NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 — Organization, Business and Basis
of Presentation:
Organization and Business
CorMedix Inc., together with its wholly
owned subsidiaries (collectively “CorMedix” or the “Company”), is a biopharmaceutical company focused on
developing and commercializing therapeutic products for the prevention and treatment of infectious and inflammatory diseases. The
Company’s primary focus is on the development of its lead product candidate, Defencath™, for potential commercialization
in the United States, or the U.S., and other key markets as a catheter lock solution, or the CLS. The name Defencath is the U.S.
proprietary name conditionally approved by the U.S. Food and Drug Administration, or the FDA, while the name Neutrolin® is
currently used in the European Union, or the EU, and other territories where the Company has received CE-Mark approval for the
commercial distribution of Neutrolin as a CLS regulated as a medical device.
The Company has in-licensed the worldwide
rights to develop and commercialize Defencath and Neutrolin. The CLS is a formulation of 1.35% taurolidine, 3.5% citrate, and 1000
u/ml heparin and is regulated by the FDA as an investigational new drug, where it is being developed to prevent catheter-related
blood stream infections, or CRBSIs, and thrombosis in patients using central venous catheters, or CVCs, for hemodialysis. CRBSIs
and thrombosis represent key complications among hemodialysis, intensive care, cancer and total parenteral nutrition, or TPN, patients
with CVCs. These complications can lead to treatment delays and increased costs to the healthcare system when they occur due to
hospitalizations, need for intravenous, or IV, antibiotic treatment, long-term anticoagulation therapy, removal/replacement of
the CVC, related treatment costs and increased mortality. The Company initially expects to sell Defencath directly to dialysis
centers and hospitals, but also plans to expand its usage into intensive care, oncology and TPN patients using central venous catheters.
The Company believes Defencath addresses a significant unmet medical need and a potential large market opportunity in the U.S.
In late 2013, the Company met with the FDA
to determine the regulatory pathway for U.S. marketing approval of Defencath and began discussions on the clinical development
program. In January 2015, the FDA granted Fast Track designation to Defencath, which is a program designed to facilitate development
of drugs that are intended to treat serious and life-threatening conditions and to address an unmet medical need. Fast Track designation
provides eligibility to request Priority Review of the marketing application.
Also, in January 2015, the FDA designated
Defencath as a Qualified Infectious Disease Product, or QIDP, which provides an additional five years of marketing exclusivity
to be added to any exclusivity for which the application qualifies upon approval. For example, an additional five years of marketing
exclusivity will be added to the five years granted to a New Chemical Entity, or the NCE, upon approval of the NDA. QIDP designation
also confers eligibility for Priority Review of the NDA.
The Company launched its Phase 3 Prospective,
Multicenter, Double-blind, Randomized, Active Control Study to Demonstrate Safety & Effectiveness of Defencath/Neutrolin in
Preventing Catheter related Bloodstream Infection in Subjects on Hemodialysis for End Stage Renal Disease, or LOCK-IT-100, in patients
with hemodialysis catheters in the U.S. in December 2015. The clinical trial was designed to demonstrate the safety and effectiveness
of Defencath compared to the standard of care CLS, Heparin, in preventing CRBSIs. The primary endpoint for the trial assessed the
incidence of CRBSI and time to CRBSI for each study subject. Secondary endpoints were catheter patency, which was defined as required
use of tissue plasminogen activating factor (“tPA”), or removal of catheter due to dysfunction, and removal of catheter
for any reason.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In July 2018, 28 potential cases of CRBSI
were identified in LOCK-IT-100 that occurred through early December 2017. As previously agreed with the FDA, an interim efficacy
analysis was performed. Based on these first 28 cases, there was a highly statistically significant 72% reduction in CRBSI by Defencath
relative to the active control of heparin (p=0.0034). Because the pre-specified level of statistical significance was reached for
the primary endpoint and efficacy had been demonstrated with no safety concerns, the independent Data Safety Monitoring Board,
or the DSMB, recommended early termination. Following discussions with the FDA, we proceeded with an orderly termination of LOCK-IT-100.
The study had continued enrolling and treating subjects until study termination, and the final analysis was based on a total of
795 subjects. The Company remained blinded until the topline results of the full data set of LOCK-IT-100 were announced in late
January 2019. In a total of 41 cases, there was a 71% reduction in CRBSI by Defencath relative to heparin, which was highly statistically
significant (p=0.0006), with a good safety profile. During 2019, CorMedix had a series of meetings with the FDA to discuss the
analyses of data from LOCK-IT-100, including an end of Phase 3 meeting, a pre-NDA meeting and a CMC meeting, in preparation for
submission of the NDA.
The FDA granted the Company’s request
for a rolling submission and review of the NDA, which is designed to expedite the approval process for products being developed
to address an unmet medical need. Although the FDA usually requires two pivotal clinical trials to provide substantial evidence
of safety and effectiveness for approval of an NDA, the FDA will in some cases accept one adequate and well-controlled trial, where
it is a large multicenter trial with a broad range of subjects and study sites that has demonstrated a clinically meaningful and
statistically very persuasive effect on a disease with potentially serious outcome. In March 2020, the Company began the modular
submission process for the NDA for Defencath for the prevention of CRBSI in hemodialysis patients, and recently announced on July
8, 2020, that submission of all modules for the NDA was completed. In August 2020, the FDA accepted for filing the Defencath NDA
and also granted the Company’s request for Priority Review. Priority Review provides for six-month review period instead
of the standard ten-month review period, and February 28, 2021 has been set as the Prescription Drug User Fee Act, or PDUFA, date
for the completion of the review for approval of the NDA. The FDA noted that it is planning to hold an advisory committee
meeting to discuss the application and that it had not identified any potential review issues at this time. The meeting of the Antimicrobial Drugs Advisory Committee to discuss the Defencath NDA has tentatively been scheduled for January 14,
2021. The Company has not
been informed of any delays by the FDA in the review of the NDA, but the FDA has limited international and domestic travel due
to COVID-19, and pre-approval inspections are required for manufacturing sites.
The FDA also previously agreed that the
Company could request consideration of Defencath for approval under the Limited Population Pathway for Antibacterial and Antifungal
Drugs, or LPAD. LPAD, passed as part of the 21st Century Cures Act, is a new program intended to expedite the development
and approval of certain antibacterial and antifungal drugs to treat serious or life-threatening infections in limited populations
of patients with unmet medical needs. Given that the LPAD pathway provides for a streamlined clinical development program for a
limited population that may involve smaller, shorter, or fewer clinical trials, the Company believes that LPAD will provide additional
flexibility for the FDA to approve Defencath to prevent CRBSIs in the limited population of adult patients with end-stage renal
disease receiving hemodialysis through a CVC.
The Company was granted a deferral by the
FDA under the Pediatric Research Equity Act, or PREA, that requires sponsors to conduct pediatric studies for NDAs for a new active
ingredient, such as taurolidine in Defencath, unless a waiver or deferral is obtained from the FDA. A deferral acknowledges that
a pediatric assessment is required but permits the applicant to submit the pediatric assessment after the submission of an NDA.
The Company has made a commitment to conduct the pediatric study after approval of the NDA for use in adult hemodialysis patients.
Pediatric studies for an approved product conducted under PREA may qualify for pediatric exclusivity, which if granted would provide
an additional six months of marketing exclusivity. Defencath would then have the potential to receive a total marketing exclusivity
period of 10.5 years, including exclusivity pursuant to NCE and QIDP.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Company anticipates that Medicare reimbursement
could be available for Defencath in hemodialysis and other catheter indications in intensive care, oncology and TPN through relevant
hospital inpatient diagnosis-related groups, or DRGs, or outpatient ambulatory payment classifications, or APCs, the End-Stage
Renal Disease Prospective Payment System, or ESRD PPS, base payment, or under the Durable Medical Equipment, Prosthetics, Orthotics,
and Supplies, or DMEPOS, Fee Schedule, depending on the setting of care. The Company also plans to seek separate reimbursement
as a drug, where available under Medicare, through mechanisms such as pass-through status under the Hospital Outpatient Prospective
Payment System, the transitional drug add-on payment adjustment, or TDAPA, under the ESRD PPS, or reimbursement as a drug used
with a DMEPOS infusion pump. The Company has engaged U.S. Centers for Medicare & Medicaid Services, or CMS, in preliminary
discussions concerning the reimbursement for Defencath under TDAPA, however, qualifications cannot be determined until after FDA
approval and CMS evaluates the request for coverage in a quarterly review. If approved under TDAPA, reimbursement of Defencath
would be calculated based on its average selling price.
Although the Company cannot fully anticipate
changes in reimbursement requirements and mechanisms in the coming years, the Company expects Defencath would be eligible for and
would obtain TDAPA. To be eligible for TDAPA, an innovative new renal drug or biologic must be, among other things, identified
as having an end action effect that treats or manages a condition or conditions associated with ESRD and as not fitting into an
established ESRD PPS functional category. The Company believes that in addition to the Fast Track and QIDP designations granted
by the FDA, Defencath meets the criterion of being a new renal dialysis product used to treat or manage a condition associated
with ESRD, since infections are the second leading cause of death in patients with ESRD and CVCs are a significant risk factor
for infection-associated mortality.
In the EU, Neutrolin is regulated as a Class
3 medical device. In July 2013, the Company received CE Mark approval for Neutrolin. In December 2013, the Company started
commercial sales of Neutrolin in Germany for the prevention of CRBSI, and maintenance of catheter patency in hemodialysis patients
using a tunneled, cuffed CVC for vascular access. To date, Neutrolin is registered and may be sold in certain European
Union and Middle Eastern countries for such treatment.
In September 2014, the TUV-SUD and The Medicines Evaluation
Board of the Netherlands, or MEB, granted a label expansion for Neutrolin, to include use in oncology patients receiving chemotherapy,
IV hydration and IV medications via CVC for the EU. In December 2014, the Company received approval from the Hessian District President
in Germany to expand the label for these same expanded indications. The expansion also adds patients receiving medication and IV
fluids via CVC in intensive or critical care units (cardiac care unit, surgical care unit, neonatal critical care unit, and urgent
care centers). An indication for use in total parenteral nutrition was also approved.
In May 2020, the Company formed a wholly-owned Spanish subsidiary,
CorMedix Spain, S.L.U.
The Company intends to pursue additional
indications for Defencath use as a CLS in populations with an unmet medical need that also represent a significant market opportunity.
For example, the Company intends to pursue marketing authorization in the U.S. for use as a CLS to reduce CRBSIs in oncology and
total parenteral nutrition patients using a CVC.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In addition to the CLS, the Company is sponsoring
a pre-clinical research collaboration for the use of taurolidine as a possible treatment for pediatric tumors. In February 2018,
the FDA granted orphan drug designation to taurolidine for the treatment of neuroblastoma in children. The Company may seek one
or more strategic partners or other sources of capital to help with the development and commercialization of taurolidine for the
treatment of neuroblastoma in children. The Company is also evaluating opportunities for the possible expansion of taurolidine
as a platform compound for use in certain medical devices. Patent applications have been filed in several indications, including
wound closure, surgical meshes, and wound management. Based on initial feasibility work, the Company is advancing pre-clinical
studies for taurolidine-infused surgical meshes, suture materials and hydrogels. The Company will seek to establish development/commercial
partnerships as these programs advance.
The FDA regards taurolidine as an NCE and
therefore it is currently an unapproved new drug. The Company may in the future pursue product candidates that would involve devices
impregnated with taurolidine, and the Company believes that at the current time such products would be combination products subject
to device premarket submission requirements, while subject also, under review by the FDA, to the standards for drug approvability.
Consequently, given that there is no appropriate predicate medical device currently marketed in the U.S. on which a 510(k) approval
process could be based and that taurolidine is not yet approved in any application, the Company anticipates that it would be required
to submit a premarket approval application, or PMA, for marketing authorization for any medical device indications that the Company
may pursue for devices containing taurolidine. In the event that an NDA for Defencath is approved by the FDA, the regulatory pathway
for these medical device product candidates may be revisited with the FDA. Although there may be no appropriate predicate, de novo
Class II designation can be proposed, based on a risk assessment and a reasonable assurance of safety and effectiveness.
In December 2019, the novel coronavirus
disease, COVID-19, was identified in Wuhan, China. This virus has been declared a pandemic and has spread to multiple global regions.
The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses
and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended;
and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and
services, such as travel, has fallen. In response to the COVID-19 outbreak, “shelter in place” orders and other public
health guidance measures have been implemented across much of the United States, Europe and Asia, including in the locations of
the Company’s offices, clinical trial sites, key vendors and partners. The Company’s program timelines may be negatively
affected by COVID-19, which could materially and adversely affect its business, financial condition and results of operations.
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 8 of Regulation
S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required
by GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary to fairly state
the interim results. Interim operating results are not necessarily indicative of results that may be expected for the full year
ending December 31, 2020 or for any subsequent period. These unaudited condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto of the Company which are included in the Company’s
Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 16, 2020. The accompanying condensed
consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements included in such Form
10-K.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards
Board, or FASB, issued new guidance which replaces the incurred loss impairment methodology in current GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. This adoption on January 1, 2020 did not have a material impact on the Company’s condensed
consolidated financial statements.
In August 2018, the FASB issued a new guidance
which modifies the disclosure requirements on fair value measurements. The guidance was effective for the Company beginning in
the first quarter of fiscal year 2020. This adoption on January 1, 2020 did not have a material impact on the Company’s condensed
consolidated financial statements.
In November 2018, the FASB issued new guidance
to clarify the interaction between the authoritative guidance for collaborative arrangements and revenue from contracts with customers.
The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account,
revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance,
and that, in a transaction with a collaborative arrangement participant who is not a customer, precludes presenting the transaction
together with revenue recognized under contracts with customers. The guidance was effective for the Company beginning in the first
quarter of fiscal year 2020. This adoption on January 1, 2020 did not have a material impact on the Company’s condensed consolidated
financial statements.
In November 2019, the FASB issued new guidance
which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in
FASB’s Accounting Standards Codification, or ASC, 718. The guidance was effective for the Company beginning in the first
quarter of fiscal year 2020. This adoption on January 1, 2020 did not have a material impact on the Company’s condensed consolidated
financial statements.
Recently Issued Authoritative Pronouncements
In December 2019, the FASB issued new guidance
which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application
of and simplification of other areas when accounting for income taxes. The guidance is effective for the company beginning in the
first quarter of fiscal year 2021. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on
its consolidated financial statements.
Note 2 — Summary of Significant Accounting
Policies:
Liquidity and Uncertainties
The financial statements have been prepared
in conformity with GAAP which contemplate continuation of the Company as a going concern. To date, the Company’s commercial
operations have not generated sufficient revenues to enable profitability. As of September 30, 2020, the Company had an accumulated
deficit of $211.4 million, and incurred losses from operations of $6.6 million and $5.3 million for the three months ended September
30, 2020 and 2019, respectively, and $15.9 million and $11.1 million for the nine months ended September 30, 2020 and 2019, respectively.
The Company currently estimates that as of September 30, 2020 it has sufficient cash, cash equivalents and short-term investments
on hand to fund operations for at least twelve months after the filing date of this report, after taking into consideration the
net proceeds received through October 14, 2020 from the At-the-Market Issuance Sales Agreement (the “ATM program”)
of $4.6 million (see Note 7) and the costs for the initial preparations for commercial launch for Defencath.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In April 2020, the Company received approximately
$5.2 million, net of expenses, from the sale of most of its remaining unused New Jersey net operating losses, or NOL, eligible
for sale under the State of New Jersey’s Economic Development Authority’s New Jersey Technology Business Tax Certificate
Transfer program, or NJEDA Program. The NJEDA Program allowed the Company to sell approximately $5.5 million of its total $6.0
million in available NOL tax benefits for the state fiscal year 2019.
In April 2020, the Company received from
the FDA a refund for the NDA application fee in the amount of $2.9 million, which was paid in the first quarter of 2020. The Company
met the conditions of the Federal Food, Drug, and Cosmetic Act for the small business waiver of the user fees and its request for
a waiver of an application user fee was granted by the FDA.
The Company’s continued operations
will depend on its ability to raise additional capital through various potential sources, such as equity and/or debt financings,
strategic relationships, or out-licensing of its products, to commercially launch Defencath upon NDA approval, and until profitability
is achieved, if ever. Management can provide no assurances that such financing or strategic relationships will be available on
acceptable terms, or at all. At September 30, 2020, the Company had approximately $8.7 million available under its ATM program
(see Note 3).
The Company’s operations are subject
to a number of other factors that can affect its operating results and financial condition. Such factors include, but are not limited
to: the ability to obtain regulatory approval to market the Company’s products; ability to manufacture successfully; competition
from products manufactured and sold or being developed by other companies; the price of, and demand for, Company products; the
Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products; the
results of clinical testing and trial activities of the Company’s product candidates; and the Company’s ability to
raise capital to support its operations.
Use of Estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements
include the accounts of the Company, CorMedix Europe GmbH and CorMedix Spain, S.L.U. its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Financial Instruments
Financial instruments
that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and short-term
investments. The Company maintains its cash and cash equivalents in bank deposit and other interest-bearing accounts, the balances
of which, at times, may exceed federally insured limits.
The following table
is the reconciliation of the accounting standard that modifies certain aspects of the recognition, measurement, presentation and
disclosure of financial instruments as shown on the Company’s consolidated statement of cash flows:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
34,364,560
|
|
|
$
|
16,350,237
|
|
Restricted cash
|
|
|
182,892
|
|
|
|
174,950
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
34,547,452
|
|
|
$
|
16,525,187
|
|
The appropriate classification of marketable securities is determined
at the time of purchase and re-evaluated as of each balance sheet date. Investments in marketable debt classified as available-for-sale
and equity securities are reported at fair value. Fair value is determined using quoted market prices in active markets for identical
assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered
temporary are reported in the condensed consolidated statement of operations. Realized gains and losses, amortization of premiums
and discounts and interest and dividends earned are included in other income (expense). For declines in the fair value of equity
securities that are considered other-than-temporary, impairment losses are charged to other income (expense), net. The Company
considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which
fair value is less than cost. There were no deemed permanent impairments at September 30, 2020 or December 31, 2019.
The Company’s marketable securities
are highly liquid and consist of U.S. government agency securities, high-grade corporate obligations and commercial paper with
original maturities of more than 90 days. As of September 30, 2020, and December 31, 2019, all of the Company’s investments
had contractual maturities of less than one year. As of September 30, 2020, no allowance for credit loss was recorded. The
following table summarizes the amortized cost, unrealized gains and losses and the fair value at September 30, 2020 and December
31, 2019:
|
|
Amortized Cost
|
|
|
Gross Unrealized Losses
|
|
|
Gross Unrealized Gains
|
|
|
Fair Value
|
|
September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds included in Cash Equivalents
|
|
$
|
4,962,810
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,962,810
|
|
U.S. Government Agency Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate Securities
|
|
|
2,375,059
|
|
|
|
(435
|
)
|
|
|
497
|
|
|
|
2,375,121
|
|
Commercial Paper
|
|
|
299,636
|
|
|
|
-
|
|
|
|
13
|
|
|
|
299,649
|
|
Subtotal
|
|
|
2,674,695
|
|
|
|
(435
|
)
|
|
|
510
|
|
|
|
2,674,770
|
|
Total September 30, 2020
|
|
$
|
7,637,505
|
|
|
$
|
(435
|
)
|
|
$
|
510
|
|
|
$
|
7,637,580
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds included in Cash Equivalents
|
|
$
|
3,472,043
|
|
|
$
|
-
|
|
|
$
|
51
|
|
|
$
|
3,472,094
|
|
U.S. Government Agency Securities
|
|
|
2,691,091
|
|
|
|
(42
|
)
|
|
|
869
|
|
|
|
2,691,918
|
|
Corporate Securities
|
|
|
6,058,265
|
|
|
|
(1,438
|
)
|
|
|
440
|
|
|
|
6,057,267
|
|
Commercial Paper
|
|
|
3,234,583
|
|
|
|
(16
|
)
|
|
|
405
|
|
|
|
3,234,972
|
|
Subtotal
|
|
|
11,983,939
|
|
|
|
(1,496
|
)
|
|
|
1,714
|
|
|
|
11,984,157
|
|
Total December 31, 2019
|
|
$
|
15,455,982
|
|
|
$
|
(1,496
|
)
|
|
$
|
1,765
|
|
|
$
|
15,456,251
|
|
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Fair Value Measurements
The Company’s financial instruments
recorded in the condensed consolidated balance sheets include cash and cash equivalents, accounts receivable, investment securities,
accounts payable and accrued expenses. The carrying value of certain financial instruments, primarily cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses approximate their estimated fair values based upon the short-term nature
of their maturity dates.
The Company categorizes its financial instruments
into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair
value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority
to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category
level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial
assets recorded at fair value on the Company’s condensed consolidated balance sheets are categorized as follows:
|
●
|
Level 1 inputs—Observable inputs that reflect quoted
prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level 2 inputs— Significant other observable inputs
(e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not
active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
|
|
●
|
Level 3 inputs—Unobservable inputs for the asset
or liability, which are supported by little or no market activity and are valued based on management’s estimates of assumptions
that market participants would use in pricing the asset or liability.
|
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following table provides the carrying
value and fair value of the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2020
and December 31, 2019:
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
4,962,810
|
|
|
$
|
4,962,810
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government Agency Securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate Securities
|
|
|
2,375,121
|
|
|
|
-
|
|
|
|
2,375,121
|
|
|
|
-
|
|
Commercial Paper
|
|
|
299,649
|
|
|
|
-
|
|
|
|
299,649
|
|
|
|
-
|
|
Subtotal
|
|
|
2,674,770
|
|
|
|
-
|
|
|
|
2,674,770
|
|
|
$
|
-
|
|
Total September 30, 2020
|
|
$
|
7,637,580
|
|
|
$
|
4,962,810
|
|
|
$
|
2,674,770
|
|
|
$
|
-
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
3,472,094
|
|
|
$
|
3,472,094
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government Agency Securities
|
|
|
2,691,918
|
|
|
|
2,691,918
|
|
|
|
-
|
|
|
|
-
|
|
Corporate Securities
|
|
|
6,057,267
|
|
|
|
-
|
|
|
|
6,057,267
|
|
|
|
-
|
|
Commercial Paper
|
|
|
3,234,972
|
|
|
|
-
|
|
|
|
3,234,972
|
|
|
|
-
|
|
Subtotal
|
|
|
11,984,157
|
|
|
|
2,691,918
|
|
|
|
9,292,239
|
|
|
|
-
|
|
Total December 31, 2019
|
|
$
|
15,456,251
|
|
|
$
|
6,164,012
|
|
|
$
|
9,292,239
|
|
|
$
|
-
|
|
Foreign Currency Translation
and Transactions
The condensed consolidated financial statements
are presented in U.S. Dollars (“USD”), the reporting currency of the Company. For the financial statements of the Company’s
foreign subsidiaries, whose functional currency is the EURO, foreign currency asset and liability amounts, are translated into
USD at end-of-period exchange rates. Foreign currency income and expenses are translated at average exchange rates in effect during
the period in which the income and expenses were recognized. Translation gains and losses are included in other comprehensive income
(loss).
The Company has intercompany loans between
the parent company based in New Jersey and its German subsidiary. The intercompany loans outstanding are not expected to be repaid
in the foreseeable future and unrealized foreign exchange movements related to long-term intercompany loans are recognized in other
comprehensive income (loss).
Foreign currency exchange transaction gain
(loss) is the result of re-measuring transactions denominated in a currency other than the functional currency of the entity recording
the transaction.
Restricted Cash
As of September 30, 2020, and December 31,
2019, the Company has restricted cash in connection with the patent and utility model infringement proceedings against TauroPharm
(see Note 4). The Company was required by the District Courts of Mannheim to provide a security deposit of an aggregate of
approximately $124,000 (€110,000) to cover legal fees in the event TauroPharm is entitled to reimbursement of these costs.
The company furthermore had to provide a deposit in the amount of $40,000 (€36,000) and $11,000 (€10,000) for the first
and second instances, respectively, in connection with the unfair competition proceedings in Cologne. During the nine months ended
September 30, 2020, the Company accrued expenses of $12,000 in connection with the utility model infringement proceedings, which
may be deducted from restricted cash when settled.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Prepaid Research and Development and Other Prepaid Expenses
Prepaid expenses consist of payments made
in advance to vendors relating to service contracts for clinical trial development, manufacturing, preclinical development, deposits
on equipment and insurance policies. These advanced payments are amortized to expense either as services are performed or over
the relevant service period using the straight-line method.
Other prepaid expenses consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Deposit on equipment
|
|
$
|
500,822
|
|
|
$
|
-
|
|
Insurance
|
|
|
286,241
|
|
|
|
244,828
|
|
Subscription fees
|
|
|
132,982
|
|
|
|
97,983
|
|
Software costs
|
|
|
372,454
|
|
|
|
10,081
|
|
Other
|
|
|
47,740
|
|
|
|
93,523
|
|
Total
|
|
$
|
1,340,239
|
|
|
$
|
446,415
|
|
Inventories, net
Inventories are valued at the lower of cost
or net realizable value on a first in, first out basis. Inventories consist of raw materials (including labeling and packaging),
work-in-process, and finished goods, if any, for the Defencath product. Inventories consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
6,893
|
|
Finished goods
|
|
|
351,542
|
|
|
|
461,735
|
|
Inventory reserve
|
|
|
(150,836
|
)
|
|
|
(130,163
|
)
|
Total
|
|
$
|
200,706
|
|
|
$
|
338,465
|
|
Leases
The Company determines if an arrangement
is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion
of operating lease liabilities, and operating lease liabilities, net of current portion, on the condensed consolidated balance
sheet.
Operating lease ROU assets and operating
lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the
information available at commencement date in determining the present value of future payments. The Company’s lease terms
may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The
Company has elected, as an accounting policy, not to apply the recognition requirements in ASC 842 to short-term leases. Short-term
leases are leases that have a term of 12 months or less and do not include an option to purchase the underlying asset that
the Company is reasonably certain to exercise. The Company recognizes the lease payments for short-term leases on a straight-line
basis over the lease term.
The Company has also elected, as a practical
expedient, by underlying class of asset, not to separate lease components from non-lease components and, instead, account for them
as a single component.
Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Professional and consulting fees
|
|
$
|
618,472
|
|
|
$
|
214,777
|
|
Accrued payroll and payroll taxes
|
|
|
1,603,245
|
|
|
|
1,287,047
|
|
Clinical trial related
|
|
|
687
|
|
|
|
2,435,953
|
|
Manufacturing development related
|
|
|
230,248
|
|
|
|
806,032
|
|
Other
|
|
|
64,189
|
|
|
|
54,666
|
|
Total
|
|
$
|
2,516,841
|
|
|
$
|
4,798,475
|
|
In December 2015, the Company contracted
a clinical research organization (“CRO”) to help conduct its LOCK-IT-100 Phase 3 multicenter, double-blind, randomized
active control study to demonstrate the safety and effectiveness of Defencath/Neutrolin in preventing catheter-related bloodstream
infections and blood clotting in subjects receiving hemodialysis therapy as treatment for end stage renal disease.
Through September 30, 2020, approximately $30.0 million of clinical
trial expense has been recorded and paid. During the three and nine months ended September 30, 2020, the Company recognized $2,000
and $36,000 in research and development expense related to this agreement, and $61,000 and $763,000 during the three and nine months
ended September 30, 2019, respectively. During the quarter ended September 30, 2020, the Company paid the outstanding balances
in accounts payable and accrued expenses in the amount of $2.4 million.
Revenue Recognition
The Company recognizes
revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” ASC 606 prescribes a five-step
model for recognizing revenue which includes (i) identifying contracts with customers; (ii) identifying performance obligations;
(iii) determining the transaction price; (iv) allocating the transaction price; and (v) recognizing revenue.
The Company recognizes net sales upon shipment
of product and upon meeting the five-step model prescribed by ASC 606 outlined above.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Loss Per Common Share
Basic loss per common
share excludes any potential dilution and is computed by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. However, since their effect is anti-dilutive, the Company has excluded potentially dilutive shares.
The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect
would be anti-dilutive.
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Number of Shares of Common Stock Issuable)
|
|
Series C-3 non-voting preferred stock
|
|
|
104,000
|
|
|
|
108,000
|
|
Series E non-voting preferred stock
|
|
|
391,953
|
|
|
|
391,953
|
|
Series G non-voting preferred stock
|
|
|
5,560,137
|
|
|
|
5,560,137
|
|
Restricted stock units
|
|
|
-
|
|
|
|
8,411
|
|
Shares issuable for payment of deferred board compensation
|
|
|
45,326
|
|
|
|
31,498
|
|
Shares underlying outstanding warrants
|
|
|
183,148
|
|
|
|
344,828
|
|
Shares underlying outstanding stock options
|
|
|
2,427,687
|
|
|
|
1,435,110
|
|
Total potentially dilutive shares
|
|
|
8,712,251
|
|
|
|
7,879,937
|
|
Stock-Based Compensation
Share-based compensation cost for stock
options granted to employees is measured at grant date using the Black-Scholes stock option pricing model in accordance with ASC
No. 718, “Compensation-Stock Compensation”, based on the estimated fair value of the award for options with
service or performance-based conditions and is recognized as expense over the requisite service period on a straight-line basis.
For stock options with performance-based vesting provisions, share-based compensation cost is recorded when the achievement of
the performance condition is probable.
Research and Development
Research and development costs are charged
to expense as incurred. Research and development include fees associated with operational consultants, contract clinical research
organizations, contract manufacturing organizations, clinical site fees, contract laboratory research organizations, contract central
testing laboratories, licensing activities, and allocated executive, human resources, facilities expenses and costs related to
the manufacturing of the product that could potentially be available to support the commercial launch prior to marketing approval.
For the nine months ended September 30, 2020, costs related to the manufacturing of commercial pre-launch inventory that were expensed
amounted to approximately $4.8 million. The Company accrues for costs incurred as the services are being provided by monitoring
the status of the activities and the invoices received from its external service providers. Costs related to the acquisition of
technology rights and patents for which development work is still in process are charged to operations as incurred and considered
a component of research and development expense.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 3 — Stockholders’ Equity:
Common Stock
On July 30, 2020, the Company completed
an underwritten public offering of its common stock, par value $0.001 per share, which yielded net proceeds of approximately $21.3
million. The public offering was made pursuant to an underwriting agreement with SunTrust Robinson Humphrey, Inc. and JMP Securities
LLC (collectively, the “Underwriters”), relating to the issuance and sale of an aggregate of 5,111,110 shares of common
stock, including 666,666 shares of common stock pursuant to the full exercise of the Underwriters’ option, at a public offering
price of $4.50 per share. The offering was made pursuant to the Company’s effective registration statement on Form S-3 Registration
Statement No. 333-223562 previously filed with and declared effective by the SEC and a prospectus supplement and accompanying prospectus
filed with the SEC.
The Company is a party to a sales agreement with B. Riley dated
March 9, 2018 for the sale of up to $14.7 million of the Company’s common stock under the Company’s ATM program, pursuant
to a registration statement filed on March 9, 2018 for an aggregate of $70.0 million of the Company’s securities, which became
effective on April 16, 2018. In November 2018, the ATM program amount was increased by $25.0 million. Under the ATM program, the
Company may issue and sell common stock from time to time through B. Riley acting as agent, subject to limitations imposed by the
Company and subject to B. Riley’s acceptance, such as the number or dollar amount of shares registered under the registration
statement to which the offering relates. B. Riley is entitled to a commission of up to 3% of the gross proceeds from the sale of
common stock sold under the ATM program. On August 31, 2020, the Company filed a prospectus supplement which allocated to the ATM
program the remaining balance of its current shelf registration statement of approximately $7.3 million. The $7.3 million under
the prospectus supplement, plus the $2.1 million already available under the ATM program, resulted in a total of approximately
$9.4 million available to be sold under the Company’s ATM program. At September 30, 2020, the Company has approximately $8.7
million available under its ATM program (see Note 7 for subsequent event sales under the ATM program).
During the nine months ended September 30, 2020
and 2019, the Company sold 477,721 and 1,768,012 shares of common stock under the ATM program, respectively, and realized net proceeds
of approximately $3.0 million and $15.2 million, respectively.
During the nine months ended September 30, 2020
and 2019, the Company issued an aggregate of 91,500 and 1,944,707 shares of its common stock upon exercise of warrants, respectively,
resulting in net proceeds to the Company of $0.4 million and $8.7 million, respectively.
During the nine months ended September 30,
2020 and 2019, the Company issued an aggregate of 2,490 and 19,425 shares of its common stock, respectively, upon the vesting of
restricted stock units issued to the Company’s board of directors.
During the nine months ended September 30,
2019, the Company issued an aggregate of 36,590 shares of its common stock upon exercise of stock options, resulting in net proceeds
of $117,000 to the Company. No stock options were exercised during the nine months ended September 30, 2020.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Preferred Stock
The Company is authorized to issue up to
2,000,000 shares of preferred stock in one or more series without stockholder approval. The Company’s board of directors
has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. Of the 2,000,000 shares
of preferred stock authorized, the Company’s board of directors has designated (all with par value of $0.001 per share) the
following:
|
|
As of September 30, 2020
|
|
|
As of December 31, 2019
|
|
|
|
Preferred Shares Outstanding
|
|
|
Liquidation Preference (Per Share)
|
|
|
Total Liquidation Preference
|
|
|
Preferred Shares Outstanding
|
|
|
Liquidation Preference (Per Share)
|
|
|
Total Liquidation Preference
|
|
Series C-3
|
|
|
52,000
|
|
|
$
|
10.00000
|
|
|
$
|
520,000
|
|
|
|
52,000
|
|
|
$
|
10.00000
|
|
|
$
|
520,000
|
|
Series E
|
|
|
89,623
|
|
|
$
|
49.20000
|
|
|
$
|
4,409,452
|
|
|
|
89,623
|
|
|
$
|
49.20000
|
|
|
$
|
4,409,452
|
|
Series G
|
|
|
100,000
|
|
|
$
|
187.36452
|
|
|
$
|
18,736,452
|
|
|
|
100,000
|
|
|
$
|
187.36452
|
|
|
$
|
18,736,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
Stock Options
During the nine months ended September 30,
2020, the Company granted ten-year qualified and non-qualified stock options covering an aggregate of 1,086,984 shares of the Company’s
common stock under the 2019 Stock Incentive Plan. The weighted average exercise price of these options is $5.11 per share.
During the three and nine months ended September 30, 2020, total
compensation expense for stock options issued to employees, directors, officers and consultants was $611,000 and $1,973,000, respectively,
and $519,000 and $1,835,000 for the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020, there was approximately
$3,719,000 in total unrecognized compensation expense related to stock options granted, which expense will be recognized over an
expected remaining weighted average period of 1.7 years.
The fair value of each
stock option award estimated on the grant date is determined using the Black-Scholes option pricing model with the following assumptions,
for the nine months ended September 30, 2020:
Expected term, years
|
|
5 - 10
|
Volatility
|
|
102.73% - 107.87%
|
Dividend yield
|
|
0.0%
|
Risk-free interest rate
|
|
0.27% - 1.67%
|
Weighted average grant date fair value of options granted during the period
|
|
$3.58
|
The Company estimated the expected term
of the stock options granted based on anticipated exercises in future periods. The expected term of the stock options granted to
consultants is based upon the full term of the respective option agreements. The expected stock price volatility for the Company’s
stock options is calculated based on the historical volatility since the initial public offering of the Company’s common
stock in March 2010. The expected dividend yield of 0.0% reflects the Company’s current and expected future policy for dividends
on the Company’s common stock. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve
in effect at the time of grant with a term consistent with the expected term of the Company’s awards which is 5 years for
employees and 10 years for non-employees.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following table summarizes the Company’s
stock options activity and related information for the nine months ended September 30, 2020:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at beginning of period
|
|
|
1,376,394
|
|
|
$
|
8.98
|
|
|
|
6.8
|
|
|
$
|
799,379
|
|
Granted
|
|
|
1,086,984
|
|
|
$
|
5.11
|
|
|
|
|
|
|
$
|
1,070,717
|
|
Forfeited
|
|
|
(28,800
|
)
|
|
$
|
9.01
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(6,891
|
)
|
|
$
|
12.53
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Outstanding at end of period
|
|
|
2,427,687
|
|
|
$
|
7.23
|
|
|
|
7.5
|
|
|
$
|
1,870,096
|
|
Exercisable at end of period
|
|
|
1,251,023
|
|
|
$
|
8.53
|
|
|
|
5.9
|
|
|
$
|
827,570
|
|
The aggregate intrinsic value is calculated
as the difference between the exercise prices of the underlying options and the quoted closing price of the common stock of the
Company at the end of the reporting period for those options that have an exercise price below the quoted closing price. There
were no stock options exercised during the nine months ended September 30, 2020.
Restricted Stock Units
During the nine months ended September 30,
2020, the Company issued an aggregate of 2,490 shares of its common stock upon the vesting of RSUs issued to the Company’s
board of directors.
During the three and nine months ended September
30, 2020, compensation expense recorded for the RSUs was $400 and $11,000, respectively, and $52,000 and $151,000 for the three
and nine months ended September 30, 2019, respectively. As of September 30, 2020, all outstanding RSUs had vested and compensation
expense had been fully recognized.
Warrants
During the nine months ended September 30,
2020 and 2019, the Company issued an aggregate of 91,500 and 1,944,707 shares of its common stock upon exercise of warrants, respectively,
resulting in net proceeds to the Company of $412,000 and $8,658,000, respectively.
As
of September 30, 2020, there were 183,148 outstanding warrants with a weighted average exercise price of $4.96 per share and a
weighted average remaining contractual life of 1.86 years.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 4 — Commitments and Contingencies:
Contingency Matters
On September 9, 2014, the Company filed
in the District Court of Mannheim, Germany, a patent infringement action against TauroPharm GmbH and Tauro-Implant GmbH as well
as their respective CEOs (the “Defendants”) claiming infringement of the Company’s European Patent EP 1 814 562
B1, which was granted by the European Patent Office (the “EPO”) on January 8, 2014 (the “Prosl European Patent”).
The Prosl European Patent covers the formulation of taurolidine and citrate with low dose heparin in a catheter lock solution for
maintaining patency and preventing infection in hemodialysis catheters. In this action, the Company claims that the Defendants
infringe on the Prosl European Patent by manufacturing and distributing catheter locking solutions to the extent they are covered
by the claims of the Prosl European Patent. The Company believes that its patent is sound and is seeking injunctive
relief and raising claims for information, rendering of accounts, calling back, destruction and damages. Separately, TauroPharm
has filed an opposition with the EPO against the Prosl European Patent alleging that it lacks novelty and inventive step. The
Company cannot predict what other defenses the Defendants may raise, or the ultimate outcome of either of these related matters.
At present, the EPO has revoked the Prosl European Patent as invalid, and the Company has filed an appeal, which is currently pending.
In the same complaint against the same Defendants,
the Company also alleged an infringement (requesting the same remedies) of ND Partners’ utility model DE 20 2005 022 124
U1 (the “Utility Model”), which the Company believes is fundamentally identical to the Prosl European Patent in its
main aspects and claims. The Court separated the two proceedings and the Prosl European Patent and the Utility Model claims are
now being tried separately. TauroPharm has filed a cancellation action against the Utility Model before the German Patent and Trademark
Office (the “German PTO”) based on the similar arguments as those in the opposition against the Prosl European Patent.
On March 27, 2015, the District Court held
a hearing to evaluate whether the Utility Model has been infringed by TauroPharm in connection with the manufacture, sale and distribution
of its TauroLock-HEP100TM and TauroLock-HEP500TM products. A hearing before the same court was held on January
30, 2015 on the separate, but related, question of infringement of the Prosl European Patent by TauroPharm.
The Court issued its decisions on May 8,
2015, staying both proceedings. In its decisions, the Court found that the commercialization by TauroPharm in Germany of its TauroLock
catheter lock solutions Hep100 and Hep500 infringes both the Prosl European Patent and the Utility Model and further that
there is no prior use right that would allow TauroPharm to continue to make, use or sell its product in Germany. However, the Court
declined to issue an injunction in favor of the Company that would preclude the continued commercialization by TauroPharm based
upon its finding that there is a sufficient likelihood that the EPO, in the case of the Prosl European Patent, or the German PTO,
in the case of the Utility Model, may find that such patent or utility model is invalid. Specifically, the Court noted the possible
publication of certain instructions for product use that may be deemed to constitute prior art. As such, the District Court determined
that it will defer any consideration of the request by the Company for injunctive and other relief until such time as the EPO or
the German PTO made a final decision on the underlying validity of the Prosl European Patent and the Utility Model. We expect that
the complaint regarding the infringement of the Utility Model will be dismissed now that the German PTO has voided the Utility
Model (see below). This does not, however, have a direct effect on the infringement proceedings concerning the Prosl European Patent.
The opposition proceeding against the Prosl
European Patent before the EPO is ongoing. The EPO held a hearing in the opposition proceeding on November 25, 2015. In its preliminary
consideration of the matter, the EPO (and the German PTO) had regarded the patent as not inventive or novel due to publication
of prior art. However, the EPO did not issue a decision at the end of the hearing but adjourned the matter due to the fact that
the panel was of the view that Claus Herdeis, one of the managing directors of TauroPharm, had to be heard as a witness in a further
hearing in order to close some gaps in the documentation presented by TauroPharm as regards the publication of the prior art.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The German PTO held a hearing in the validity
proceedings relating to the Utility Model on June 29, 2016, at which the panel affirmed its preliminary finding that the Utility
Model was invalid based upon prior publication of a reference to the benefits that may be associated with adding heparin to a taurolidine
based solution. The Company filed an appeal against the ruling on September 7, 2016. An oral hearing was held on September 17,
2019 in which the German Federal Patent Court affirmed the first instance decision that the Utility Model was invalid. The decision
has only a declaratory effect, as the Utility Model had expired in November 2015. On April 28, 2020, the Company filed a withdrawal
of the complaint on the German utility model, thereby waiving its claims on these proceedings. The Company estimates that the expense
will be less than €40,000.
In October 2016, TauroPharm submitted a
further writ to the EPO requesting a date for the hearing and bringing forward further arguments, in particular in view of the
June 2016 decision of the German PTO on the invalidity of the utility model. On November 22, 2017, the EPO in Munich, Germany held
a further oral hearing in this matter. At the hearing, the panel held that the Prosl European Patent would be invalidated because
it did not meet the requirements of novelty based on a technical aspect of the European intellectual property law. The Company
disagrees with this decision and, after the written opinion was issued by the Opposition Division in September 2018, has appealed
the decision. The Company continues to believe that the Prosl European Patent is indeed novel and that its validity should be maintained.
There can be no assurance that the Company will prevail in this matter. In addition, the ongoing Unfair Competition litigation
brought by the Company against TauroPharm is not affected and will continue.
On January 16, 2015, the Company filed a
complaint against TauroPharm GmbH and its managing directors in the District Court of Cologne, Germany. In the
complaint, the Company alleges violation of the German Unfair Competition Act by TauroPharm for the unauthorized use of its proprietary
information obtained in confidence by TauroPharm. The Company alleges that TauroPharm is improperly and unfairly using
its proprietary information relating to the composition and manufacture of Neutrolin, in the manufacture and sale of TauroPharm’s
products TauroLockTM, TauroLock-HEP100 and TauroLock-HEP500. The Company seeks a cease and desist order against
TauroPharm from continuing to manufacture and sell any product containing taurolidine (the active pharmaceutical ingredient (“API”)
of Neutrolin) and citric acid in addition to possible other components, damages for any sales in the past and the removal
of all such products from the market. An initial hearing in the District Court of Cologne, Germany was held on November 19, 2015
to consider the Company’s claims. In this hearing, the presiding judge explained that the court needed more information with
regard to several aspects of the case. As a consequence, the Court issued an interim decision in the form of a court order outlining
several issues of concern that relate primarily to the court’s interest in clarifying the facts and reviewing any and all available
documentation, in particular with regard to the question which specific know-how was provided to TauroPharm by whom and when. The
Company’s legal team prepared the requested reply and produced the respective documentation. TauroPharm had also filed another
writ within the same deadline and both parties have filed further writs at the end of April 2016 setting out their respective argumentation
in more detail. A further oral hearing in this matter was held on November 15, 2016. In this hearing, the court heard arguments
from CorMedix and TauroPharm concerning the allegations of unfair competition. The Court made no rulings from the bench and indicated
that it is prepared to further examine the underlying facts of the Company’s allegations. On March 7, 2017, the Court issued another
interim decision in the form of a court order outlining again several issues relating to the argumentation of both sides in the
proceedings. In particular the court requested the Company to further specify its requests and to further substantiate in even
more detail which know-how was provided by Biolink (the company who developed Neutrolin that was acquired by ND Partners) to TauroPharm
by whom and when. The Court also raised the question whether the know-how provided at the time to TauroPharm could still be considered
to be secret know-how or may have become public in the meantime. The Court granted both sides the opportunity to reply to this
court order and provide additional facts and evidence until May 15, 2017. Both parties have submitted further writs in this matter
and the Court scheduled a further hearing on May 8, 2018. After having been rescheduled several times, the hearing took place on
November 20, 2018. A decision was rendered by the court on December 11, 2018, dismissing the complaint in its entirety. However,
the Company intends to continue to pursue this matter, and still believes firmly that its claims are well-founded. The Company
therefore appealed in January 2019 and filed its grounds of appeal in March 2019. An oral hearing was held on September 6, 2019
in which the legal counsel of the Company brought forward further arguments for the fact that the manufacturing process of the
respective catheter locking solution is indeed protectable as a trade secret. In view of these new arguments, the Court issued
an evidentiary order on September 27, 2019 ordering an expert opinion. The expert opinion was not in the Company’s favor but the
Company has filed a response to the expert opinion in reaction to which the Court asked the expert to supplement his opinion to
address the issues brought forward in the Company’s submission. In the supplementary expert opinion, the expert confirmed his view.
The Company has filed a response and requested an oral hearing which has not yet been scheduled.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In connection with the aforementioned patent and utility model
infringement and unfair competition proceedings against TauroPharm, the Company was required by the District Courts of Mannheim
and Cologne to provide security deposits of an aggregate of approximately $183,000, to cover legal fees in the event TauroPharm
is entitled to reimbursement of these costs. The Company recorded the deposits as restricted cash on the consolidated balance
sheets. During the nine months ended September 30, 2020, the Company accrued an expense of $12,000 in connection with the utility
model infringement proceedings, which will be deducted from restricted cash when settled.
Commitments
In-Licensing
In 2008, the Company entered into a License
and Assignment Agreement (the “NDP License Agreement”) with ND Partners, LLP (“NDP”). Pursuant to the NDP
License Agreement, NDP granted the Company exclusive, worldwide licenses for certain antimicrobial catheter lock solutions, processes
for treating and inhibiting infections, a biocidal lock system and a taurolidine delivery apparatus, and the corresponding United
States and foreign patents and applications (the “NDP Technology”). The Company acquired such licenses and patents
through its assignment and assumption of NDP’s rights under certain separate license agreements by and between NDP and Dr.
Hans-Dietrich Polaschegg, Dr. Klaus Sodemann and Dr. Johannes Reinmueller. As consideration in part for the rights to the NDP Technology,
the Company paid NDP an initial licensing fee of $325,000 and granted NDP a 5% equity interest in the Company, consisting of 7,996
shares of the Company’s common stock.
The Company is required to make payments to
NDP upon the achievement of certain regulatory and sales-based milestones. Certain of the milestone payments are to be made in
the form of shares of common stock currently held in escrow for NDP, and other milestone payments are to be paid in cash. The maximum
aggregate number of shares issuable upon achievement of milestones is 29,109 shares. In 2014, a certain milestone was achieved
resulting in the release of 7,277 shares held in escrow. The number of shares held in escrow as of September 30, 2020 is 21,832
shares of common stock. The maximum aggregate amount of cash payments due upon achievement of milestones is $3,000,000 with the
balance being $2,500,000 as of September 30, 2020 and 2019. Events that trigger milestone payments include but are not limited
to the reaching of various stages of regulatory approval and upon achieving certain worldwide net sales amounts. There were no
milestones achieved during the three and nine months ended September 30, 2020 and 2019.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The NDP License Agreement may be terminated
by the Company on a country-by-country basis upon 60 days prior written notice. If the NDP License Agreement is terminated by either
party, the Company’s rights to the NDP Technology will revert back to NDP.
Employment Agreements
On April 30, 2020, the Company entered into
an employment agreement with Dr. Matthew David, pursuant to which Dr. David became the Company’s Executive Vice President
and Chief Financial Officer effective on May 11, 2020. After the initial three-year term of the employment agreement, the agreement
will automatically renew for additional successive one-year periods, unless either party notifies the other in writing at least
90 days before the expiration of the then current term that the agreement will not be renewed. In connection with Dr. David’s
employment, the Company granted him stock options to purchase 250,000 shares of common stock, 166,000 of which vest in four equal
installments over four years beginning one year after his start date and continuing on each of the next three anniversaries, subject
to Dr. David’s continued employment with the Company, and 84,000 of which vest upon the achievement of designated performance
milestones, subject to Dr. David’s continued employment with the Company.
If the Company terminates Dr. David’s
employment other than for Cause (as defined in the agreement), death, disability, or by notice of nonrenewal, or if he resigns
for Good Reason (as defined in the agreement), including in each case within 24 months of a Change of Control (as defined in the
agreement), Dr. David will receive his base salary and benefits for a period of nine months following the effective date of the
termination of his employment, and all unvested stock options held by him that are scheduled to vest on or before the next succeeding
anniversary of the date of termination will be accelerated and deemed to have vested as of the termination date, provided that
any milestone option whose vesting requirements have not been met as of the termination date will be terminated.
If the Company terminates Dr. David’s
employment for Cause (as defined in the agreement), Dr. David will be entitled to receive only the accrued compensation due to
him as of the date of such termination, rights to indemnification and directors’ and officers’ liability insurance,
and as otherwise required by law. All outstanding equity awards and all outstanding stock options then held by Dr. David that are
granted on or after the effective date of his employment agreement, whether or not vested, will be forfeited to us as of such date.
Note 5 — Leases:
The Company entered into a seven-year operating
lease agreement in March 2020 for an office space at 300 Connell Drive, Berkeley Heights, New Jersey 07922. The lease agreement,
with a monthly average cost of approximately $17,000 commenced on September 16, 2020.
The Company’s lease on its current
premises at 400 Connell Drive, Berkeley Heights, New Jersey 07922 terminates on November 30, 2020.
The Company entered into an operating lease
for office space in Germany that began in July 2017. The rental agreement has a three-month term which automatically renews and
includes a monthly cost of 400 Euros. The Company elected to apply the short-term practical expedient to the office lease. The
Company also has an operating lease for office equipment.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Operating lease expense in the Company’s
condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 was
approximately $10,000 and $14,000, respectively, which includes costs associated with leases for which ROU assets have been recognized
as well as short-term leases. Operating lease expense in the Company’s condensed consolidated statements of operations and
comprehensive loss for the three and nine months ended September 30, 2019 was approximately $2,000 and $6,000, respectively, which
includes costs associated with leases for which ROU assets have been recognized as well as short-term leases.
At September 30, 2020, the Company has a total
operating lease liability and operating lease ROU assets of $1,050,000 and $1,042,000, respectively.
For the three and nine months ended September
30, 2020 and 2019, cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating
leases was $2,000 and $6,000, respectively.
The weighted average remaining lease term as
of September 30, 2020 and 2019 were 7.0 and 2.8 years, respectively, and the weighted average discount rate for operating leases
was 9.0% and 10.0% as of September 30, 2020 and 2019, respectively.
As of September 30, 2020, maturities of
lease liabilities were as follows:
2020 (excluding the nine months ended September 30, 2020)
|
|
$
|
41,000
|
|
2021
|
|
|
198,000
|
|
2022
|
|
|
200,000
|
|
2023
|
|
|
202,000
|
|
2024
|
|
|
205,000
|
|
2025 and thereafter
|
|
|
588,000
|
|
Total future minimum lease payments
|
|
|
1,434,000
|
|
Less imputed interest
|
|
|
(384,000
|
)
|
Total
|
|
$
|
1,050,000
|
|
Note 6 — Concentrations:
At September 30, 2020, 99% of net accounts receivable
was due from two customers that exceeded 10% of the Company’s accounts receivable (50% each) and at December 31, 2019, no
customer exceeded 10% of the Company’s accounts receivable. During the three months ended September 30, 2020, the Company
had revenue from three customers that exceeded 10% of its total sales (50%, 24% and 16%) and for the nine months ended September
30, 2020, the Company had revenue from three customers that each exceeded 10% of its total sales (50%, 16% and 12%). During the
three months ended September 30, 2019, the Company had revenue from one customer that exceeded 10% of its totals sales (77%) and
for the nine months ended September 30, 2019, the Company had revenue from four customers that each exceeded 10% of its total sales
(46%, 20%, 13% and 13%).
Note 7 — Subsequent Event:
During October 2020, the Company sold an aggregate
of 784,321 shares of its common stock under the ATM program and realized net proceeds of approximately $4.6 million.