drugs with new active ingredients.

Pre‑clinical studies are conducted to obtain preliminary information on a pharmaceutical product’s efficacy and safety in animal or in vitro models. The results of these studies are submitted to the FDA as part of the IND and are reviewed by the FDA before human clinical trials begin. Human clinical trials may begin 30 days after receipt of the IND by the FDA unless the FDA objects to the commencement of clinical trials.

Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase 1 trials consist of testing the product primarily for safety, metabolism and pharmacologic action in a small number of patients or healthy volunteers at one or more doses. In Phase 2 trials, the safety and efficacy of the product are evaluated in a patient population somewhat larger than the Phase 1 trials with the primary intent of determining the effective dose range. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at a large number of test sites. A clinical plan, or protocol, accompanied by documentation from the institutions participating in the trials, must be received by the FDA prior to commencement of each of the clinical trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time.

The results of product development and pre‑clinical and clinical studies are submitted to the FDA as an NDA for approval. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA in a timely manner. The FDA may refuse to file an NDA if it is not sufficiently complete to permit substantive review.  The FDA may deny an NDA by way of a complete response letter if applicable regulatory criteria are not satisfied or it may require additional testing, including pre‑clinical, clinical and or product manufacturing tests. Even if such data are submitted, the FDA may ultimately deny approval of the product. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling, or a change in a manufacturing facility, an NDA supplement may be required to be submitted to the FDA. Product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. The FDA may require testing and surveillance programs to monitor the effect of products which have been commercialized and has the power to prevent or limit further marketing of these products based on the results of these post‑marketing programs.

Manufacturing facilities are subject to periodic inspections for compliance with regulations, such as cGMP requirements, and each domestic drug manufacturing facility must be registered with the FDA. Foreign regulatory authorities may also have similar regulations. We expend significant time, money and effort in the area of quality assurance to comply with all applicable requirements. FDA approval to manufacture a drug is site specific. In the event an approved manufacturing facility for a particular drug becomes inoperable, obtaining the required FDA approval to manufacture such drug at a different manufacturing site could result in production delays, which could adversely affect our business and results of operations. Manufacturers and distributors must comply with various post‑market requirements, including adverse event reporting, re‑evaluation of approval decisions and notices of changes in the product or in the process or procedures used to manufacture a product.

Once an NDA is approved, a product is subject to certain post-approval requirements. As an NDA applicant, we are required to submit to FDA information about any adverse event associated with the use of our approved drug, whether or not the adverse event is considered drug related. If our marketed drug is found to be potentially harmful or does not comply with applicable requirements, we also may recall the product. The FDA regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational

Under the Pediatric Research Equity Act ("PREA"), NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication where orphan designation has been granted.

The federal and state governments in the United States, as well as many foreign governments, from time to time explore ways to reduce medical care costs through health care reform. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical and medical device industry or on our business or operating results. Our activities are subject to various federal, state and local laws and regulations regarding occupational safety, laboratory practices, and environmental protection and may be subject to other present and possible future local, state, federal and foreign regulations. We do not expect that compliance with these regulations, including environmental laws, will have a material adverse impact on our financial condition.

The approval procedures for the marketing of our products in foreign countries vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. We generally depend on our foreign distributors or marketing partners to obtain the appropriate regulatory approvals to market our products in those countries, which generally do not require additional testing for products that have received FDA approval.

However, since medical practice and governmental regulations differ across regions, further testing may be needed to support market introduction in some foreign countries. Some foreign regulatory agencies may require additional studies involving patients located in their countries. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. Issues related to import and export can delay product introduction. Many countries require additional governmental approval for price reimbursement under national health insurance systems.

We are party to a Licensing Agreement between the Company and Charak, LLC (“Charak”) dated January 7, 2002 (the “2002 Agreement”) that grants the Company exclusive worldwide rights to certain patents and information related to our Triferic products.  On October 7, 2018, we entered into a Master Services and IP Agreement (the “Charak MSA”) with Charak and Dr. Ajay Gupta, who serves as Executive Vice President and Chief Scientific Officer of the Company. Pursuant to the Charak 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 provided for a payment of $1,000,000 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. As of December 31, 2019, all payments under the Charak MSA were paid.

Pursuant to the Charak MSA, the aforementioned parties entered into an Amendment, dated as of October 7, 2018 (the “Charak Amendment”), to the 2002 Agreement, under which Charak granted the Company an exclusive, worldwide, non-transferable license to commercialize SFP for the treatment of patients with renal failure. The Charak Amendment amends the royalty payments due to Charak under the 2002 Agreement such that the Company is liable to pay Charak royalties on net sales by the Company of products developed under the license, which includes the Company’s Triferic product, at a specified rate until

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 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 no be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.

Also pursuant to the Charak MSA, the Company and Charak entered into a Technology License Agreement TPN Triferic, dated as of October 7, 2018 (the “TPN Agreement”), pursuant to which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing worldwide certain TPN products incorporating SFP. The license grant under the TPN Agreement continues for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. During the term of the TPN Agreement, the Company is liable to pay Charak a base royalty on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the TPN Agreement, which amount shall not be less than a minimum royalty on net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and no 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 foregoing summary does not purport to be a complete description of the terms of the MSA, the Amendment, the IV Agreement and the TPN Agreement and each is qualified in their entirety by reference to the full text of such documents, which are filed as exhibits to this Annual Report on Form 10-K.

We have several trademarks and service marks used on our products and in our advertising and promotion of our products, and we have applied for registration of such marks in the United States and several foreign countries.  Most such applications have resulted in registration of such trademarks and service marks.

As of December 31, 2019, we owned or had the rights to 25 issued patents (5 U.S. and 20 foreign) and 64 pending applications (5 U.S. and 59 foreign). Patents and patent applications owned or licensed by us include claims to I.V. and Dialysate Triferic compositions, formulations and methods of making, as well as other patent claims, including Erythropoietin Stimulation Agent ("ESA") sparing methods using Triferic, and parenteral nutritional compositions including Triferic.

The raw materials and packaging materials for our hemodialysis concentrates, the components for our hemodialysis kits and the ancillary hemodialysis products distributed by us are generally available from several potential suppliers. The raw materials for our concentrate products consist primarily of chemical ingredients and packaging components, all of which meet or exceed the requirements of United States Pharmacopeia (“USP”).  Key raw materials for our hemodialysis concentrates include citric acid USP, calcium chloride USP, dextrose USP, glacial acetic acid USP, magnesium chloride USP, potassium chloride USP, sodium bicarbonate hemodialysis grade USP and sodium chloride USP, as well as key packaging components such as bottles, caps, bags, boxes and labels. There are multiple potential suppliers for each of these raw materials. We generally negotiate pricing and approximate material quantities for our chemicals on an annual basis and utilize blanket purchase orders with monthly release schedules to meet our needs for production.

We have engaged CMOs for the manufacture and packaging of Triferic. We have two suppliers for the active pharmaceutical ingredient (“API”) utilized in Triferic, two packagers for the powder formulation of Dialysate Triferic and one fill and finish vendor for the liquid formulation of Dialysate Triferic and I.V. Triferic. New production is generally initiated via purchase orders, though we will evaluate the need for supply agreements based on our forecasted product needs. The lead time to qualify and obtain regulatory approval for an additional CMO could be lengthy. Any material dispute, lack of quality of the product, or loss of any significant drug product supplier could have a material adverse effect on our business, financial condition and results of operations.

We operate in one market segment, the hemodialysis market, which involves the manufacture, sale and distribution of hemodialysis products to hemodialysis clinics, including pharmaceutical, dialysis concentrates, dialysis kits and other ancillary products used in the dialysis process.

One customer, DaVita, accounted for 49% of our sales in 2019 and 46% of our sales in 2018.  Our accounts receivable from this customer were $1.2 million and $2.5 million as of December 31, 2019 and 2018, respectively.  In August 2019, we signed a new Products Purchase Agreement with DaVita, with an initial term expiring on December 31, 2023.

In October 2014, we entered into the Distribution Agreement with Baxter, which was amended in June 2017, pursuant to which Baxter received exclusive distribution rights for our concentrate products in the United States.  Our domestic customer contracts for the supply of dialysis concentrate products that permitted assignment to Baxter without consent have been assigned to Baxter.  As a result, for 2019 and 2018, our direct sales to Baxter aggregated approximately 27% and 26% of sales, respectively, and we had a receivable from Baxter of $2.0 million and $2.8 million as of December 31, 2019 and 2018, respectively.

Another customer, Nipro Medical Corporation, accounted for 9% and 10% of our sales in 2019 and 2018, respectively.

DaVita, Baxter, the accounts administered by Baxter, and Nipro Medical Corporation are important to our business, financial condition and results of operations.  The loss of any significant accounts could have a material adverse effect on our business, financial condition and results of operations.

No other customers accounted for more than 10% of our sales in any of the last three years.

See Item 1A “Risk Factors” for a discussion of certain risks related to our key customers.

The majority of our international sales in each of the last two years were sales to domestic distributors that were resold to end users outside the United States.  Our total international sales, including sales made through domestic distributors for resale outside the United States, aggregated 11% and 14%, of our overall sales in 2019 and 2018, respectively.

See Item 1A “Risk Factors” for a discussion of certain risks related to our foreign sales.

As of December 31, 2019, we had 299 employees, substantially all of whom are full time employees. Our arrangements with our employees are not governed by any collective bargaining agreement. Our employees are employed on an “at‑will” basis.

We have invested heavily in the testing and development of Triferic and our Triferic products.  We have engaged outside service providers, contract research organizations, consultants and legal counsel to assist us with clinical trials, product development and obtaining regulatory approval.    We completed human clinical trials and other testing in 2013 and submitted our NDA for Dialysate Triferic to the FDA in 2014. We received FDA approval for Dialysate Triferic in January 2015.

Since the approval of Dialysate Triferic, we have conducted additional clinical studies of Triferic for other indications and presentations, including the IV formulation, a proof of concept clinical study in peritoneal dialysis patients, and a pediatric study of Triferic. We have incurred product development and research costs aggregating approximately $6.9 million and $5.6 million in 2019 and 2018, respectively, with such costs primarily related to Triferic.  Such costs also included efforts to address manufacturing issues in an effort to achieve FDA approval of Calcitriol, which we have since discontinued.

We expect that research and product development spending in 2020 will focus on the Triferic platform, with projects that may include the pediatric study to satisfy FDA and EMA requirements, a Phase 3 study in Europe to support registration for approval, post-marketing studies to further demonstrate the pharmacoeconomics and patient outcomes of Triferic and additional studies of Triferic in new indications.

Our website is included as an inactive textual reference only and nothing on the website is incorporated by reference into this Annual Report on Form 10‑K.

Both formulations of Triferic will be reimbursed “within the bundle,” which means that dialysis providers will not receive any additional amount of reimbursement from Medicare or Medicaid to compensate them for the cost of purchasing and administering Triferic. This reimbursement status may result in a slower rate of commercial adoption, as we must work to show dialysis providers that improved patient outcomes, the reduction of utilization in other therapies and the resulting savings offset the costs associated with Triferic. Additionally, Triferic competes against current anemia therapies (including intravenous iron and the ESA class of drugs) and possibly other future products. Additionally, it may be difficult to gain market acceptance from dialysis chains, anemia managers and nephrologists and such acceptance may be slower than expected, if at all.

Market acceptance will depend on a number of factors, such as demonstration of Dialysate Triferic’s safety and efficacy, cost-effectiveness, and advantages over existing products. Other factors that may impact the commercial success and ultimate profitability of Triferic include:

An adverse development with respect to any of the foregoing may have a material adverse effect on our ability to manufacture and market either formulation of Triferic. We cannot assure you that we will be able to generate meaningful and sustained revenues through the sale of either formulation of Triferic. If we are not successful in commercializing either formulation of Triferic, or are significantly delayed in doing so, our entire investment in Triferic may be of no value, our inventory of finished product may expire or become obsolete (resulting in write-offs of such inventory), our licensing rights could be materially adversely affected and the price of our common stock could substantially decline. Even if we are successful in commercializing either formulation of Triferic, since the market is highly concentrated with two significant suppliers, our continued success may depend on adoption of Dialysate Triferic by the limited number of existing dialysis providers.

We are still in the process of establishing an internal sales organization for the sale, marketing and distribution of Dialysate Triferic, as well as I.V. Triferic (if approved). In order to successfully commercialize Dialysate Triferic, I.V. Triferic and future product candidates, 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, I.V. Triferic, or any future product candidate, 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.

Given that we have recently commenced commercialization of Dialysate Triferic, we cannot predict the rate of future sales and usage of the drug. As of December 31, 2019, we had a gross inventory balance for Dialysate Triferic of $3.5 million, including approximately $2.9 million in Dialysate Triferic’s active pharmaceutical ingredient and $0.6 million in finished goods inventory. Of this amount, we had reserved $2.8 million related to our Dialysate Triferic finished goods and active pharmaceutical ingredient inventory.  As a result of this reserve, our total Dialysate Triferic inventory had a net book value of $0.7 million as of December 31, 2019. The Dialysate Triferic inventory has an initial shelf life ranging from one to three years. If we are unable to utilize some or all of our Dialysate Triferic inventory before its shelf life expires, some or all of our investment in Dialysate Triferic inventory may not be salable. This would reduce the inventory we have available for sale and require us to reserve for the reduction in value, which would likely require us to write-off the value of such inventory. We may also need to reserve for inventory that we estimate will not be sold before such inventory expires. Any such inventory reserve could have a material adverse effect on our business, results of operations, financial position and cash flows.

In order to expand and realize the full potential value of our Triferic franchise, we will need to obtain approval of I.V. Triferic by the FDA, as well as foreign regulators, such as the EMA. We believe that the market opportunity for I.V. Triferic is greater than for Dialysate Triferic. Although we believe that we have sufficient data to support the approval of I.V. Triferic, it is possible that the FDA could request additional data regarding the product or the manufacturing process. Accordingly, there is no guarantee the FDA or any other foreign regulator will approve I.V. Triferic. In reviewing our planned NDA submission for I.V.

The FDA must approve any new indication for an approved product. Dialysate Triferic is approved by the FDA for use in adult patients receiving hemodialysis treatments and has not yet been approved for other indications or for other claims for which we may seek approval, such as ESA-sparing. We are not able to promote Dialysate Triferic or encourage our customers to use Dialysate Triferic for purposes other than the indications of use that have been specifically approved by the FDA as safe and effective. If we are not able to obtain FDA approval for additional indications for Dialysate Triferic or secure an expanded product label, our ability to fully market Dialysate Triferic on the basis of cost savings or improved patient outcomes may be limited, which would limit our ability to take full advantage of Dialysate Triferic’s market opportunity.

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

Our success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization of our drug products and product candidates. The degree of patent protection that will be afforded to our drug products and processes in the United States and in other important markets remains uncertain and is dependent upon the scope of protection afforded to us by the patent offices, courts, administrative bodies and lawmakers in the relevant jurisdictions. We can provide no assurance that we will successfully obtain or preserve patent protection for the technologies incorporated into our drug products and processes, or that the protection obtained will be of sufficient breadth and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect.

While we have an issued patent in the United States and certain other major markets, including Europe and Japan, that covers the I.V. and Dialysate formulations of Triferic, these patents expire in 2029. The previously issued foundational composition-of-matters patents for Triferic expired in 2016. In light of the current patent protection that we have for Triferic, it is possible that a competitor could seek to manufacture a generic version of Triferic using product specifications and manufacturing methods that do not infringe our issued patent. Further, it is possible that a competitor could seek to invalidate our issued Triferic patent.

We also rely on regulatory exclusivity for protection of our drug products, which includes regulatory data protection and market protection. Implementation and enforcement of regulatory exclusivity varies widely from country to country. Failure to qualify for regulatory exclusivity, or failure to obtain or maintain the necessary extent or duration of such protections for our drug products could affect our revenues, our decision on whether to market our drug products in a particular country and could otherwise have an adverse impact on our results of operations. In the United States, our regulatory exclusivity for Dialysate Triferic as a new chemical entity started with FDA approval of the product. Because of the delay between approval and the commercial launch of Triferic, our regulatory exclusivity has expired and we must rely on patent protection for the long-term protection of our Triferic franchise.

We rely on CMOs to manufacture Triferic. If a CMO is unable to manufacture Triferic in sufficient quantities and on a consistent basis, or if it becomes unwilling to produce Triferic for us, we may not be able to supply our customers in a timely manner. For I.V. Triferic and our liquid formulation of Dialysate Triferic, we have a single-source finished goods supplier and do not have a long-term supply contract. If we were to experience a supply disruption, it could take an extended period of time to find and qualify an alternate supplier. The manufacturing facilities and processes used by our CMOs must be approved by the FDA and foreign regulators, where applicable, before the drug products manufactured by such CMOs can be sold. After approval, CMOs must meet certain ongoing regulatory requirements for product testing and stability of our commercially marketed products. We do not control the manufacturing processes of our CMOs and depend on them to comply with current good manufacturing practices (“cGMP”), and obtain and maintain regulatory approval. If approval for a CMO is not received or ongoing testing does not continue to meet approved standards and approval is withdrawn, the CMO’s production would be delayed or suspended, which could adversely affect our Triferic commercialization efforts. If that was to happen, we may be forced to find another capable CMO or shift production to another CMO that is already approved and under contract with us. Any such circumstance could

We may not be able to obtain the raw materials or packaging components we need, or the price of such materials or components may rise significantly, for a variety of reasons, including but not limited to:

Some of the suppliers for our raw materials or packaging components are single-source suppliers. Finding an alternative source can be expensive and take a substantial amount of time, especially when regulatory approval is required to qualify the supplier. If we are unable to obtain our raw materials and packaging components and are not able to establish alternative supply sources, or if the prices for such items increase substantially, our CMOs may not be able to produce the desired quantities of our drug products and our expected gross profit margins may be materially adversely affected.

The regulatory procedures for obtaining marketing approval of drug products and product candidates, including Dialysate Triferic and I.V. Triferic, outside the United States vary from country to country and such approvals can be difficult to obtain. Regulatory approval in foreign countries may require additional clinical testing, such is the case with Triferic and our ability to file for regulatory approval in Europe. These tests may be expensive and time consuming and there can be no assurance as to our ability to achieve a positive result, even if we have had positive clinical trial results in the past. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. Many countries require additional government approval for price reimbursement under national health insurance systems.

Even if we obtain the necessary foreign approval in a particular market, we do not have expertise selling and marketing on an international level and, therefore, may not be successful in realizing commercial value from our drug products. Thus, our strategy is to out-license the rights to our drug products in markets outside the United States to partners who we believe will have the necessary resources and expertise to obtain regulatory approval and ultimately commercialize our out-licensed drug products. However, we may not be successful in finding new partners who will be willing to invest in our drug products outside the United States and even if we are able to find new partners, they may not be able to obtain the necessary foreign regulatory approvals. If we are not successful in out-licensing our drug products outside of the United States or entering into other arrangements with partners capable of obtaining the necessary regulatory approvals to commercialize our drug products, we may be forced to seek regulatory approval and market these products ourselves. If we elect to seek regulatory approval ourselves, it may take longer than expected to obtain such approval and to market and manufacture our products. As a result, we may decide to delay or abandon development efforts in certain markets. Any such delay or abandonment, or any failure to receive one or more foreign approvals, may have an adverse effect on the benefits otherwise expected from marketing in foreign countries.

If we are successful in obtaining partners to develop and commercialize our drug products in foreign markets, we will be dependent upon their effectiveness in selling and marketing our drug products in those foreign markets. These partners may face stiff competition, government price regulations, generic versions of our drug products, violations of our intellectual property rights and other negative events or may otherwise be ineffective in commercializing our drug products, any of which could reduce the market potential for our drug products and our success in those markets.

We may be subject to additional risks if Dialysate Triferic, I.V. Triferic or any other drug product candidates are approved and marketed outside of the United States, including:

As part of our business strategy to expand our drug product portfolio, we are seeking to acquire or in-license other drug products or product candidates that we believe are a complementary fit with our current product portfolio, as well as other product or product candidates that we believe have substantial development potential. We may not be able to identify such products or product candidates. If we do, the negotiation of such arrangements can be a lengthy and complex process and there can be no

In addition, the market potential for new drug products or product candidates is highly uncertain and evaluation of such potential requires significant judgment and assumptions. There is a significant risk that any new drug product may not be able to be brought to market as profitably as expected or at all. If the results of any new drug product initiative are materially worse than expected, it could have a material adverse effect on our business, results of operations, financial position and cash flows.

Medicare and Medicaid fund the majority of dialysis costs in the United States. Many dialysis providers receive the majority of their funding from the government and are supplemented by payments from private health care insurers. These providers depend on Medicare and Medicaid funding to be viable businesses. Changes to health insurance and reimbursement by Congress may have a negative impact on Medicare and Medicaid funding and on reimbursement protocols. If Medicare and Medicaid funding were to be materially decreased, dialysis providers would be severely impacted, increasing our risk of not being paid in full. An increase in our exposure to uncollectible accounts could have a material adverse effect on our business, results of operations, financial position and cash flows.

Since 2011, CMS has continued to modify reimbursement policies for dialysis under the ESRD prospective payment system generally resulting in lower payment to dialysis providers. We anticipate that dialysis providers will continue to seek ways to reduce their costs per treatment due to this change in reimbursement practice, which could reduce our sales and profitability and have a material adverse effect on our business, results of operations, financial position and cash flows.

The Trump administration and members of Congress have introduced legislation in both the House of Representatives and Senate to repeal and/or replace all or part of the Patient Protection and Affordable Care Act ("PPACA"). Such legislation includes potential changes to or the repeal of Medicaid expansion, coverage for pre-existing conditions and insurance coverage minimum benefits. The likelihood of passage and the impact of this legislation is uncertain. However, it could potentially impact reimbursement by Medicare and Medicaid programs for our drug products and dialysis and could negatively affect the ability of certain individuals to obtain coverage. Other federal and state healthcare reform measures could be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, or change the methods used by Medicare and Medicaid to reimburse providers, including the “bundled” payment model and the availability of transitional separate reimbursement.

As a result of these changes to Medicare and Medicaid reimbursement, the dialysis provider industry may continue to consolidate. This may result in increased purchasing leverage for providers across all dialysis product categories and increased pricing pressure on all suppliers to the industry.

Upon the occurrence of a “Refund Trigger Event” under the Distribution Agreement with Baxter, we may be required to repay to Baxter $5.0 million of the $20.0 million upfront fee and a portion of the facility fee. A Refund Trigger Event includes, among other things, termination due to an uncured material breach by us. If we are required to make any such payment to Baxter, we may need to reallocate funds from other parts of our business, which could force us to change or delay plans for use of that

Sales of our medical device products are highly concentrated in a few customers. One customer accounted for nearly half of our sales in each of the last three years and for a substantial number of the clinics we serve. The loss of any of these significant customers could have a material adverse effect on our business, results of operations, financial position and cash flows.

We provided Baxter with certain pricing concessions as an incentive to increase its domestic concentrate business. Baxter may not be successful in increasing its domestic concentrate business. If Baxter is not successful in increasing its concentrate business, we may realize lower operating profit from concentrates as a result.

The primary competitor in the market for our concentrate products is Fresenius, a large diversified company which has financial, technical, manufacturing, marketing, research and management resources substantially greater than ours. We and our distributor, Baxter, may not be able to successfully compete with Fresenius. Fresenius has historically used product bundling and low pricing as a competitive strategy to capture market share of concentrate products. We and Baxter may be at a disadvantage in competing against these strategies to sell concentrate products. Furthermore, Fresenius is vertically integrated and is the largest provider of dialysis services in the United States, treating approximately 37% of all U.S. in-center hemodialysis patients through its clinics. Fresenius has routinely acquired our customers, and it may acquire more of our customers in the future.

A significant portion of our costs relates to chemicals and other raw materials, which are subject to price volatility based on demand and are highly influenced by the overall level of economic activity in the United States and abroad. These costs have tended to rise from year to year and are likely to continue to rise in the future. Under the Distribution Agreement with Baxter, such cost inflation may result in increases in the prices we charge Baxter. If these increases exceed levels specified in the Distribution Agreement, Baxter has the option to terminate the Distribution Agreement and obtain a refund of a portion of the fees (as a Refund Trigger Event) we received from Baxter. Any such termination or refund could have a material adverse effect on our business, results of operations, financial position and cash flows. Additionally, we have been adversely affected by a general shortage in commercial truckers in the United States. This has negatively impacted our profit margins as we pay higher costs to ship products to our customers. Continued increases in shipping costs, or the costs of raw materials, could negatively impact our profit margins, as we may be limited in our ability to pass these costs along to our customers.

We have limited capital resources, a cumulative deficit of approximately $306.5 million since inception and we expect to incur further losses for the foreseeable future. As of December 31, 2019, we had approximately $26.0 million of cash, cash equivalents and investments available-for-sale, and working capital of $24.5 million. Net cash used in operating activities for the year ended December 31, 2019 was approximately $27.3 million.

On March 22, 2019, we entered into a sales agreement with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which we may offer and sell from time to time up to $40,000,000 of shares of common stock through the Agent. We are not required to sell any shares at any time during the term of the sales agreement. Our ability to sell common stock under the sales agreement 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 sales agreement, among other things.

On June 20, 2019, we closed a public offering of 5,833,334 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 February 6, 2020, we closed a public offering of 3,191,489 shares of common stock at a price of $2.22 per share. On February 19, 2020, the underwriter of the public offering exercised its over-allotment option to purchase an additional 478,723 shares of common stock at a price of $2.22 per share in full, which closed on February 21, 2020.

Our forecast of the period of time through which our existing capital resources will be adequate to support our current operations is a forward-looking statement that involves risks and uncertainties. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include, but are not limited to:

If our cash is insufficient to meet our future operating requirements, we will have to raise additional funds. Our capital raising activities may include, but may not be limited to, the issuance of common stock or other securities via private placement or public offerings or the issuance of debt. While we may seek capital through a number of means, there can be no assurance that additional financing will be available on acceptable terms, if at all. Furthermore, additional equity financings may be dilutive to our stockholders and newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock.

Debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business. Additionally, we may have difficulty borrowing money through a term loan or debt facility given the covenants in our distribution agreement with Baxter which prohibit us from entering into a contract encumbering the assets used in our concentrate business. These assets currently constitute a substantial portion of the tangible assets we own. If our development activities require substantial cash resources in the future in excess of our liquid resources on hand and if our cash flows are not sufficient to support financing through unsecured indebtedness, we may not be able to obtain debt financing and our capital financing options may become limited.

Our businesses are highly regulated. The testing, manufacture and sale of the products we manufacture directly or through third party CMOs are subject to extensive regulation by the FDA and by other federal, state and foreign authorities. Before drug product candidates or medical devices, such as our concentrate products, can be commercially marketed in the United States, the FDA must give either premarket approval or 510(k) clearance. After a product is approved, regulatory authorities may impose significant restrictions on a product’s indicated uses or marketing or requirements for potentially costly post-marketing studies. Our drug products are subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record- keeping and reporting of safety and other post-market information. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current cGMP and applicable state laws. As such, we and our CMOs are subject to continual review and periodic inspections to assess compliance with cGMP and state laws. Accordingly, we and our partners must continue to expend time, money and effort in all areas to achieve and maintain regulatory compliance. We are also required to report certain adverse reactions and production problems, if any, to applicable regulatory authorities and to comply with requirements concerning advertising and promotion for our drug products or product candidates.

If non-compliant inventory is sold or if a regulatory agency determines that we are not compliant with any applicable regulatory requirements, we may be subject to warnings from, or enforcement action by, state and federal government authorities, which may include penalties, fines, injunctions, recall or seizure of products, suspension of production, denial of future regulatory approvals, withdrawal or suspension of existing regulatory approvals, operating restrictions, injunctions and criminal prosecution. If regulatory sanctions are applied, the value of our Company and our operating results could be materially and adversely affected. Our business could also be adversely affected by delays in obtaining necessary regulatory approvals and any restrictions placed by the FDA on our intended marketing or the use of our drug products.

Our failure to comply with applicable regulations could also result in product liability litigation against us. In addition, our failure to comply with applicable regulations with respect to our concentrate products could constitute a breach by us of the Distribution Agreement, providing Baxter with various remedies that would be material and adverse to us. Moreover, changes in applicable regulatory requirements could significantly increase the costs of our operations, which, if such higher costs result in price increases that exceed the thresholds specified in the Distribution Agreement, could give Baxter the right to terminate the Distribution Agreement and obtain a partial refund of certain fees paid to us.

The Company was subjected to a proxy contest at the 2017 Annual Meeting of Shareholders, which resulted in the negotiation of changes to the Board and substantial costs were incurred.  A future proxy contest would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and the Board. The potential of a proxy contest could interfere with our ability to execute our strategic plan, give rise to perceived uncertainties as to our future direction, adversely affect our relationships with customers, suppliers, investors, prospective and current team members and others, result in the loss of potential business opportunities or make it more difficult to attract and retain qualified personnel, any of which could materially and adversely affect our business and operating results.

We may also be subject, from time to time, to other legal and business challenges in the operation of our company due to actions instituted by activist shareholders. Responding to such actions, which may include publicity campaigns and, potentially, litigation, could be costly and time-consuming, divert the time and attention of our Board of Directors and management from our business, interfere with our ability to execute our strategic plan, give rise to perceived uncertainties as to our future direction, adversely impact our lobbying efforts, adversely affect our relationships with customers, suppliers,  prospective and current team members and others, result in the loss of potential business opportunities or make it more difficult to attract and retain qualified personnel, any of which could materially and adversely affect our business and operating results. We cannot predict, and no assurances can be given as to, the outcome or timing of any matters relating to actions by activist shareholders or the ultimate impact on our business, results of operations, financial position and cash flows.

We are highly dependent on the product development, clinical and business development expertise of the principal members of our management, scientific and clinical team. Although we have entered into employment agreements with our

Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel is critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of, and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel.

We hired a new Chief Executive Officer and Chief Financial Officer in 2018 and have hired additional executive-level employees who are leading the commercialization of Dialysate Triferic. This leadership transition may 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.

It is possible that we may infringe on intellectual property rights of others without being aware of the infringement. If a third party believes that one of our drug products or product candidates infringes on the third party’s patent, it may sue us even if we have received our own patent protection for the technology. If we infringe the rights of a third party, we could be prevented from manufacturing and selling products, forced to pay damages, compelled to license technology from the party claiming infringement and lose the opportunity to license our technology to others and collect royalty payments, any of which could have a material adverse effect on our business. If Baxter is prevented from selling any of our concentrate or ancillary products due to a patent infringement or if its ability to sell any of our concentrate or ancillary products due to a patent infringement is materially and adversely affected, Baxter may be entitled to terminate our Distribution Agreement and obtain a refund of a portion of the upfront fee and facility fee.

As is common in the biotechnology and pharmaceutical industry, we engage the services of consultants to assist us in the development of our drug products and product candidates. Many of these consultants were previously employed at, may have previously been, or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. As such, the Company advises consultants not to disclose, or use trade secrets, or proprietary information of their former employers or their former or current customers. Although no claims against us are currently pending, we may be subject to claims that these consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to

If concerns are raised regarding the safety of a product candidate as a result of undesirable side effects identified during clinical testing, the FDA may decline to approve the product candidate at the end of the NDA review period or issue a letter requesting additional data or information prior to making a final decision regarding whether or not to approve the product candidate. Following FDA approval, if we or others later identify previously unknown undesirable side effects caused by our product candidate or concentrate products, if known side effects are more frequent or severe than in the past, or if we or others detect unexpected safety signals for such products or any products perceived to be similar to such products, the FDA or other applicable regulatory authorities may require the addition of unfavorable labeling statements, specific warnings or contraindications, may suspend or withdraw their approval of the product, may require it to be removed from the market or may impose restrictions on the distribution or use of the product. Such side effects may also result in litigation against us by private litigants.

We maintain product liability insurance. We cannot be sure that such insurance would be sufficient to protect us against liabilities associated with any of these events in view of our expanding business or that such insurance will remain available at economical levels. We may have significant legal expenses that are not covered by insurance. In addition, our reputation could be damaged by such sanctions or product liability litigation and that could harm our business reputation and marketing ability. Any such sanctions or litigation could also hurt our ability to retain product liability insurance or make such insurance more expensive. In any such event, our business, results of operations, financial position and cash flows could be materially adversely affected.

We use hazardous materials, including chemicals and biological agents and compounds, which could be dangerous to human health and safety or the environment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our pharmaceutical development efforts.

In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. If one of our employees was accidentally injured from the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment would be covered by our workers’ compensation insurance policy. However, we do not carry specific biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended, or operations otherwise affected.

In addition to the purported class action, shareholder derivative action and SEC investigation filed against us as described in Note 15 “Commitments and Contingencies” in the accompanying consolidated financial statements for the year ended December 31, 2019, it is possible that other legal proceedings 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 15 “Commitments and Contingencies – Litigation” in the accompanying consolidated financial statements for the year ended December 31, 2019.

We received letters in 2017 from the SEC informing us that the SEC was conducting an inquiry into our accounts receivable and inventory, calculation practices regarding such information, as well as disclosure regarding our dispute with Baxter and requesting that we voluntarily provide certain information and documents relating to our accounts receivable and inventory calculations and reporting practices, as well as information relating to the Baxter dispute. In 2018, we received additional requests (including a subpoena) from the SEC asking for certain records and information relating to the termination of our prior Chief Executive Officer and Chief Financial Officer, as well as the facts and circumstances leading up to the resignation of our prior audit firm. The SEC’s letters stated that the SEC’s inquiry should not be construed as an indication that any violation of any federal securities laws has occurred. We have provided all of the requested information and documents to the SEC from the 2017 requests and are substantially complete in providing the requested information and documents from the 2018 subpoena. We have and will continue to fully cooperate with the SEC investigation. At this stage, we are unable to predict when the SEC’s inquiry will conclude or what the consequences may be. Furthermore, any continuation of the SEC inquiry may cause a diversion of management’s time and attention, which could have a material adverse effect on our business, results of operations, financial position and cash flows.

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 - Restatement of Unaudited Condensed Consolidated Financial Statements 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, 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 weaknesses 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, regulatory or other actions or demands in connection with the restatement or other matters. Any such proceedings will, regardless of the outcome, consume a significant amount of the Board’s and management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail 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, stockholders, or other counterparties to lose confidence in us. Any of these occurrences could have a material adverse effect on our business, results of operations, financial condition and stock price.

Any future sales by us of substantial amounts of our common stock, or the possibility of such sales, could adversely affect the market price of our common stock and also impair our ability to raise capital through an offering of our equity securities in the future. In the future, we may issue additional shares or warrants in connection with investments or for other purposes considered advisable by our Board of Directors. Any substantial sale of our common stock may have an adverse effect on the market price of our common stock and may dilute the economic value and voting rights of existing stockholders.

In addition, as of December 31, 2019, there were 6,481,095 shares issuable upon the exercise of the then-outstanding and exercisable stock options and 1,728,929 shares issuable upon the exercise of then-outstanding stock options that were not yet exercisable. The market price of the common stock may be depressed by the potential exercise of these options. The holders of these options are likely to exercise them when we would otherwise be able to obtain additional capital on more favorable terms than those provided by the options.

Our stock price, like the market price of many stocks in the specialty pharmaceutical, biotechnology and pharmaceutical industries, is volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

We have substantial net operating loss carryforwards ("NOLs") available to reduce future taxable income. Our ability to use our NOLs to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the NOLs. In addition to uncertainty regarding our future profitability, our use of the NOLs may be subject to annual limitations under the “ownership change” provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which may result in the expiration of some or all of the NOLs before they can be used. In general, an “ownership change” occurs if, during a rolling three-year period, there is a greater than 50% change in the percentage ownership of the corporation by 5% owners (and persons treated as 5% owners), as defined in Section 382 and related regulations. We may experience an ownership change in the future as a result of future changes in our stock ownership. The inability to use our NOLs to reduce federal taxable income could result in increased future tax liability to us and reduce the cash that would otherwise be available to our business.

Since inception, we have not paid any cash dividend on our common stock and do not anticipate paying such dividends in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors and depends upon our earnings, capital requirements, financial condition and requirements, future prospects, restrictions in future financing agreements, business conditions and other factors deemed relevant by the Board. We intend to retain earnings and any cash resources to finance our operations. Therefore, it is highly unlikely we will pay cash dividends.

Our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of the company and could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions, among other things:

We lease 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 lease 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 in February 2023. In addition, we executed a lease for 4,100 square feet of office space in Hackensack, New Jersey with a lease term beginning on April 1, 2019 and expiring on July 1, 2024.

We use each of our facilities to manufacture and warehouse our products. All such facilities and their contents are covered under various insurance policies which management believes provide adequate coverage. We use the office space in Wixom, Michigan as our principal administrative office and the office space in Hackensack, New Jersey for senior executives and other local administrative staff. With our continued growth we expect that we will require additional office space, manufacturing capacity and distribution facilities to meet our business requirements.

Our common stock trades on The Nasdaq Global Market under the trading symbol “RMTI”.

As of February 28, 2020, there were 26 holders of record of our common stock.

Our Board of Directors has discretion whether or not to pay dividends. Among the factors our Board of Directors considers when determining whether or not to pay dividends are our earnings, capital requirements, financial condition, future business prospects and business conditions. We have never paid any cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. We intend to retain earnings, if any, to finance the development and expansion of our operations.

There were no unregistered sales of equity securities which have not been previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K during the year ended December 31, 2019.

The information contained under “Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10‑K under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” is incorporated herein by reference.

Not applicable.

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 I.V. Triferic, a novel intravenous formulation of Triferic that would be used for the same indication, if approved. Descriptions of Dialysate Triferic and I.V. Triferic are set forth below.

Dialysate Triferic, our dialysate formulation of 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 reimbursement J-code on January 1, 2016 from the CMS, 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.  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, which became effective on July 1, 2019.

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 finished goods.  However, due to the delays in launching and feedback received from CMMI in March 2018 regarding near-term approval, our inventory reserves for Triferic increased to $11.6 million as of December 31, 2018. We had a total inventory reserve of $5.8 million as of December 31, 2018, net of inventory destroyed or used for samples during 2018 was $5.8 million.

As of December 31, 2019, we had $0.6 million of Dialysate Triferic finished goods inventory that could expire within the next 12 months and against which we have reserved $0.4 million. As of December 31, 2019, we also had approximately $2.9 million of API against which we have reserved $2.4 million and classified $0.4 million of API as non-current inventory. Depending on the success of our commercialization of Dialysate Triferic, additional amounts or all of our current investment in Dialysate Triferic finished goods inventory and some or all of our API inventory may need to be written off. Additional inventory write-offs will not have a material negative impact on our cash flow, but could have a material adverse impact on our reported results of operations and financial position.

We are also developing I.V. Triferic, an intravenous injection of Triferic, for use by hemodialysis clinics in the United States as well as international markets. Based on the data from a clinical equivalence study and feedback received during the pre-NDA meeting, on May 28, 2019, we submitted a NDA seeking FDA approval to market I.V. Triferic in the United States for the clinical indication of replacing iron and maintain hemoglobin in adult dialysis patients. We have a PDUFA date of March 28, 2020.

While we intend to market and sell Dialysate Triferic and I.V. Triferic directly in the United States, our international 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.

Dialysis Concentrates

We manufacture, sell, deliver and distribute hemodialysis concentrates, along with a 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% of our revenues for the year ended December 31, 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.

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.  To date, we have not commercially launched Calcitriol. Following a strategic review of this product, including pricing, commercial distribution and marketing, manufacturing efficiencies and capacity (including potential capital investment), we have determined commercialization of Calcitriol in the U.S. would not be 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 on a dose-equivalent basis, and as a result it would be difficult for us to market Calcitriol profitably. As a result of this decision, we recorded a full inventory reserve in the fourth quarter of 2018, reflecting the remainder of our Calcitriol inventory.

Clinical Development

Although Triferic is approved for commercial sale in the United States, it is not approved for sale in other major markets globally.  We have received regulatory guidance from the EMA regarding the clinical studies that are needed to file for approval of I.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, we completed two clinical pharmacology studies in China during 2019. We expect Wanbang to initiate additional clinical studies during 2020 that are necessary to support a submission for regulatory approval in China.

As a post-approval requirement under the Pediatric Research Equity Act, we are required to conduct a further clinical study of the effectiveness of Triferic in a pediatric patient population. We have reached agreement with the FDA on the design of this study and we expect to initiate enrollment in the study during 2020, assuming we have the liquidity and capital resources to do so. 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 Triferic has the potential to be developed for use in other indications in which iron replacement is required. In addition, we are assessing investing in potential clinical programs to evaluate other product presentations of Triferic within ESRD.

As of December 31, 2019, we had approximately $26.0 million of cash, cash equivalents and investments available-for-sale, and working capital of $24.5 million. Net cash used in operating activities for the year ended December 31, 2019 was approximately $27.3 million. On June 20, 2019, the Company closed a public offering of 5,833,334 shares of common stock at a

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 of Dialysate Triferic and I.V. Triferic, if approved, in the United States; the timing and magnitude of cash received from drug product sales; the timing and expenditures associated with the development of 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, 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.  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. 

We believe that our ability to fund our activities in the long term will be highly dependent upon our ability to successfully launch Dialysate Triferic and to obtain regulatory approval for, and successfully launch, I.V. Triferic. Our commercialization of Dialysate Triferic and I.V. Triferic (if approved) is subject to significant risks and uncertainties, such that there can be no assurance that we will be successful in completing the commercialization in accordance with our plans, or at all. If our commercialization of Dialysate Triferic and/or I.V. Triferic should be delayed for any reason, 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 though we began commercialization of Dialysate Triferic 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 business. 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 stockholders’ interests and, in such event, the market price of our common stock may decline.

Net cash used in operating activities was $20.4 million for the year ended December 31, 2018. The net loss for this period was higher than net cash used in operating activities by $11.7 million, which was primarily attributable to non-cash expenses of $15.1 million, consisting of, $8.8 million of inventory reserves, $4.4 million of stock-based compensation, $1.1 million of research and development licenses acquired, $0.7 million of depreciation and amortization, and $0.2 million of realized losses on sale of investments available-for-sale, primarily offset by an increase of $0.8 million in inventory, a decrease of $2.4 million in deferred revenue related to the recognition of revenue from our licensing agreements, an increase of $0.6 million in accounts receivable related to increases in revenues related to our international sales and an increase of $0.4 million in settlement fees related to the Settlement Agreement between the Company and its former directors and officers.

Net cash provided by investing activities was $12.7 million during the year ended December 31, 2018. The net cash provided was primarily due to the sale of our available-for-sale investments of $33.9 million, offset by $20.2 million used for the purchase of investments available-for-sale, $0.7 million for the purchase of equipment and $0.3 million for the purchase of research and development licenses acquired.

Net cash provided by financing activities was $22.0 million during the year ended December 31, 2018. The net cash provided was primarily due to the proceeds received from the issuance of the Company’s common stock of $21.9 million, net of issuance costs, and proceeds received from the exercise of employee stock options of $0.1 million.

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and contingencies. All significant estimates, judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary. Actual results could differ from these estimates. Changes in estimates are reflected in our financial statements in the period of change based upon on‑going actual experience, trends, or subsequent realization depending on the nature and predictability of the estimates and contingencies.

Interim changes in estimates are generally applied prospectively within annual periods. Certain accounting estimates, including those concerning revenue recognition, allowance for doubtful accounts, inventory reserves, share based compensation, impairments of long‑lived assets, and accounting for income taxes, are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgments and estimates. These are described below. For further information on our accounting policies, see Note 3 to our Consolidated Financial Statements.

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.

Accounts receivable are stated at invoice amounts. The carrying amount of trade accounts receivable is reduced by an allowance for doubtful accounts that reflects our best estimate of accounts that may not be collected. We review outstanding trade accounts receivable balances and based on our assessment of expected collections, we estimate the portion, if any, of the balance that may not be collected as well as a general valuation allowance for other accounts receivable based primarily on historical experience. All accounts or portions thereof deemed to be uncollectible are written off to the allowance for doubtful accounts.

Inventory is stated at the lower of cost or net realizable value.  Cost is determined on the first‑in first‑out (FIFO) method.  Inventory that is not expected to be converted to cash over the next year is classified as non-current.  Our policy is to reserve for our drug product inventory that we determine is unlikely to be sold to, or if sold, unlikely to be utilized by our customers on or before its expiration date.  

Property and equipment are recorded at cost and are depreciated using the straight‑line method over the useful lives of the assets, which range from three to ten years. Expenditures for routine maintenance and repairs are expensed as incurred. Leasehold improvements are amortized using the straight‑line method over the shorter of the useful lives or the related lease term.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment losses on long-lived assets, such as real estate and equipment, are recognized when

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives.

We review goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values.

Intangible assets with definite lives are amortized over their estimated useful lives. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

Definite-lived intangible assets consist of our license fees related to the technology, intellectual property and marketing rights for Triferic covered under certain issued patents have been capitalized and are being amortized over the life of the related patents which is generally 17 years.

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 $2.0 million and $2.1 million related to the Baxter agreement during the years ended December 31, 2019 and 2018, respectively.

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 $0.3 million during the years ended December 31, 2019 and 2018, respectively. Deferred revenue related to the Wanbang agreement totaled $2.9 million and $3.2 million as of December 31, 2019 and 2018, respectively.

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 judgment. For the years ended December 31, 2019 and 2018, 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.

We estimate our income tax provision to recognize our tax expense and our deferred tax liabilities and assets for future tax consequences of events that have been recognized in our financial statements using current enacted tax laws. Deferred tax assets must be assessed based upon the likelihood of recoverability from future taxable income and to the extent that recovery is not likely, a valuation allowance is established. The allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgment about whether the related deferred tax asset may be realized. These calculations and assessments involve complex estimates and judgments because the ultimate tax outcome can be uncertain and future events unpredictable. If we determine that the deferred tax asset will be realized in the future, it may result in a material beneficial effect on earnings.

None.

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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, internal control over financial reporting determined to be effective provides only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019. In making their assessment of internal control over financial reporting, our management used the criteria described in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included documenting, evaluating and testing of the design and operating effectiveness of our internal control over financial reporting. Based on this evaluation, and due to the material weaknesses described below, we concluded that we did not maintain effective control over financial reporting at a reasonable assurance level as of December 31, 2019.

Management has taken a number of steps with the intention of remediating the deficiencies described above. In June 2019, we hired a new Principal Accounting Officer with experience in SEC reporting and internal control over financial reporting. We updated and implemented change management and user access policies. We added additional review controls to support change management and user access protocols outside of policy procedures.

The remediation of the material weaknesses described above is among our highest priorities. Our Audit Committee will continually assess the progress and sufficiency of these initiatives and make adjustments as and when necessary. As of the date of this report, our management believes that our efforts, when completed, will remediate the material weaknesses in internal control over financial reporting as described above.

Marcum LLP, an independent registered public accounting firm, as auditors of our consolidated financial statements, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2019. Marcum’s report, which expresses an adverse opinion on the effectiveness of our internal control over financial reporting due to the material weaknesses, is included herein.

The attestation report required under this Item 9A can be found on page F-4 in Consolidated Financial Statements for Rockwell Medical, Inc. and Subsidiaries found at the end of this Annual Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm.”

As described above, our management is taking action intended to remediate such material weaknesses.

As described in our 2018 Form 10-K filed on March 15, 2019, our management identified material weaknesses in our internal control over financial reporting and continues to remediate items identified.

The information required by this Item 10 is incorporated herein by reference to information in our proxy statement for our 2020 Annual Meeting of Stockholders (the “2020 Proxy Statement”), which we expect to be filed with the SEC within 120 days of the end of our fiscal year ended December 31, 2019, including under headings “Election of Directors,” “Executive Officers” and “Corporate Governance.”

The information required by this Item 13 is incorporated herein by reference to information in our 2020 Proxy Statement, including under headings “Independence” and “Related Party Transactions.”

The information required by this Item 14 is incorporated herein by reference to information in our 2020 Proxy Statement, including under heading “Independent Accountants.”

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.

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stuart Paul and Angus Smith, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all documents in connection therewith, with the Securities and Exchange commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

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

As of December 31, 2019, the Company had approximate balances of $11.8 million of cash and cash equivalents, $14.3 million of investments available-for-sale, working capital of $24.5 million and an accumulated deficit of $306.5 million. Net cash used in operating activities for the year ended December 31, 2019 was approximately $27.3 million. The Company evaluated the Company’s ability to continue as going concern for at least the next 12 months from the filing of this report.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Rockwell Transportation, Inc. and Rockwell Medical India Private Limited. Rockwell Medical India Private Limited was formed in 2017 for the purpose of conducting certain commercial activities in India. 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.

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.

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

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.

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

For the years ended December 31, 2019 and 2018, license fee revenue was $2.3 million and $2.4 million, respectively. For the years ended December 31, 2019 and 2018, product sales revenue was $59.0 million and $61.0 million, respectively.

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

There were no impairment losses recognized related to any receivables arising from the Company’s contracts with customers for the years ended December 31, 2019 and 2018, respectively.

For the years ended December 31, 2019 and 2018, the Company did not recognize material bad-debt expense and there were no material contract assets recorded on the consolidated balance sheet as of December 31, 2019 and 2018, respectively.  The Company does not generally accept returns of its concentrate products and no reserve for returns of concentrate products was established as of December 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.

For the year ended December 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 recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, totaled $12.1 million and $14.3 million for each of the years ended December 31, 2019 and 2018. 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 totaling $9.1 million, which will be amortized through expiration of the agreement on October 2, 2024.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, allowance for doubtful accounts, inventory reserves, accrued expenses, deferred license revenue, stock-based compensation, impairments of long‑lived assets, and accounting for income taxes.

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents excluding items held in Investments - Available for Sale as noted below. Cash and cash equivalents include cash held in banks, money market mutual funds and unrestricted certificates of deposit. The Company’s cash and cash equivalents exceeds the Federal Deposit Insurance Corporation insured limits. The Company has not experienced any credit losses for amounts in excess of insured limits.  Currently the Company does not reasonably believe a significant risk of credit loss exists.

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

The Company has designated its short term investments as of each balance sheet date as available-for-sale securities and accounts for them at their respective fair values. Available-for-sale securities are measured at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders' equity until their disposition. We review all available-for-sale securities at each period end to determine if they remain available-for-sale based on our then current intent and ability to sell the security if required to do so. The cost of securities sold is based on the specific identification method.

All of our investments available-for-sale are subject to periodic impairment review. We recognize an impairment charge when a decline in the fair value of our investments below the cost basis is judged to be other than temporary.

Accounts receivable are stated at invoice amounts. The carrying amount of trade accounts receivable is reduced by an allowance for doubtful accounts that reflects our best estimate of accounts that may not be collected. We review outstanding trade accounts receivable balances and based on our assessment of expected collections, we estimate the portion, if any, of the balance that may not be collected as well as a general valuation allowance for other accounts receivable based primarily on historical experience. All accounts or portions thereof deemed to be uncollectible are written off to the allowance for doubtful accounts.

Inventory is stated at the lower of cost or net realizable value.  Cost is determined on the first‑in first‑out (FIFO) method. Inventory that is not expected to be converted to cash over the next year is classified as non-current.  Our policy is to reserve for our drug product inventory that we determine is unlikely to be sold to, or if sold, unlikely to be utilized by our customers on or before its expiration date.  

Property and equipment are recorded at cost and are depreciated using the straight‑line method over the useful lives of the assets, which range from three to ten years. Expenditures for routine maintenance and repairs are expensed as incurred. Leasehold improvements are amortized using the straight‑line method over the shorter of the useful lives or the related lease term.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. For the years ended December 31, 2019 and 2018, there were no impairments of long-lived assets.

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. We do not amortize goodwill and intangible assets with indefinite useful lives.

We review goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values.

Intangible assets with definite lives are amortized over their estimated useful lives. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

Definite-lived intangible assets consist of our license fees related to the technology, intellectual property and marketing rights for Triferic covered under certain issued patents have been capitalized and are being amortized over the life of the related patents which is generally 17 years.

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 $2.1 million during each of years ended December 31, 2019 and 2018, respectively. Deferred revenue related to the Baxter agreement totaled $9.1 million and $11.1 million as of December 31, 2019 and 2018, respectively.

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.

During the year ended December 31, 2017, 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 $0.3 million during each of the years ended December 31, 2019 and 2018. Deferred revenue related to the Wanbang agreement totaled $2.9 million and $3.2 million as of December 31, 2019 and 2018, respectively.

The effects of tax positions are generally recognized in the financial statements consistent with amounts reflected in returns filed, or expected to be filed, with taxing authorities. For tax positions that the Company considers to be uncertain, current and deferred tax liabilities are recognized, or assets derecognized, when it is probable that an income tax liability has been incurred and the amount of the liability is reasonably estimable, or when it is probable that a tax benefit, such as a tax credit or loss carryforward, will be disallowed by a taxing authority. The amount of unrecognized tax benefits related to current tax positions is insignificant. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense.

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 $6.9 million and $5.6 million for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2018, an additional $1.1 million was expensed related to our product license agreement for exclusive worldwide rights to certain patents and information related to our Triferic product.

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 judgment. For the years ended December 31, 2019 and 2018, 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 (See Note 13).

In addition to awards with service-based vesting conditions, the Company has granted performance share units with market and performance conditions, to certain of its executives. The fair value of awards with performance conditions are based on the fair value of the Company’s common stock on the date of grant. The fair value of awards with market conditions are based on a Monte Carlo simulation model. Assumptions and estimates utilized in the calculation of the fair value of the market awards include the risk-free interest rate, dividend yield, average closing price, expected volatility based on the historical volatility of the Company, and the remaining period of the award.

The awards with performance conditions vest and result in issuance, at settlement, of common stock for each recipient based upon the recipient’s continued employment with the Company through the settlement date of the award and the Company’s achievement of specified milestones. The requisite service period of the awards with performance conditions is generally 1-2

The awards with market conditions vest and result in the issuance of common stock based upon the recipient’s continuing employment with the Company through the settlement date of the award related to the market capitalization criteria. The fair value related to the awards with market conditions is recorded as stock-based compensation expense over the period from date of grant to the settlement date regardless of whether the market capitalization is achieved.

In the normal course of business, the Company may become subject to loss contingencies, such as legal proceedings and claims arising out of its business, including government investigations. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount of loss can be reasonably estimated. The Company expenses legal costs associated with loss contingencies as they are incurred.

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 common stock or resulted in the issuance of common stock that are 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 years ended December 31, 2019 and 2018 were as follows:

Accumulated other comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Accumulated other comprehensive income (loss) consists of unrealized gains and losses on available‑for‑sale investment securities and foreign currency translation adjustments.

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 August 2018, the Securities and Exchange Commission ("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 stockholders’ equity presented in the balance sheet must be provide in a note or separate statement. The analysis should represent a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company implemented this change on the Company's Form 10Q filed May 10, 2019 and the adoption did not have a material impact on its consolidated financial statements and related disclosures.

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 consolidated financial statements.

As of December 31, 2019 and 2018, the amortized cost and estimated fair value of our available-for-sale securities were due in one year or less.

We operate in one market segment, the hemodialysis market, which involves the manufacture, sale and distribution of hemodialysis products to hemodialysis clinics, including pharmaceutical, dialysis concentrates, dialysis kits and other ancillary products used in the dialysis process.

One customer, DaVita, Inc. ("DaVita"), accounted for 49% of our sales in 2019 and 46% of our sales in 2018.  Our accounts receivable from this customer were $1,166,603 and $2,538,503 as of December 31, 2019 and 2018, respectively. 

In October 2014, we entered into the Distribution Agreement with Baxter, which was amended in June 2017, pursuant to which Baxter received exclusive distribution rights for our concentrate products in the United States.  Our domestic customer contracts for the supply of dialysis concentrate products that permitted assignment to Baxter without consent have been assigned to Baxter.  As a result, for 2019 and 2018, our direct sales to Baxter aggregated approximately 27% and 26% of sales, respectively, and we had a receivable from Baxter of $2,015,438 and $2,824,051 as of December 31, 2019 and 2018, respectively.

DaVita and Baxter and the accounts administered by Baxter are important to our business, financial condition and results of operations.  The loss of any significant accounts could have a material adverse effect on our business, financial condition and results of operations.  No other domestic customers accounted for more than 10% of our sales in any of the last two years.

The majority of our international sales in each of the last two years were sales to domestic distributors that were resold to end users outside the United States.  Our sales to foreign customers and distributors accounted for approximately 11% and 14% of our total sales in 2019 and 2018, respectively. One international customer, Nipro Medical Corporation, accounted for 9% and 10% of our sales for 2019 and 2018 respectively.

As of October 2, 2014, we entered into the Distribution Agreement with Baxter, pursuant to which Baxter became our exclusive agent for sales, marketing and distribution activities for our hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years ending on October 2, 2024.  The Distribution Agreement does not include any of our drug products.  We will retain sales, marketing and distribution rights for our hemodialysis concentrate products in specified foreign countries in which we have an established commercial presence.  During the term of the Distribution Agreement, Baxter has agreed not to manufacture or sell any competitive concentrate products in the United States hemodialysis market, other than specified products.

Pursuant to the Distribution Agreement, Baxter paid us $20 million in cash in October 2014 (the “Upfront Fee”).  The Upfront Fee has been deferred and is being recognized as revenue based on the proportion of product shipments to Baxter in each period to total expected sales volume over the term of the Distribution Agreement. We recognized revenue associated with the Upfront Fee totaling $2.1 million for each of the years ended December 31, 2019, and 2018, respectively.

Under the Distribution Agreement, Baxter purchases products from us at established gross margin-based prices per unit, adjusted each year during the term.  We continue to manage customer service, transportation and certain other functions for our current customers on Baxter’s behalf, in exchange for which Baxter will pay us an amount equal to our related costs to provide such functions plus a slight mark-up.

The Distribution Agreement also requires Baxter to meet minimum annual gallon-equivalent purchase levels, subject to a cure period and certain other relief, in order to maintain its exclusive distribution rights.  The minimum purchase levels increase each year over the term of the Distribution Agreement.  Orders in any contract year that exceed the minimum will be carried forward and applied to future years’ minimum requirements. The Distribution Agreement also contains provisions governing the operating relationship between the parties, our obligations to maintain specified manufacturing capacity and quality levels, remedies, as well as representations, warranties and indemnification obligations of the parties.

Either party may terminate the Distribution Agreement upon the insolvency or material breach of the other party or in the event of a force majeure.  In addition, Baxter may also terminate the Distribution Agreement at any time upon 270 days’ prior written notice to us or if (1) prices increase beyond certain thresholds and notice is provided within 45 days after the true up payment is due for the year in which the price threshold is exceeded, (2) a change of control of the Company occurs and 270 days’ notice is provided, or (3) upon written notice that 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.  If Baxter terminates the Distribution Agreement under the discretionary termination or the price increase provisions, it would be subject to a limited non-compete obligation in the United States with respect to certain products for a period of two years.

If a “Refund Trigger Event” occurs, we would be obligated to repay 25% of the Upfront Fee and Facility Fee (described below)  if the event occurs in 2019, 2020 or 2021.  A “Refund Trigger Event” means any of the following: (1) a change of control of the Company involving any of certain specified companies; (2) a termination by Baxter due to the Company’s bankruptcy or breach, or due to price increases that exceed the stated thresholds; (3) a termination by either party due to a force majeure;

The Distribution Agreement also required us to prepay our outstanding secured long-term indebtedness within 180 days and prohibits us from entering into a subsequent contract encumbering the assets used in our concentrate business without the prior written consent of Baxter.

The Distribution Agreement may be extended an additional five years by Baxter if Baxter achieves a specified sales target and pays an extension fee of $7.5 million.  If the first extension occurs, the Distribution Agreement term may later be extended an additional five years at Baxter’s option at no additional cost.

As of December 31, 2019 and 2018, we classified $0.4 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 December 31, 2019 and 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.

Total goodwill was $0.9 million at December 31, 2019 and 2018. We completed our annual impairment tests as of December 31, 2019 and 2018, and determined that no adjustment for impairment of goodwill was required during the years ended December 31, 2019 and 2018.

We entered into global licensing agreements for certain patents covering our Triferic products. We received FDA approval for Dialysate Triferic in January 2015. We have capitalized the licensing fees paid for the rights to use this patented technology as an intangible asset.

Our policy is to amortize licensing fees over the life of the patents pertaining to certain licensing agreements and to amortize patent costs over the life of the patent. Amortization expense was $353 for capitalized patent costs for each of the years ended December 31, 2019 and 2018, respectively.

As of December 31, 2019 and 2018, there were 2,000,000 shares of preferred stock, $0.0001 par value per share, authorized and no shares of preferred stock issued or outstanding.

As of December 31, 2019 and 2018, there were 170,000,000 shares of common stock, $0.0001 par value per share, authorized and 65,378,890 and 57,034,154 shares issued and outstanding, respectively.

During the year ended December 31, 2018, 267,500 vested employee stock options were exercised for net cash proceeds of $67,548 at a weighted average exercise price of $3.09 per share. The Company withheld 210,132 of these shares of common stock at a cost of $759,028, or a weighted average cost of $3.61 per share, to cover the employee withholding taxes and other expenses related to these exercises.

During the year ended December 31, 2019, 30,000 vested employee stock options were exercised for net cash proceeds of $147,900 at a weighted average exercise price of $4.93 per share.

On October 15, 2018, the Company raised $21.9 million, net of issuance costs, in capital from the offering and sale of 5,541,562 shares of common stock at a price of $3.97 per share, along with warrants to purchase up to an additional 2,770,781 shares of common stock at a price of $4.96 per share.

On August 7, 2018, 333,200 shares of restricted stock were forfeited. Forfeitures of restricted stock were related to a settlement agreement between the Company and its former CEO, CFO, and two former Directors. (see Note 15).

The Board of Directors adopted the Rockwell Medical, Inc., 2007 Long Term Incentive Plan (“2007 LTIP”) on April 11, 2007. The 2007 LTIP expired on April 11, 2017 and no equity awards were granted under the 2007 LTIP following its expiration. There were 11,500,000 shares of common stock reserved for issuance under the 2007 LTIP. The Board of Directors adopted the 2018 Long-Term Incentive Plan (“2018 LTIP”) on January 29, 2018 as a replacement for the 2007 LTIP. There are 3,300,000 shares of common stock reserved for issuance under the 2018 LTIP. The Compensation Committee of the Board of Directors (the “Committee”) is responsible for the administration of the 2007 LTIP and 2018 LTIP, including the grant of stock based awards and other financial incentives including performance based incentives to employees, non‑employee directors and consultants.

Our standard stock option agreement under the 2007 LTIP and 2018 LTIP allows for the payment of the exercise price of vested stock options either through cash remittance in exchange for newly issued shares, or through non‑cash exchange of previously issued shares held by the recipient for at least six months in exchange for our newly issued shares.  The 2007 LTIP and 2018 LTIP also allow for the retention of shares in payment of the exercise price and income tax withholding.  The latter method results in no cash being received by us, but also results in a lower number of total shares being outstanding subsequently as a direct result of this exchange of shares. Shares returned to us in this manner would be retired.

The Company recognized total stock-based compensation expense during the years ended December 31, 2019 and 2018 as follows:

During the year ended December 31, 2018, forfeitures of performance based restricted stock awards totaled 333,200 related to the settlement agreement with the Company’s former CEO, CFO, and two former Directors. (see Note 15.)

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 December 31, 2019, unvested restricted stock awards of 146,800 were related to performance based awards. Stock-based compensation expense of nil and $1.3 million was recognized during the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, there is no unrecognized stock-based compensation expense related to restricted stock awards.

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 $1.6 million and $0.8 million was recognized during the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the unrecognized stock-based compensation expense was $0.9 million.

Stock-based compensation expense recognized for performance based restricted stock units was $0.6 million and $0.5 million for the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the unrecognized stock-based compensation expense related to performance based restricted stock units was $0.9 million. The performance based restricted stock unit compensation was reduced by $0.7 million for the year ended December 31, 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 vesting.

A performance unit may be comprised of either a performance based award or a market-based award. Performance based awards vest from the grant date through the remaining service period, and the fair value is the market price of one common share on the grant date. Evaluation of the expected vesting period is reviewed quarterly. Market-based awards vest upon the achievement of the market-based performance goal, provided the continued employment of the Company’s employee. The fair value of each market-based restricted stock unit was determined through the use of the Monte Carlo simulation method. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets.