NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization, Business and Basis of Presentation:
Organization
and Business:
CorMedix
Inc. (“CorMedix” or the “Company”) was incorporated in the State of Delaware on July 28, 2006. The Company
is a biopharmaceutical company focused on developing and commercializing therapeutic products for the prevention and treatment
of infectious and inflammatory diseases. In 2013, the Company formed a wholly-owned subsidiary, CorMedix Europe GmbH and in May
2020, the Company formed a wholly-owned Spanish subsidiary, CorMedix Spain, S.L.U.
The Company’s
primary focus is to develop its lead product candidate, DefenCath™, for potential commercialization in the United States
(“U.S.”) and other key markets. The Company has in-licensed the worldwide rights to develop and commercialize DefenCath/Neutrolin®,
which is a novel anti-infective solution (a formulation of taurolidine 1.35% and heparin 1000 u/ml) intended for the reduction
and prevention of catheter-related infections and thrombosis in patients requiring central venous catheters in clinical settings
such as hemodialysis, total parenteral nutrition, and oncology. The name DefenCath is the U.S. proprietary name conditionally approved
by the U.S. Food and Drug Administration (“FDA”), while the name Neutrolin is currently used in the European Union
(“EU”) and other territories where the Company has received CE-Mark approval for the commercial distribution of Neutrolin
as a catheter lock solution (“CLS”) regulated as a medical device.
In
January 2015, the FDA designated DefenCath as a Qualified Infectious Disease Product (“QIDP”) for prevention of catheter-related
blood stream infections in patients with end stage renal disease receiving hemodialysis through a central venous catheter. Catheter-related
blood stream infections and clotting can be life-threatening. The QIDP designation provides five years of market exclusivity in
addition to the five years granted for a New Chemical Entity upon approval of a New Drug Application (“NDA”). In addition,
in January 2015, the FDA granted Fast Track designation to DefenCath Catheter Lock Solution, a designation intended to facilitate
development and expedite review of drugs that treat serious and life-threatening conditions so that the approved drug can reach
the market expeditiously. The Fast Track designation of DefenCath provides us with the opportunity to meet with the FDA on a more
frequent basis during the development process, and also ensures eligibility to request priority review of the marketing application.
In
December 2015, 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 (“LOCK-IT-100”), in patients with hemodialysis catheters in the U.S. 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, or tPA, or removal
of catheter due to dysfunction, and removal of catheter for any reason.
As
previously agreed with the FDA, an interim efficacy analysis was performed when the first 28 potential CRBSI cases were identified
in our LOCK-IT-100 study that occurred through early December 2017. 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 LOCK-IT-100 study was terminated early. The study continued enrolling and treating subjects until study termination, and the
final analysis was based on a total of 795 subjects. 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.
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 investigation sites with procedures to include
trial quality that has demonstrated a clinically meaningful and statistically very persuasive effect on prevention of 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 in August 2020, the FDA accepted for filing the DefenCath NDA. The FDA also granted the Company’s request
for priority review, which provides for a six-month review period instead of the standard ten-month review period. As the
Company announced in March 2021, the FDA informed the Company that it will not approve the NDA for DefenCath in its present
form. The FDA noted concerns at the third-party manufacturing facility after a review of records requested by the FDA and
provided by the manufacturing facility. The Company is working with the manufacturing facility to develop plans for
resolution of the deficiencies. Additionally, the FDA is requiring a manual extraction study to demonstrate that the labeled
volume can be consistently withdrawn from the vials despite an existing in-process control to demonstrate fill volume within
specifications. The Company expects to be able to complete this requirement expeditiously. Satisfactory resolution of these
issues is required for approval of the DefenCath NDA by a pre-approval inspection and/or adequate manufacturing facility
responses addressing these concerns. If an inspection is required, the Company may encounter delays in obtaining FDA approval
because the FDA is currently facing a backlog due to the pandemic and is actively working to define an approach for
scheduling outstanding inspections once safe travel may resume. The Company will request a meeting with the FDA, which the
Company estimates will occur in mid-April, to obtain agreement with the FDA on the proposed resolutions of the
deficiencies.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The
FDA did not request additional clinical data and did not identify any deficiencies related to the data submitted on the efficacy
or safety of DefenCath from LOCK-IT-100. In draft labeling discussed with the FDA, the FDA added that the initial approval will
be for the limited population of patients with kidney failure receiving chronic hemodialysis through a central venous catheter.
This is consistent with our request for approval pursuant to the Limited Population Pathway for Antibacterial and Antifungal Drugs
(“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 needs. LPAD provides for a streamlined clinical development program involving smaller, shorter,
or fewer clinical trials and is intended to encourage the development of safe and effective products that address unmet medical
needs of patients with serious bacterial and fungal infections. We believe that LPAD will provide additional flexibility for the
FDA to approve DefenCath to reduce CRBSIs in the limited population of patients with kidney failure receiving hemodialysis through
a central venous catheter.
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 central venous catheter.
In
addition to DefenCath, the Company is sponsoring a pre-clinical research collaboration for the use of taurolidine as a possible
treatment for rare orphan 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 develop
and commercialize 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.
The Company was granted
a deferral by the FDA under the Pediatric Research Equity Act (“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.
The
FDA regards taurolidine as a new chemical entity and therefore, it is currently an unapproved new drug. The Company might 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 (“PMA”)
for marketing authorization for any medical device indications that we 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 the European Union
(“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 commercially launched Neutrolin in Germany for the prevention of CRBSI, and maintenance
of catheter patency in hemodialysis patients using a tunneled, cuffed central venous catheter 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 (“MEB”), granted a label expansion for Neutrolin
to include use in oncology patients receiving chemotherapy, intravenous (“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 September 2019,
the Company’s registration with the Saudi Arabia Food and Drug Administration, or the SFDA, expired. As a result, the Company
cannot sell Neutrolin in Saudi Arabia. The Company intends to complete the documentation required to renew its registration with
the SFDA, however, the Company cannot predict how long the renewal process will take. There is no assurance that the registration
will be renewed by the SFDA.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
On
March 26, 2019, the Company effected a 1-for-5 reverse stock split of its issued and outstanding shares of common stock, par value
$0.001, per share (“Common Stock”), by combining, reclassifying and changing each authorized and outstanding five
shares of “old” common stock into one share of “new” common stock. No fractional shares were issued, and,
in lieu thereof, where applicable, one whole share was issued. To reflect the reverse stock split, reclassification, combination
and change, proportional adjustments were also made to the number of shares of our common stock issuable upon conversion of outstanding
preferred shares and the convertible note payable, warrants and options and other equity awards. The reverse stock split did not
affect the par value per share of our common stock (which remains at $0.001 per share) or the total number of shares of common
stock that are authorized to be issued pursuant to our Amended and Restated Certificate of Incorporation, as amended, which remains
at 160 million shares. All issued and outstanding share and per share amounts included in the accompanying consolidated financial
statements and in this report have been adjusted to reflect the reverse stock split, reclassification, combination and change
for all periods presented.
The
Company is using its current cash resources for certain pre-launch activities. Commercial preparations are dependent on the Company’s
ability to raise sufficient additional funds through various potential sources, such as equity, debt financings, and/or strategic
relationships and potential strategic transactions. The Company can provide no assurances that financing or strategic relationships
will be available on acceptable terms, or at all, to complete its clinical development program for DefenCath.
The novel coronavirus
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 conditions and results of operations.
Note
2 — Liquidity and Uncertainties:
The consolidated financial
statements have been prepared in conformity with generally accepted accounting principles 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 December 31, 2020, the Company had an accumulated deficit of $217.4 million, and incurred net losses of $22.0
million and $16.4 million for the years ended December 31, 2020 and 2019, respectively. Based on the Company’s current development
plans for DefenCath/Neutrolin in both the U.S. and foreign markets and its other operating requirements, the Company’s existing
cash and cash equivalents and short-term investments at December 31, 2020 are expected to fund its operations for at least twelve
months after the filing date of this report after taking into consideration the $41.5 million of net proceeds received in January
and February 2021 from the At-the-Market Issuance Sales Agreement (the “ATM program”) (see Note 11) and the costs
for the initial preparations for the commercial launch for DefenCath.
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, potential strategic transactions or out-licensing of its products in order 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. As of the filing date of this Annual Report
on Form 10-K, the Company has no available balance under its ATM program and has $50.0 million available under its current shelf
registration for the issuance of equity, debt or equity-linked securities (see Note 8).
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 results of clinical testing and trial activities of the Company’s product
candidates; 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;
and the Company’s ability to raise capital to support its operations.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Note
3 — Summary of Significant Accounting Policies:
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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
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.
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:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
41,905,469
|
|
|
$
|
16,350,237
|
|
Restricted cash
|
|
|
191,314
|
|
|
|
174,950
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
42,096,783
|
|
|
$
|
16,525,187
|
|
The
appropriate classification of marketable securities is determined at the time of purchase and reevaluated as of each balance sheet
date. Investments in marketable debt and equity securities classified as available-for-sale 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 net of tax in other comprehensive
income (loss). Realized gains and losses, amortization of premiums and discounts and interest and dividends earned are included
in 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 December 31, 2020 or 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 December 31, 2020 and 2019, all of the Company’s
investments had contractual maturities which were less than one year. The following table summarizes the amortized cost, unrealized
gains and losses and the fair value at December 31, 2020 and 2019:
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Losses
|
|
|
Gross Unrealized
Gains
|
|
|
Fair Value
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
3,182,762
|
|
|
$
|
(81
|
)
|
|
$
|
8
|
|
|
$
|
3,182,689
|
|
Corporate Securities
|
|
|
3,565,501
|
|
|
|
(1,005
|
)
|
|
|
3
|
|
|
|
3,564,499
|
|
Commercial Paper
|
|
|
879,501
|
|
|
|
-
|
|
|
|
72
|
|
|
|
879,573
|
|
Subtotal
|
|
|
4,445,002
|
|
|
|
(1,005
|
)
|
|
|
75
|
|
|
|
4,444,072
|
|
Total December 31, 2020
|
|
$
|
7,627,764
|
|
|
$
|
(1,086
|
)
|
|
$
|
83
|
|
|
$
|
7,626,761
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and 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
|
|
Fair
Value Measurements
The
Company’s financial instruments recorded in the 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’s senior secured convertible note (prior to
its extinguishment in August 2019) falls into the Level 3 category within the fair value level hierarchy. The fair value was determined
using market data for valuation.
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, which is set out below. 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.
|
●
|
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 CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The
following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of
December 31, 2020 and 2019:
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
3,182,689
|
|
|
$
|
3,182,689
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Corporate Securities
|
|
|
3,564,499
|
|
|
|
-
|
|
|
|
3,564,499
|
|
|
|
-
|
|
Commercial Paper
|
|
|
879,573
|
|
|
|
-
|
|
|
|
879,573
|
|
|
|
-
|
|
Subtotal
|
|
|
4,444,072
|
|
|
|
-
|
|
|
|
4,444,072
|
|
|
|
-
|
|
Total December 31, 2020
|
|
$
|
7,626,761
|
|
|
$
|
3,182,689
|
|
|
$
|
4,444,072
|
|
|
$
|
-
|
|
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 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, if any, 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 year. Translation gains and losses are included in other comprehensive income (loss). The Company had a foreign currency
translation gain of $6,020 in 2020 and a gain of $467 in 2019.
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.
Geographic
Information
The
following table summarizes the geographic information:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Reported revenues
|
|
$
|
239,231
|
|
|
$
|
283,266
|
|
Revenues attributable to European and Mideast operations, which are based in Germany
|
|
|
237,025
|
|
|
|
274,443
|
|
Total assets
|
|
|
49,308,303
|
|
|
|
29,475,910
|
|
Total assets located in the United States, with the remainder in the European Union
|
|
$
|
48,928,244
|
|
|
$
|
28,919,276
|
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Restricted
Cash
As of December 31, 2020, and 2019 the Company has restricted
cash in connection with the patent and utility model infringement proceedings against TauroPharm (see Note 7). The Company was
required by the District Court Mannheim to provide a security deposit of approximately $135,000 (€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 $44,000 (€36,000) and $12,000 (€10,000) for the first and second instances, respectively, in connection with
the unfair competition proceedings in Cologne. During the year ended December 31, 2020, the Company reimbursed TauroPharm approximately
$30,000 for the costs in connection with the utility model infringement proceedings. In January 2021, approximately $48,000 (€40,000)
was released by the court to the Company’s account which will be deducted from the restricted cash.
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,
pre-clinical development 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.
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:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
6,893
|
|
Finished goods
|
|
|
317,733
|
|
|
|
461,735
|
|
Inventory reserve
|
|
|
(174,169
|
)
|
|
|
(130,163
|
)
|
Total
|
|
$
|
143,564
|
|
|
$
|
338,465
|
|
Property
and Equipment
Property
and equipment consist primarily of furnishings, fixtures, leasehold improvements, office equipment and computer equipment all
of which are recorded at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized using the straight-line method over the remaining lease term or the life
of the asset, whichever is shorter. Property and equipment, as of December 31, 2020 and 2019 were $111,499 and $122,130, respectively,
net of accumulated depreciation of $303,279 and $244,328, respectively. Depreciation and amortization of property and equipment
is included in selling, general and administrative expenses.
Description
|
|
Estimated
Useful Life
|
|
Office equipment and furniture
|
|
5 years
|
|
Leasehold improvements
|
|
7 years
|
|
Computer equipment
|
|
5 years
|
|
Computer software
|
|
3 years
|
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 (included in accrued expenses), and operating lease liabilities, net of current
portion, on the consolidated balance sheet (see Note 10).
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.
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:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Professional and consulting fees
|
|
$
|
146,129
|
|
|
$
|
214,777
|
|
Accrued payroll and payroll taxes
|
|
|
2,490,441
|
|
|
|
1,287,047
|
|
Clinical trial related
|
|
|
2,187
|
|
|
|
2,435,953
|
|
Manufacturing development related
|
|
|
143,780
|
|
|
|
806,032
|
|
Other
|
|
|
141,814
|
|
|
|
54,666
|
|
Total
|
|
$
|
2,924,351
|
|
|
$
|
4,798,475
|
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Revenue
Recognition
The
Company uses Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,”
issued by the Financial Accounting Standards Board (“FASB”), that 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 to the dialysis centers and upon meeting the five-step model prescribed
by ASC 606 outlined above.
Deferred
Revenue
In August 2014, the
Company entered into an exclusive distribution agreement (the “Wonik Agreement”) with Wonik Corporation, a South Korean
company, to market, sell and distribute Neutrolin for hemodialysis and oncolytic patients upon receipt of regulatory approval in
South Korea. Upon execution, Wonik paid the Company a non-refundable $50,000 payment and will pay an additional $50,000 upon receipt
of the product registration necessary to sell Neutrolin in South Korea (the “Territory”). The term of the Wonik Agreement
commenced on August 8, 2014 and will continue for three years after the first commercial sale of Neutrolin in the Territory. The
non-refundable up-front payment has been recorded as deferred revenue and will be recognized as revenue on a straight-line basis
over the contractual term of the Agreement. Deferred revenue related to this agreement was fully amortized at December 31, 2020.
Loss
Per Common Share
Basic
loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted 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.
The
Company’s outstanding shares of Series E preferred stock entitle the holders to receive dividends on a basis equivalent
to the dividends paid to holders of common stock. As a result, the Series E preferred stock meet the definition of participating
securities requiring the application of the two-class method. Under the two-class method, earnings available to common shareholders,
including both distributed and undistributed earnings, are allocated to each class of common stock and participating securities
according to dividends declared and participating rights in undistributed earnings, which may cause diluted earnings per share
to be more dilutive than the calculation using the treasury stock method. No loss has been allocated to these participating securities
since they do not have contractual obligations that require participation in the Company’s losses.
Since
the Company has only incurred losses, basic and diluted loss per share are the same as potentially dilutive shares have been excluded
from the calculation of diluted net loss per share as their effect would be anti-dilutive. The shares outstanding at the end of
the respective periods presented below were excluded from the calculation of diluted net loss per share due to their anti-dilutive
effect:
|
|
Number of Shares of Common Stock Issuable
At
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Series C non-voting preferred stock
|
|
|
104,000
|
|
|
|
104,000
|
|
Series E voting preferred stock
|
|
|
391,953
|
|
|
|
391,953
|
|
Series G voting preferred stock
|
|
|
5,560,137
|
|
|
|
5,560,137
|
|
Restricted stock units
|
|
|
-
|
|
|
|
2,490
|
|
Shares issuable for payment of deferred board compensation
|
|
|
48,909
|
|
|
|
33,597
|
|
Shares underlying outstanding warrants
|
|
|
183,148
|
|
|
|
341,328
|
|
Shares underlying outstanding stock options
|
|
|
2,447,687
|
|
|
|
1,376,394
|
|
Total potentially dilutive shares
|
|
|
8,735,834
|
|
|
|
7,809,899
|
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Stock-Based
Compensation
Share-based
compensation cost is measured at grant date, based on the estimated fair value of the award using the Black-Scholes option pricing
model for options with service or performance-based conditions. Stock-based compensation is recognized as expense over the requisite
service period on a straight-line basis or 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 and facilities
expenses. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial and
the invoices received from its external service providers. As actual costs become known, the Company adjusts its accruals in the
period when actual costs become known. 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.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not
that some or all of the deferred tax assets will not be realized.
Recently
Adopted Authoritative Pronouncements
In
June 2016, the Financial Accounting Standards Board (“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 consolidated financial statements.
In
August 2018, the FASB issued 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 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, 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 consolidated financial statements.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 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 consolidated financial
statements.
Recent
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
4 — Related Party Transactions:
On
August 14, 2019, the Company entered into an exchange agreement (the “Exchange Agreement”) with Manchester Securities
Corp. (“Manchester”), an existing institutional investor and a wholly owned subsidiary of Elliott Associates, L.P.
(together with Manchester, “Elliott”), who collectively beneficially own the largest portion of the Company’s
common stock, pursuant to which Elliott agreed to exchange all of its outstanding warrants, its 10% senior secured convertible
note and its shares of Series C-2 preferred stock, Series D preferred stock and Series F preferred stock, and make a cash payment
of $2.0 million to the Company, for 100,000 shares of Series G preferred stock (see Notes 6 and 8). On September 6, 2019, the
Company completed the transactions contemplated by the Exchange Agreement.
On
December 31, 2018, the Company entered into a securities purchase agreement with Elliott, for the purchase and sale of a 10% senior
secured convertible note in the aggregate principal amount of $7,500,000 and a warrant to purchase up to an aggregate of 90,000
shares of the Company’s common stock, for gross proceeds of $7,500,000 (see Note 6). The warrant with a grant date fair
value of $433,365, is immediately exercisable, has an exercise price of $7.50 per share, subject to adjustment in the event of
stock dividends and distributions, stock splits, stock combinations, or reclassifications affecting our common stock, and has
a term of five years. The note has a conversion price of $7.50 per share. The conversion price is subject to appropriate adjustment
in the event of stock dividends and distributions, stock splits, stock combinations, or reclassifications affecting our common
stock. As of December 31, 2019, this note is no longer outstanding as a result of the Exchange Agreement (see Notes 6 and 8).
In
May 2013, the Company issued a warrant to purchase up to 100,000 shares of the Company’s common stock to Elliott. The warrant
had an expiration date of May 30, 2019. In May 2019, to allow the Company and Elliott time to discuss and possibly conclude the
Exchange Agreement, the Company extended the expiration date of the warrant to July 1, 2019, which was subsequently extended to
August 16, 2019. The warrant, which was canceled in connection with the terms of the Exchange Agreement, had an exercise price
of $0.005 (see Note 6). The incremental value of the warrant extended was immaterial.
Note
5 — Income Taxes:
The
Company’s U.S. and foreign loss before income taxes are set forth below:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
(20,605,821
|
)
|
|
$
|
(20,943,703
|
)
|
Foreign
|
|
|
(591,257
|
)
|
|
|
(550,149
|
)
|
Total
|
|
$
|
(27,197,078
|
)
|
|
$
|
(21,493,852
|
)
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
There
were no current or deferred income tax provision for the years ended December 31, 2020 and 2019 because the Company has incurred
operating losses since inception.
The
Company’s deferred tax assets consist of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net operating loss carryforwards – Federal
|
|
$
|
38,986,000
|
|
|
$
|
33,494,000
|
|
Net operating loss carryforwards – State
|
|
|
2,958,000
|
|
|
|
6,171,000
|
|
Net operating loss carryforwards – Foreign
|
|
|
2,455,000
|
|
|
|
2,128,000
|
|
Capitalized licensing fees
|
|
|
600,000
|
|
|
|
757,000
|
|
Stock-based compensation
|
|
|
3,358,000
|
|
|
|
2,892,000
|
|
Accrued compensation
|
|
|
102,000
|
|
|
|
349,000
|
|
Other
|
|
|
21,000
|
|
|
|
24,000
|
|
Totals
|
|
|
48,480,000
|
|
|
|
45,815,000
|
|
Less valuation allowance
|
|
|
(48,480,000
|
)
|
|
|
(45,815,000
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company had the following potentially utilizable net operating loss tax carryforwards:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
Federal
|
|
|
$
|
185,650,000
|
|
|
$
|
155,400,000
|
|
State
|
|
|
$
|
41,600,000
|
|
|
$
|
82,700,000
|
|
Foreign
|
|
|
$
|
8,185,000
|
|
|
$
|
7,091,000
|
|
The net operating losses
generated will start to expire in 2026 for Federal purposes whereas the operating losses for state purposes will begin expiring
in 2038. The Tax Cuts and Jobs Act of 2017 (the “Act”) limits the net operating loss deduction to 80% of taxable income
for losses arising in tax years beginning after December 31, 2017. However, the net operating losses now have an indefinite carryforward
as opposed to the former 20-year carryforward. The foreign net operating loss tax carryforwards do not expire. Our federal and
state operating loss carryforwards include windfall tax deductions from stock option exercises.
The
utilization of the Company’s net operating losses may be subject to a substantial limitation due to the “change of
ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result
in the expiration of the net operating loss carryforwards before their utilization.
The
Company’s foreign earnings are derived from its German subsidiary. The Company does not expect any foreign earnings to be
repatriated in the U.S. in the near future.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The
Company’s effective tax rate varied from the statutory rate as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Statutory federal tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax rate (net of federal)
|
|
|
4.3
|
%
|
|
|
7.2
|
%
|
Effect of foreign operations
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
Federal deferred tax rate change
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
NJ NOL adjustment
|
|
|
2.9
|
%
|
|
|
6.2
|
%
|
Other permanent differences
|
|
|
(0.6
|
)%
|
|
|
(0.4
|
)%
|
Effect of valuation allowance
|
|
|
(9.8
|
)%
|
|
|
(11.3
|
)%
|
Effective tax rate
|
|
|
19.0
|
%
|
|
|
23.6
|
%
|
In
assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income of the appropriate character during the periods in which those temporary differences become
deductible and the loss carryforwards are available to reduce taxable income. In making its assessment, the Company considered
all sources of taxable income including carryback potential, future reversals of existing deferred tax liabilities, prudent and
feasible tax planning strategies, and lastly, objectively verifiable projections of future taxable income exclusive of reversing
temporary differences and carryforwards. At December 31, 2020 and 2019, the Company maintained a full valuation allowance against
its net deferred tax assets. The Company will continue to assess all available evidence during future periods to evaluate the
realization of its deferred tax assets.
The
following table presents the changes in the deferred tax asset valuation allowance for the periods indicated:
Year Ended
|
|
Balance at Beginning of Year
|
|
|
Increase (Decrease) Charged (Credited) to Income Taxes (Benefit)
|
|
|
Increase (Decrease) Charged (Credited) to OCI
|
|
|
Balance at End of Year
|
|
December 31, 2020
|
|
$
|
45,815,000
|
|
|
$
|
2,696,000
|
|
|
$
|
(31,000
|
)
|
|
$
|
48,480,000
|
|
December 31, 2019
|
|
$
|
43,396,000
|
|
|
$
|
2,449,000
|
|
|
$
|
(30,000
|
)
|
|
$
|
45,815,000
|
|
Accounting
for uncertainty in income taxes requires uncertain tax positions to be classified as non-current income tax liabilities unless
they are expected to be paid within one year. The Company has concluded that there are no uncertain tax positions requiring recognition
in its consolidated financial statements as of December 31, 2020 and 2019. The Company recognizes interest and penalties related
to uncertain tax positions if any as a component of income tax expense.
The
Company files income tax returns in the U.S. federal, state and foreign jurisdictions. Tax years 2014 to 2018 remain open to examination
for both the U.S. federal and state jurisdictions. Tax years 2015 to 2018 remain open for Germany.
During
the years ended December 31, 2020 and 2019, the Company received net proceeds of $5,169,395 and $5,060,778, respectively, from
the sale of most of its remaining unused New Jersey net operating losses (“NOL”) eligible for sale under the State
of New Jersey’s Economic Development Authority’s New Jersey Technology Business Tax Certificate Transfer program (“NJEDA
Program”). The NJEDA Program allowed the Company to sell $5,529,000 of its total $6,018,000 in available NOL tax benefits
for the state fiscal year 2019 and $5,413,000 of its total $6,085,000 for the state fiscal year 2018.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Note
6 — Senior Secured Convertible Note, Related Party:
On December 31, 2018,
the Company entered into a securities purchase agreement with Elliott for the purchase and sale of a 10% senior secured convertible
note in the aggregate principal amount of $7,500,000 and a warrant to purchase up to an aggregate of 90,000 shares of the Company’s
common stock, for gross proceeds of $7,500,000. For year ended December 31, 2019, $462,000 was recognized as interest expense on
the consolidated statement of operations and comprehensive loss. The senior secured convertible note, including accrued interest,
and warrant to purchase up to an aggregate of 90,000 shares of the Company’s common stock were cancelled in connection with
the terms of the Exchange Agreement.
On
the same date, and in connection with the sale of the note and warrant, the Company amended and restated the following warrants
held by Elliott and its affiliates to reduce the exercise price of each warrant to $0.005 per share: warrants issued in May 2013
to purchase up to an aggregate of 100,000 shares of the Company’s common stock with a pre-amendment exercise price of $3.25
per share and an expiration date of May 30, 2019, which was subsequently extended to August 16, 2019 (the “May 30, 2019
Warrants”), (see Note 4); and warrants issued in October 2013 to purchase up to an aggregate of 150,000 shares of the Company’s
common stock with a pre-amendment exercise price of $4.50 per share and an expiration date of October 22, 2019 (the “October
22, 2019 Warrants”). These warrants were subsequently cancelled in connection with the Exchange Agreement, (see Note 8).
Also
in conjunction with the December 2018 securities purchase agreement, the Company and Elliott and certain of its affiliates that
hold shares of various series of the Company’s preferred stock and warrants to purchase shares of the Company’s common
stock agreed to waive any rights of conversion or exercise for all of the shares of its Series C-2, D, E and F preferred stock
and shares issuable upon the exercise of certain warrants (collectively with the shares of Series C-2, D, E, and F preferred stock,
the “Elliott Derivative Securities”), until the earliest to occur of (i) the effective date on which the Company’s
Certificate of Incorporation is amended to increase the number of authorized shares of common stock, (ii) the effective date on
which the Company effects a reverse stock split of its common stock, (iii) one business day immediately prior to the consummation
of a fundamental transaction (as defined in the instruments governing the applicable Elliott Derivative Securities), and (iv)
April 30, 2019. The 1-for-5 reverse stock split that was effective on March 26, 2019 satisfied this condition, however, with the
exception of the Series E preferred stock, the Elliot Derivative Securities were cancelled in connection with the Exchange Agreement.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The
Company was required to have a majority of the Series C-2, Series D, Series E and Series F non-voting preferred stock consent
to any indebtedness other than trade payables incurred in the ordinary course of business consistent with past practice, and letters
of credit incurred in an aggregate amount of $3,000,000 at any point in time. At the time of the securities purchase agreement,
Elliott was the holder of all of the shares of the Series C-2, Series D, Series E and Series F non-voting preferred stock and
implicitly consented to the convertible note financing. Elliott is currently the holder of all of the shares of the Series E and
Series G preferred stock.
The
$7,500,000 in gross proceeds, along with the legal fees of approximately $267,000, were allocated between the senior secured convertible
note and warrants based on their relative fair values. The portion of the proceeds allocated to the warrants of approximately
$396,000, net of allocated fees of approximately $6,000, was accounted for as additional paid-in capital. The remainder of the
proceeds of approximately $7,000,000, net of allocated fees of approximately $103,000 was allocated to the senior convertible
note, with the fair value of the warrants resulting in a debt discount. In addition, the incremental cost of approximately $710,000
associated with the warrant modification was recorded as a debt discount. An additional debt discount of approximately $143,000
was recorded as a beneficial conversion feature as the stock price was greater than the effective conversion price (after allocation
of the total proceeds) on the measurement date.
The
debt discount was being amortized to interest expense using the effective interest method in accordance with ASC 835 over the
term of the agreement. For the year ended December 31, 2019, approximately $313,000 was recognized as amortization of debt discount
and is included in interest expense on the consolidated statement of operations and comprehensive loss.
The
Company used a hybrid valuation model to determine the fair value of the senior secured convertible note. The hybrid model incorporated
both a present value analysis and the use of the Black Scholes option pricing model to reflect the senior secured convertible
note’s conversion feature. The Black-Scholes option pricing model was also used to determine the fair value of the warrants
in order to allocate the gross proceeds based on relative fair values (see Note 1). ASC 820, “Fair Value Measurements,”
states that the reporting entity should use the valuation technique(s) appropriate for the measurement, considering the availability
of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset
or liability. Market participants price options based on expected volatility, not historical volatility. In estimating the expected
volatility of the Company’s common stock, the Company followed the guidance of ASC 820 and considered a number of factors
- including the implied volatility of put and call options on the Company’s common stock that are traded over the counter.
A
summary of the assumptions used in the Black Scholes pricing model are as follows:
|
|
Conversion Option
At Issuance Date
|
|
|
New Warrants
At Issuance Date
|
|
Expected term (months)
|
|
36
|
|
|
60
|
|
Volatility
|
|
161.5%
|
|
|
161.5%
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
2.43%
|
|
|
2.48%
|
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
As
part of the Exchange Agreement, the senior secured convertible note, along with certain warrants and the Series C-2, Series D
and Series F preferred stock, and the payment of $2,000,000, was exchanged for 100,000 shares of Series G preferred stock. As
a result of this transaction, the Company recognized a deemed dividend of $26,733,098 on its consolidated statement of operations
and comprehensive loss for the year ended December 31, 2019 (see Note 8).
Note
7 — 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 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 were 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.
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.
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. 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 CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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.
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 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. 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. 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. 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 an oral hearing
has been scheduled for February 5, 2021 but was postponed to June 18, 2021 due to the COVID19 situation in Germany.
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 to cover legal fees in the
event TauroPharm is entitled to reimbursement of these costs. As of December 31, 2020, the aggregate deposit was approximately
$191,000, which the Company recorded as restricted cash on the consolidated balance sheets. During the year ended December 31,
2020, costs in connection with the utility model infringement proceedings of approximately $30,000 was reimbursed to TauroPharm.
In January 2021, approximately $48,000 was released by the court to the Company’s account which will be deducted from
restricted cash.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 December 31, 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 December 31, 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 years ended December 31, 2020 and 2019.
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.
Other
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 of approximately $17,000 commenced on September 16, 2020. The Company’s
sublease on its previous premises at 400 Connell Drive, Berkeley Heights, New Jersey 07922 terminated on November 30, 2020 (see
Note 10).
Note
8 — 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 to purchase additional shares, 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.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The Company had a prior sales agreement with FBR Securities, Inc., (formerly known as B. Riley FBR, Inc.) (“B. Riley”)
for its ATM program, which expired on April 16, 2018, under which the Company could issue and sell up to an aggregate of $60.0
million of shares of its common stock. On March 9, 2018, the Company entered into a new agreement with B. Riley for the sale of
up to $14.7 million of the Company’s common stock under the ATM program, pursuant to a registration statement filed on March
9, 2018 for an aggregate of $70 million of the Company’s securities, which became effective on April 16, 2018. This new ATM
agreement replaced a prior sales agreement with B. Riley that expired on April 16, 2018. The ATM program amount was increased by
$25.0 million in November 2018. 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. During the years ended December
31, 2020 and 2019, the Company sold 1,854,970 and 1,768,012 shares of common stock under the new and expired ATM programs, respectively,
and realized net proceeds of approximately $11.4 million and $15.2 million during the years ended December 31, 2020 and 2019, respectively.
At December 31, 2020, this current ATM program and the current shelf registration for the issuance of equity, debt or equity-linked
securities has been exhausted.
In
November 2020, the Company filed a new registration statement, under which the Company could issue and sell up to an aggregate
of $100.0 million of shares of its common stock, $0.001 par value per share. On November 27, 2020, the Company entered into an
Amended and Restated At Market Issuance Sales Agreement (“Amended Sales Agreement”) with B. Riley and Needham &
Company, LLC (“Needham”), together with B. Riley, acting as sales agents (“Sales Agent”). The Amended
Sales Agreement relates to the sale of shares of up to $25.0 million of the Company’s common stock under its ATM program, of which the Company
may issue and sell common stock from time to time through the Sales Agent, subject to limitations imposed by the Company and subject
to Sales Agent’s acceptance, such as the number or dollar amount of shares registered under the registration statement to
which the offering relates. Sales Agent is entitled to a commission of up to 3% of the gross proceeds from the sale of common
stock sold under the ATM program. During the year ended December 31, 2020, the Company sold 832,676 shares of common stock under
the Amended Sales Agreement at the weighted average price of $8.69 per share and realized net proceeds of approximately $7.0 million.
At December 31, 2020, the Company had approximately $17.8 million available under the Amended Sales Agreement and $75.0 million
available under its current shelf registration for the issuance of equity, debt or equity-linked securities unrelated to the Amended
Sales Agreement.
Restricted
Stock Units
During the year ended
December 31, 2020 the Company did not grant any restricted stock units (“RSUs”) and granted an aggregate of 24,850
RSUs during the year ended December 31, 2019 to its officers and directors under its 2013 Stock Incentive Plan with a weighted
average grant date fair value of $8.33 per share. The fair value of each RSU was estimated to be the closing price of the Company’s
common stock on each date of grant. These RSUs vest monthly over one year after grant date, subject to continued service on the
board through the vesting date. During the year ended December 31, 2020 and 2019, compensation expense recorded for these RSUs
was $11,000 and $198,000, respectively. There was no unrecognized compensation expense as of December 31, 2020 as all RSU’s
outstanding had vested. At December 31, 2020, there are no RSUs outstanding.
During
the years ended December 31, 2020 and 2019, the Company issued an aggregate of 2,490 and 25,346 shares of its common stock upon
the vesting of restricted stock units issued to the Company’s board of directors, respectively.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 December 31, 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
|
|
|
$
|
10.00
|
|
|
$
|
520,000
|
|
|
|
52,000
|
|
|
$
|
10.00
|
|
|
$
|
520,000
|
|
Series E
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
Series G
|
|
|
100,000
|
|
|
$
|
187.36
|
|
|
$
|
18,736,452
|
|
|
|
100,000
|
|
|
$
|
187.36
|
|
|
$
|
18,736,452
|
|
Total
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
On November 9, 2017,
the Company entered into a securities purchase agreement which, on November 16, 2017, resulted in the Company selling $2.0 million
of its Series F preferred stock (“Series F Stock”) at $1,000 per share. All outstanding shares of Series F Stock were
cancelled in connection with the terms of the Exchange Agreement, as described below.
On
August 14, 2019, the Company entered into the Exchange Agreement with Elliott, pursuant to which Elliott agreed to exchange all
of its outstanding warrants, its 10% senior secured convertible note and its shares of Series C-2 preferred stock, Series D preferred
stock and Series F preferred stock, and make a cash payment of $2.0 million to the Company, for 100,000 shares of Series G preferred
stock, with an aggregate liquidation preference of $18,736,452, which are convertible into an aggregate of 5,560,138 shares of
the Company’s common stock at a conversion price of $3.37 per share. Elliott retained the shares of the Company’s
common stock and Series E preferred stock that it held at the time of the consummation of the Exchange Agreement. Other than with
respect to conversion price and liquidation preference, the Series G preferred stock has substantially the same terms as the Company’s
outstanding Series E preferred stock, including the restrictive covenants contained therein as modified as set forth in the Exchange
Agreement. However, Elliott is prohibited from converting the Series G preferred stock into shares of the Company’s common
stock to the extent that, as a result of such conversion, Elliott would own more than 4.99% of the total number of shares of the
Company’s common stock then issued and outstanding. The shares of Series G preferred stock are entitled to vote on an as-converted
basis with respect to the number of shares of common stock into which they are convertible, based upon an assumed conversion price,
solely for the purpose of the voting rights, equal to $7.93, the closing price of the Company’s common stock on August 14,
2019, and the Series E preferred stock was modified to provide for similar rights to vote on an as-converted basis. The Company
filed the Certificate of Designation of the Series G preferred stock and the Second Amended and Restated Certificate of Designation
of the Series E preferred stock with the Secretary of State of the State of Delaware on September 5, 2019. On September 6, 2019,
the Company closed this transaction and issued the Series G preferred stock.
Pursuant
to the terms of the Exchange Agreement, the exchange of the Series C-2 preferred stock, Series D preferred stock, Series F preferred
stock and the 10% senior secured convertible note was considered an extinguishment. As a result, the difference between the fair
value allocated to the Series G preferred stock and the carrying value of the Series C-2 preferred stock, Series D preferred stock,
Series F preferred stock and the 10% senior secured convertible note is being treated as a deemed dividend and is added to net
loss to arrive at loss available to common stockholders.
The
Series G preferred stock was valued using the Black Scholes option pricing model. The Black-Scholes option pricing model was also
used to determine the fair value of the warrants and the Series C-2 preferred stock, Series D preferred stock and Series F preferred
stock. These fair values, along with the fair value of the 10% senior secured convertible note were utilized to allocate the fair
value of the Series G preferred stock based on relative fair values. ASC 820, Fair Value Measurements, states that the reporting
entity should use the valuation technique(s) appropriate for the measurement, considering the availability of data with which
to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability. Market
participants price options based on expected volatility, not historical volatility. In estimating the expected volatility of the
Company’s common stock, the Company followed the guidance of ASC 820 and considered a number of factors - including the
implied volatility of the Company’s listed warrant contracts.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
A
summary of the assumptions used in the Black Scholes pricing model are as follows:
Expected term, years
|
|
3.0
|
|
Volatility
|
|
93.3
|
%
|
Dividend yield
|
|
0.0
|
%
|
Risk-free interest rate
|
|
1.53
|
%
|
As
a result of the Exchange Agreement, the Company recognized a deemed dividend of $26,733,098. The deemed dividend was comprised
of (1) a beneficial conversion related to the 10% secured senior convertible note recognized at extinguishment; (2) the difference
between the allocated fair value of the Series G Preferred Stock issued and the carrying values of the 10% secured senior convertible
note, the Series C-2 Preferred Stock, Series D Preferred Stock and Series F Preferred Stock; (3) the difference between the fair
value of the exchanged warrants before and after the Exchange Agreement; and (4) the difference between the fair value and the
carrying value of Series E Preferred Stock, less the fair value of the Series E warrants that were cancelled as part of the Exchange
Agreement.
The
following rights, privileges, terms and condition apply to the outstanding preferred stock at December 31, 2020:
Series
C-3 Non-Voting Preferred Stock
Rank.
The Series C-3 non-voting preferred stock will rank senior to our common stock; senior to any class or series of capital stock
created after the issuance of the Series C-3 non-voting preferred stock; and junior to the Series E voting convertible preferred
stock in each case, as to dividends or distributions of assets upon our liquidation, dissolution or winding up whether voluntarily
or involuntarily.
Conversion.
Each share of Series C-3 preferred stock is convertible into 2 shares of our common stock (subject to adjustment in the event
of stock dividends and distributions, stock splits, stock combinations, or reclassifications affecting our common stock) at a
per share price of $5.00 at any time at the option of the holder, except that a holder will be prohibited from converting shares
of Series C-3 preferred stock into shares of common stock if, as a result of such conversion, such holder, together with its affiliates,
would beneficially own more than 9.99% of the total number of shares of our common stock then issued and outstanding.
Liquidation
Preference. In the event of our liquidation, dissolution or winding up, holders of Series C-3 preferred stock will receive
a payment equal to $10.00 per share of Series C-3 preferred stock before any proceeds are distributed to the holders of our common
stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of our capital
stock hereafter created specifically ranking by its terms senior to the Series C-3 preferred stock and holders of Series C-3 preferred
stock will participate ratably in the distribution of any remaining assets with the common stock and any other class or series
of our capital stock hereafter created that participates with the common stock in such distributions.
Voting
Rights. Shares of Series C-3 preferred stock will generally have no voting rights, except as required by law and except that
the consent of holders of two thirds of the outstanding Series C-3 preferred Stock will be required to amend the terms of the
Series C-3 preferred stock or the certificate of designation for the Series C-3 preferred stock.
Dividends.
Holders of Series C-3 preferred stock are entitled to receive, and we are required to pay, dividends on shares of the Series
C-3 preferred stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends (other than dividends
in the form of common stock) actually paid on shares of the common stock when, as and if such dividends (other than dividends
in the form of common stock) are paid on shares of the common stock.
Redemption.
We are not obligated to redeem or repurchase any shares of Series C-3 preferred stock. Shares of Series C-3 preferred stock
are not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous fund provisions.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Listing.
There is no established public trading market for the Series C-3 preferred stock, and we do not expect a market to develop.
In addition, we do not intend to apply for listing of the Series C-3 preferred stock on any national securities exchange or trading
system.
Fundamental
Transactions. If, at any time that shares of Series C-3 preferred stock are outstanding, we effect a merger or other change
of control transaction, as described in the certificate of designation and referred to as a fundamental transaction, then a holder
will have the right to receive, upon any subsequent conversion of a share of Series C-3 preferred stock (in lieu of conversion
shares) for each issuable conversion share, the same kind and amount of securities, cash or property as such holder would have
been entitled to receive upon the occurrence of such fundamental transaction if such holder had been, immediately prior to such
fundamental transaction, the holder of a share of common stock.
Series
E Voting Convertible Preferred Stock
Rank.
The Series E voting preferred stock will rank senior to our common stock; senior to any class or series of capital stock created
after the issuance of the Series E voting convertible preferred stock; senior to the Series C-3 non-voting convertible preferred
stock; and on parity with the Series G voting convertible preferred stock in each case, as to dividends or distributions of assets
upon our liquidation, dissolution or winding up whether voluntarily or involuntarily.
Conversion.
Each share of Series E preferred stock is convertible into 4.3733 shares of our common stock (subject to adjustment as provided
in the certificates of designation for the Series E preferred stock) at a per share price of $3.75 at any time at the option of
the holder, except that a holder will be prohibited from converting shares of Series E preferred stock into shares of common stock
if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 4.99% of the total
number of shares of our common stock then issued and outstanding.
Liquidation
Preference. In the event of our liquidation, dissolution or winding up, holders of Series E preferred stock will receive a
payment equal to $49.20 per share of Series E preferred stock on parity with the payment of the liquidation preference due the
Series G preferred stock, but before any proceeds are distributed to the holders of common stock, and the Series C-3 non-voting
convertible preferred stock. After the payment of this preferential amount, holders of Series E preferred stock will participate
ratably in the distribution of any remaining assets with the common stock and any other class or series of our capital stock that
participates with the common stock in such distributions.
Voting
Rights. Shares of Series E preferred stock are entitled to vote on an as-converted basis, based upon an assumed conversion
price of $7.93.
Dividends.
Holders of Series E preferred stock are entitled to receive, and we are required to pay, dividends on shares of the Series
E preferred stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends (other than dividends
in the form of common stock) actually paid on shares of the common stock when, as and if such dividends (other than dividends
in the form of common stock) are paid on shares of the common stock.
Redemption.
We are not obligated to redeem or repurchase any shares of Series E preferred stock. Shares of Series E preferred stock are
not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous fund provisions.
Listing.
There is no established public trading market for the Series E preferred stock, and we do not expect a market to develop.
In addition, we do not intend to apply for listing of the Series E preferred stock on any national securities exchange or trading
system.
Fundamental
Transactions. If, at any time that shares of Series E preferred stock are outstanding, we effect a merger or other change
of control transaction, as described in the certificate of designation and referred to as a fundamental transaction, then a holder
will have the right to receive, upon any subsequent conversion of a share of Series E preferred stock (in lieu of conversion shares)
for each issuable conversion share, the same kind and amount of securities, cash or property as such holder would have been entitled
to receive upon the occurrence of such fundamental transaction if such holder had been, immediately prior to such fundamental
transaction, the holder of a share of common stock.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Debt
Restriction. As long as any of the Series E preferred stock is outstanding, we cannot create, incur, guarantee, assume or
suffer to exist any indebtedness, other than (i) trade payables incurred in the ordinary course of business consistent with past
practice, and (ii) up to $10 million aggregate principal amount of indebtedness with a maturity less than twelve months outstanding
at any time, which amount may include up to $5 million of letters of credit outstanding at any time.
Other
Covenants. In addition to the debt restrictions above, as long as any of the Series E preferred stock is outstanding, we cannot,
among others things: create, incur, assume or suffer to exist any encumbrances on any of our assets or property; redeem, repurchase
or pay any cash dividend or distribution on any of our capital stock (other than as permitted, which includes the dividends on
the Series E preferred stock and Series G preferred stock); redeem, repurchase or prepay any indebtedness (other than as permitted);
or engage in any material line of business substantially different from our current lines of business.
Purchase
Rights. In the event we issue any options, convertible securities or rights to purchase stock or other securities pro rata
to the holders of common stock, then a holder of Series E preferred stock will be entitled to acquire, upon the same terms a pro
rata amount of such stock or securities as if the Series E preferred stock had been converted to common stock.
Series
G Voting Convertible Preferred Stock
Rank.
The Series G voting convertible preferred stock will rank senior to our common stock; senior to any class or series of capital
stock created after the issuance of the Series G voting convertible preferred stock; junior to the Series C-3 non-voting convertible
preferred stock, pending the consent of the holders of such series to the subordination thereof; and on parity with the Series
E voting convertible preferred stock in each case, as to dividends or distributions of assets upon our liquidation, dissolution
or winding up whether voluntarily or involuntarily.
Conversion.
Each share of Series G preferred stock is convertible into approximately 55.5978 shares of our common stock (subject to adjustment
as provided in the certificate of designation for the Series G preferred stock) at a per share price of $3.37 at any time at the
option of the holder, except that a holder will be prohibited from converting shares of Series G preferred stock into shares of
common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than 4.99%
of the total number of shares of our common stock then issued and outstanding.
Liquidation
Preference. In the event of our liquidation, dissolution or winding up, holders of Series E preferred stock will receive a
payment equal to $187.36452 per share of Series G preferred stock on parity with the payment of the liquidation preference due
the Series E preferred stock, but before any proceeds are distributed to the holders of Series C-3 preferred stock (pending the
consent of the holders of such series to the subordination thereof) and any proceeds are distributed to the holders of common
stock. After the payment of this preferential amount, holders of Series G preferred stock will participate ratably in the distribution
of any remaining assets with the common stock and any other class or series of our capital stock that participates with the common
stock in such distributions.
Voting
Rights. Shares of Series G preferred stock are entitled to vote on an as-converted basis, based upon an assumed conversion
price of $7.93.
Dividends.
Holders of Series G Preferred stock are entitled to receive, and we are required to pay, dividends on shares of the Series G preferred
stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends (other than dividends in the form
of common stock) actually paid on shares of the common stock when, as and if such dividends (other than dividends in the form
of common stock) are paid on shares of the common stock.
Redemption.
We are not obligated to redeem or repurchase any shares of Series G preferred stock. Shares of Series G preferred stock are not
otherwise entitled to any redemption rights, or mandatory sinking fund or analogous fund provisions.
Listing.
There is no established public trading market for the Series G preferred stock, and we do not expect a market to develop. In addition,
we do not intend to apply for listing of the Series G preferred stock on any national securities exchange or trading system.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Fundamental
Transactions. If, at any time that shares of Series G preferred stock are outstanding, we effect a merger or other change
of control transaction, as described in the certificate of designation and referred to as a fundamental transaction, then a holder
will have the right to receive, upon any subsequent conversion of a share of Series G preferred stock (in lieu of conversion shares)
for each issuable conversion share, the same kind and amount of securities, cash or property as such holder would have been entitled
to receive upon the occurrence of such fundamental transaction if such holder had been, immediately prior to such fundamental
transaction, the holder of a share of common stock.
Debt
Restriction. As long as any of the Series G preferred stock is outstanding, we cannot create, incur, guarantee, assume or
suffer to exist any indebtedness, other than (i) trade payables incurred in the ordinary course of business consistent with past
practice, and (ii) up to $10 million aggregate principal amount of indebtedness with a maturity less than twelve months outstanding
at any time, which amount may include up to $5 million of letters of credit outstanding at any time.
Other
Covenants. In addition to the debt restrictions above, as long as any of the Series G preferred stock is outstanding, we cannot,
among others things: create, incur, assume or suffer to exist any encumbrances on any of our assets or property; redeem, repurchase
or pay any cash dividend or distribution on any of our capital stock (other than as permitted, which includes the dividends on
the Series E preferred stock and the Series G preferred stock); redeem, repurchase or prepay any indebtedness (other than as permitted);
or engage in any material line of business substantially different from our current lines of business.
Purchase
Rights. In the event we issue any options, convertible securities or rights to purchase stock or other securities pro rata
to the holders of common stock, then a holder of Series G preferred stock will be entitled to acquire, upon the same terms a pro
rata amount of such stock or securities as if the Series G preferred stock had been converted to common stock.
Stock
Options:
On November 26, 2019, the Company’s
shareholders approved the CorMedix Inc. 2019 Omnibus Stock Incentive Plan (the “2019 Plan”). Pursuant to the 2019 Plan and
subject to certain adjustments as described below, the Company may issue up to 3,000,000 shares of its common stock, plus any shares that
remain available for grant under its 2013 Stock Incentive Plan (the “2013 Plan”) as of the effective date (up to a maximum
carry-forward of 522,606 shares plus any outstanding options under the 2013 Plan that were canceled, forfeited and expired after the approval
of the 2019 Plan), as long-term equity incentives to the Company’s employees, consultants, and directors. The long-term incentives
may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights,
or other rights or benefits (collectively, stock rights) to employees, consultants, and directors of the Company or a related entity (collectively,
participants). The Company believes that the effective use of long- term equity incentives is essential to attract, motivate, and retain
employees, consultants and directors, to further align participants’ interests with those of the Company’s stockholders, and
to provide participants incentive compensation opportunities that are competitive with those offered by other companies in the same industry
and locations as the Company.
The 2019 Plan is a new equity
compensation plan for the Company’s employees, consultants, and directors which replaced the 2013 Plan. The 2013 Plan and the Amended
and Restated 2006 Stock Incentive Plan are referred to collectively as the “Prior Plans”. No further awards will be granted
under the Prior Plans after the approval of the 2019 Plan. Awards outstanding under the Prior Plans will remain outstanding in accordance
with their terms and the Prior Plans.
During
the year ended December 31, 2020, the Company granted ten-year qualified and non-qualified stock options to its officers, directors,
employees and consultants covering an aggregate of 1,111,984 shares of the Company’s common stock under the 2019 Plan. The
weighted average exercise price of these options is $5.11 per share.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
During
the year ended December 31, 2019, the Company granted ten-year qualified and non-qualified stock options to its officers, directors,
employees and consultants covering an aggregate of 496,300 shares of the Company’s common stock under the 2013 Plan. The
weighted average exercise price of these options is $7.64 per share.
During the years ended December 31, 2020 and 2019, total compensation
expense for stock options issued to employees, directors, officers and consultants was $2,489,000 and $2,242,000, respectively.
As of December 31, 2020, there was $3,284,000 total unrecognized compensation expense related to unvested stock options granted
which expense is expected to be recognized over an expected remaining weighted average period of 1.7 years. All share-based awards
are recognized on a straight-line method, assuming all awards granted will vest. Forfeitures of share-based awards are recognized
in the period in which they occur.
The
fair value at grants dates of the grants issued subject to service and performance-based vesting conditions were determined using
the Black-Scholes option pricing model with the following assumptions:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
0.27% - 1.67%
|
|
|
1.51% - 2.74%
|
|
Expected volatility
|
|
102.7% - 107.9%
|
|
|
103% - 110%
|
|
Expected term (years)
|
|
5 – 10 years
|
|
|
5-10 years
|
|
Expected dividend yield
|
|
0.0%
|
|
|
0.0%
|
|
Weighted-average grant date fair value of options granted during the period
|
|
$3.59
|
|
|
$6.11
|
|
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.
The
following table summarizes the Company’s stock options activity and related information for the year ended December 31,
2020:
|
|
Shares Underlying Stock Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at beginning of year
|
|
|
1,376,394
|
|
|
$
|
8.98
|
|
|
|
6.8
|
|
|
$
|
1,232,545
|
|
Granted
|
|
|
1,111,984
|
|
|
$
|
5.11
|
|
|
|
|
|
|
|
2,585,172
|
|
Expired/Canceled
|
|
|
(6,891
|
)
|
|
$
|
12.53
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
(33,800
|
)
|
|
$
|
8.51
|
|
|
|
|
|
|
|
9,000
|
|
Outstanding at end of year
|
|
|
2,447,687
|
|
|
$
|
7.22
|
|
|
|
7.1
|
|
|
$
|
3,872,092
|
|
Vested at end of year
|
|
|
1,418,990
|
|
|
$
|
8.56
|
|
|
|
5.6
|
|
|
$
|
1,683,965
|
|
Expected to vest in the future
|
|
|
1,028,697
|
|
|
$
|
5.36
|
|
|
|
9.1
|
|
|
$
|
2,188,127
|
|
No stock options were exercised during the year ended December
31, 2020 and for the year ended December 31, 2019, the total intrinsic value of stock options exercised was $154,589. 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.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Warrants:
The
following table is the summary of warrant activities:
|
|
|
Shares Underlying Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding at December 31, 2019
|
|
|
|
341,328
|
|
|
$
|
6.24
|
|
|
|
1.42
|
|
Exercised
|
|
|
|
(91,500
|
)
|
|
$
|
4.50
|
|
|
|
-
|
|
Expired
|
|
|
|
(66,680
|
)
|
|
$
|
12.13
|
|
|
|
-
|
|
Outstanding at December 31, 2020
|
|
|
|
183,148
|
|
|
$
|
4.96
|
|
|
|
1.61
|
|
On
December 31, 2018, the Company sold to Elliott a senior secured convertible note in the aggregate principal amount of $7,500,000
and a warrant to purchase up to an aggregate of 90,000 shares of common stock, for gross proceeds of $7,500,000. The warrant is
immediately exercisable, has an exercise price of $7.50 per share, subject to adjustment in the event of stock dividends and distributions,
stock splits, stock combinations, or reclassifications affecting the Company’s common stock, and has a term of five years
(see Note 6). On December 31, 2018, the Company amended and restated the following warrants held by Elliott and its affiliates
to reduce the exercise price of each warrant to $0.001 per share: warrants issued in May 2013 to purchase up to an aggregate of
100,000 shares of the Company’s common stock with a pre-amendment exercise price of $3.25 per share and an expiration date
of May 30, 2019 (the “May 30, 2019 Warrants”); and warrants issued in October 2013 to purchase up to an aggregate
of 150,000 shares of common stock with a pre-amendment exercise price of $4.50 per share and an expiration date of October 22,
2019 (the “October 22, 2019 Warrants”). The incremental cost of approximately $710,000 associated with the warrant
modification was recorded as a debt discount. The senior secured convertible note and warrant to purchase up to an aggregate of
90,000 shares of the Company’s common stock were cancelled in connection with the terms of the Exchange Agreement.
The
fair value of the warrant was determined using a Black-Scholes option pricing model using the following assumptions at the grant
date of the warrant:
Expected
Term
|
|
5.0 years
|
Volatility
|
|
102.85%
|
Dividend yield
|
|
0.0%
|
Exercise Price
|
|
$1.50
|
Risk-free interest
rate
|
|
2.51%
|
On
September 25, 2019, the Company entered into Letter Agreements with Holders of Series B Warrants. Pursuant to each Letter Agreement,
the Company agreed to reduce the exercise price of each Holder’s Series B Warrants from $5.25 to $4.00, provided that the
Holder exercised its Warrant for cash at the time of entry into such Letter Agreement. Each Holder exercised its Series B Warrants
in full and the Company issued an aggregate of 1,224,263 shares of Common Stock to them. The Company received net proceeds of
approximately $4,900,000. As a result of the modification of the exercise price of these warrants, the Company recognized an incremental
value of $369,500, which was recorded as a deemed dividend on the consolidated statement of operations and comprehensive loss
for the year ended December 31, 2019, using the Black-Scholes pricing model with the following assumptions:
Expected term
|
|
2.88 years
|
Volatility
|
|
111.5%
|
Dividend yield
|
|
0.0%
|
Risk-free interest rate
|
|
1.62%
|
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
During
the year ended December 31, 2019, the expiration date of a warrant to purchase up to 100,000 shares of the Company’s common
stock was extended from May 30, 2019 to August 16, 2019, then subsequently canceled in connection with the Exchange Agreement
transaction (see Note 6). The warrant had an exercise price of $0.005. The incremental value of the warrant extended was immaterial.
During
the year ended December 31, 2020, the Company issued an aggregate of 91,500 shares of its common stock upon exercise of warrants,
resulting in net proceeds of approximately $412,000.
Stock-based
Deferred Compensation Plan for Non-Employee Directors
In
2014, the Company established an unfunded stock-based deferred compensation plan, providing non-employee directors the opportunity
to defer up to one hundred percent of fees and compensation, including restricted stock units. The amount of fees and compensation
deferred by a non-employee director is converted into stock units, the number of which is determined based on the closing price
of the Company’s common stock on the date such compensation would have otherwise been payable. At all times, the plan participants
are one hundred percent vested in their respective deferred compensation accounts. On the tenth business day of January in the
year following a director’s termination of service, the director will receive a number of common shares equal to the number
of stock units accumulated in the director’s deferred compensation account. The Company accounts for this plan as stock-based
compensation under ASC 718. During the year ended December 31, 2020 and 2019, the amount of compensation that was deferred under
this plan was $62,250 and $36,500, respectively.
Note
9 — Concentrations:
At
December 31, 2020 and 2019, one customer exceeded 10% of the Company’s accounts receivable (95%) and at December 31, 2019,
no customer exceeded 10% of the Company’s accounts receivable. During the year ended December 31, 2020, the Company had
revenue from two customers that exceeded 10% of its total sales (58% and 12%) and the Company had revenue from four customers
that exceeded 10% of its total sales (42%, 18%, 17% and 12%) for the year ended December 31, 2019.
Note
10 — 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 sublease on its previous premises at 400 Connell Drive, Berkeley Heights, New Jersey 07922 terminated 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.
Operating
lease expense in the Company’s consolidated statements of operations and comprehensive loss for the year ended December
31, 2020 and 2019 was approximately $66,000 and $6,000, respectively, which includes costs associated with leases for which ROU
assets have been recognized as well as short-term leases.
At
December 31, 2020 and 2019, the Company has a total operating lease liability of $1,033,000 and $4,000, respectively. At December
31, 2020, approximately $109,000 and $924,000 were classified as operating lease liabilities, short-term and operating lease liabilities,
net of current portion, respectively, on the consolidated balance sheet. At December 31, 2019, approximately $2,000 was included
in each operating lease liabilities, short-term and operating lease liabilities, net of current portion on the consolidated balance
sheet. Operating ROU assets as of December 31, 2020 and 2019 are $1,015,000 and $5,000, respectively.
CORMEDIX
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
For
the year ended December 31, 2020 and 2019, cash paid for amounts included in the measurement of lease liabilities in operating
cash flows from operating leases was $48,000 and $6,000, respectively.
As
of December 31, 2020 and 2019, the weighted average remaining lease term were 6.8 years and 2.8 years, respectively and the weighted
average discount rate of 9% and 10% at December 31, 2020 and 2019, respectively.
As
of December 31, 2020, maturities of lease liabilities were as follows:
2021
|
|
|
$
|
198,000
|
|
2022
|
|
|
|
200,000
|
|
2023
|
|
|
|
202,000
|
|
2024
|
|
|
|
205,000
|
|
2025
|
|
|
|
208,000
|
|
2026 and thereafter
|
|
|
|
380,000
|
|
Total future minimum lease payments
|
|
|
|
1,393,000
|
|
Less imputed interest
|
|
|
|
(360,000
|
)
|
Total
|
|
|
$
|
1,033,000
|
|
Note
11 — Subsequent Events:
On February 5, 2021,
the Company allocated to its ATM program an additional $25.0 million of the remaining $75.0 million available under its shelf
registration statement. Giving effect to the additional $25.0 million, plus the $17.8 million available at December 31, 2020,
the Company had a total of $42.8 million available under the ATM program. During January and February 2021, the Company sold an
aggregate of 3,737,862 shares of its common stock under the ATM program and realized net proceeds of approximately $41.5 million.
As of the filing of this Annual Report on Form 10-K, the Company has no available balance under its ATM program and it has $50.0
million available under its current shelf registration for the issuance of equity, debt or equity-linked securities.
During the
first quarter of 2021, the Company issued an aggregate of 92,167 shares of its common stock upon cashless exercise of 95,286 warrants
and cash exercise of 21,898 warrants, resulting in net proceeds of $115,000.
During the first quarter of 2021,
the Company issued an aggregate of 656,069 shares of its common stock upon conversion of 10,001 Series G preferred shares by Elliott and
50,000 Series C-3 preferred shares by an unrelated party.
As previously announced, the NJEDA
has approved the Company’s application to participate in the NJEDA Program for the state fiscal year 2020. The approval will
allow the Company to sell approximately $1.3 million of the total $1.3 million in available tax benefits to an unrelated, profitable New
Jersey corporation in return for approximately $1.3 million in cash. Closing is subject to NJEDA’s typical closing conditions, which
are in process of completion.
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