Distribution Agreement

12 Months Ended

Dec. 31, 2021

DISTRIBUTION AGREEMENT.

Distribution Agreement

Distribution Agreement

In October 2014, Rockwell entered into the Baxter Distribution Agreement, pursuant to which Baxter became Rockwell's exclusive agent for commercializing its hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years ending October 2, 2024. Rockwell retains sales, marketing and distribution rights for its hemodialysis concentrate products for its international customers and in those countries in which its has 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, Rockwell entered into the First Amendment to Exclusive Distribution Agreement with Baxter (the “Amendment”). The Amendment provides for, among other things, reduced pricing on certain accounts and incentives to Baxter to pursue new customers and increase future sales. In March 2020, Rockwell entered into the Second Amendment to the Exclusive Distribution Agreement with Baxter (the “Second Amendment”). The Second Amendment provides for, among other things, a commitment by Rockwell to maintain a specified manufacturing capacity for Baxter, a cap upon the net amount of reimbursable transportation expenses and modified extension terms.

Under the Distribution Agreement, Baxter purchases concentrate-related products from Rockwell 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, as amended by the Second Amendment, also contains provisions regarding Rockwell's obligations to maintain specified manufacturing capacity and quality levels. Rockwell continues to manage customer service, transportation and certain other functions for its current customers. For customer service, Baxter pays Rockwell an amount equal to our related costs plus a slight mark-up for these services. For transportation costs, Baxter pays Rockwell an amount equal to its related costs, subject to the defined caps contained within the Second Amendment, which are based upon defined percentages of liquid concentrate product being shipped.

The Distribution Agreement also provides that, upon the mutual determination of Rockwell and Baxter, Baxter will pay Rockwell up to $10 million to build a new manufacturing facility in the Pacific time-zone that would serve customers in the western United States. The fee payable in connection with construction of 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, Rockwell 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 Rockwell 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, Rockwell received an upfront fee of $20 million in October 2014. In December 2021, Baxter sent us a letter reserving its right to assert that it could claim a refund of a portion of its upfront payment if it terminates the Distribution Agreement as a result of certain price increases. While management believes that the claims in Baxter’s letter are without merit and that Baxter cannot recoup any portion of its upfront payment, management cannot assure you what a mediator or arbitrator may decide if it pursues such claim. Rockwell intends to vigorously defend against any such claim.

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 $1.9 million and $2.0 million for the years ended December 31, 2021, and 2020, respectively.

The Distribution Agreement may be extended for 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.