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.
The Company’s primary focus is to
develop its lead product candidate, Neutrolin®, 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 Neutrolin, which is a novel
anti-infective solution (a formulation of 1.35% taurolidine, 3.5% citrate and 1000 u/ml heparin) intended for the reduction and
prevention of catheter-related infections and thrombosis in patients requiring central venous catheters in clinical settings such
as hemodialysis, critical/intensive care, and oncology.
In late 2013, the Company met with the
U.S. Food and Drug Administration (“FDA”) to determine the pathway for U.S. marketing approval of Neutrolin. The Company
launched the Phase 3 clinical trial in patients with hemodialysis catheters in the U.S. in December 2015. The clinical trial,
named Phase 3 Prospective, Multicenter, Double-blind, Randomized, Active Control Study to Demonstrate Safety and Effectiveness
of Neutrolin in Preventing Catheter-related Bloodstream Infection in Subjects on Hemodialysis for End Stage Renal Disease (“LOCK-IT-100”),
was a prospective, multicenter, randomized, double-blind, active control trial which aimed to demonstrate the efficacy and safety
of Neutrolin in preventing catheter-related bloodstream infections (“CRBSI”), in subjects receiving hemodialysis therapy
as treatment for end stage renal disease. The primary endpoint for the trial was time to CRBSI. The trial evaluated Neutrolin
relative to the active control heparin by documenting the incidence of CRBSI and the time until the occurrence of CRBSI
for each study subject. Secondary endpoints were catheter patency, which was defined as required use of tissue plasminogen activating
factor (“tPA”), or removal of catheter due to dysfunction, and removal of catheter for any reason.
The Company established the Clinical Adjudication
Committee (“CAC”), to critically and independently assess CRBSI while being blinded to treatment assignment. In July
2018, the CAC reviewed potential cases of CRBSI in the Company’s LOCK-IT-100 study that occurred through early December
2017 and identified 28 such cases. An interim efficacy analysis was performed when the first 28 CRBSIs were identified. In July
2018, the independent Data Safety Monitoring Board (“DSMB”), had completed its review of the interim analysis of the
data from the LOCK-IT-100 study. Based on the first 28 cases, there was a highly statistically significant 72% reduction in CRBSI
relative to the control (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 DSMB recommended the study be terminated early.
Following discussions with the FDA, the
Company proceeded with an orderly termination of LOCK-IT-100. 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. The Company plans to proceed with submission of the NDA for Neutrolin® based
on the results of LOCK-IT-100. Whether data from LOCK-IT-100 are sufficient will be a review issue with the FDA.
The FDA has agreed that the Neutrolin NDA
is eligible for both priority review and for submission under rolling review. In January 2020, the FDA granted the request for
rolling review. A determination on priority review will not be made until the submitted NDA is reviewed by the FDA to determine
the acceptance for filing. The FDA informs the applicant of a Priority Review designation within sixty days of the receipt of
the complete original application, if it determines the criteria have been met. Priority Review designation would mean FDA’s
goal is to take action on an application within 6 months, compared to a standard review period of ten months.
The
FDA also agreed that the Company could request consideration of Neutrolin for approval under 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. Given that the LPAD pathway provides for a streamlined clinical
development program for a limited population that may involve smaller, shorter, or fewer clinical trials, the Company believes
that LPAD will provide additional flexibility for the FDA to approve Neutrolin to prevent CRBSIs in the limited population of
patients with end-stage renal disease receiving hemodialysis through a central venous catheter.
In
the European Union (“EU”), Neutrolin is regulated as a Class 2 medical device. In July 2013, the Company received
CE Mark approval for Neutrolin. In December 2013, the Company started commercial sales of Neutrolin in Germany for the prevention
of CRBSI, and maintenance of catheter patency in hemodialysis patients using a tunneled, cuffed central venous catheter for vascular
access. To date, Neutrolin is registered and may be sold in certain EU 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 for these same expanded indications for the EU. In December 2014, the Company received approval from the Hessian
District President in Germany to expand the label to include use in oncology patients receiving chemotherapy, IV hydration and
IV medications via central venous catheters. The expansion also adds patients receiving medication and IV fluids via central venous
catheters 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
addition to Neutrolin, 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 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 Neutrolin 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.
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 the preparation and submission of the NDA for Neutrolin and 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 Neutrolin.
Note
2 — Liquidity and Uncertainties:
The 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, 2019, the Company had
an accumulated deficit of $195.4 million, and incurred net losses of $16.4 million and $26.8 million for the years ended December
31, 2019 and 2018, respectively. Based on the Company’s current development plans for Neutrolin in both the U.S. and foreign
markets and its other operating requirements, the Company’s existing cash and cash equivalents at December 31, 2019 are expected
to fund its operations into the second quarter of 2021, after taking into consideration the net proceeds received through March
12, 2020 from the At-the-Market Issuance Sales Agreement (the “ATM program”) of $2.5 million and the exercise of warrants
of $0.4 million (see Note 11).
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 undertake a second Phase 3 clinical trial, if required
by the FDA, commercially launch Neutrolin 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 approximately $2.1 million available under its current ATM program and
$30.3 million available under its current shelf registration for the issuance of equity, debt or equity-linked securities unrelated
to the current ATM program.
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.
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 and CorMedix Europe GmbH, a wholly owned subsidiary. 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,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
16,350,237
|
|
|
$
|
17,623,770
|
|
Restricted cash
|
|
|
174,950
|
|
|
|
171,553
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
16,525,187
|
|
|
$
|
17,795,323
|
|
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, 2019 or 2018.
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, 2019 and 2018, 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, 2019 and 2018:
December
31, 2019:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Losses
|
|
|
Gross
Unrealized
Gains
|
|
|
Fair
Value
|
|
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
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
1,179,673
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,179,673
|
|
Total December 31, 2018
|
|
$
|
1,179,673
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,179,673
|
|
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.
|
The
following table provides the carrying value and fair value of the Company’s financial assets measured at fair value as of
December 31, 2019 and 2018:
December 31, 2019:
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
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
|
|
|
$
|
-
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
1,179,673
|
|
|
$
|
1,179,673
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total December 31, 2018
|
|
$
|
1,179,673
|
|
|
$
|
1,179,673
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 subsidiary, 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 $467 in 2019 and a loss of $1,911 in 2018.
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 segment and geographic information:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Reported revenues
|
|
$
|
283,266
|
|
|
$
|
429,327
|
|
Revenues attributable to European and Mideast operations, which are based in Germany
|
|
|
274,443
|
|
|
|
420,973
|
|
Total assets
|
|
|
29,475,910
|
|
|
|
18,825,914
|
|
Total assets located in the United States, with the remainder in the European Union
|
|
$
|
28,919,276
|
|
|
$
|
18,154,463
|
|
Restricted
Cash
As of December 31, 2019 and 2018 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 €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 €36,000 and €10,000 for the first and second instances, respectively, in connection with the unfair
competition proceedings in Cologne.
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 Neutrolin product. Inventories consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
6,893
|
|
|
$
|
71,275
|
|
Work in process
|
|
|
-
|
|
|
|
86,957
|
|
Finished goods
|
|
|
461,735
|
|
|
|
373,283
|
|
Inventory reserve
|
|
|
(130,163
|
)
|
|
|
(103,000
|
)
|
Total
|
|
$
|
338,465
|
|
|
$
|
428,515
|
|
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, 2019 and 2018 were $126,820
and $160,860, respectively, net of accumulated depreciation of $244,328 and $218,948, 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
|
|
5
years
|
|
Computer
equipment
|
|
5
years
|
|
Computer
software
|
|
3
years
|
|
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.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Professional and consulting fees
|
|
$
|
214,777
|
|
|
$
|
258,352
|
|
Accrued payroll and payroll taxes
|
|
|
1,287,047
|
|
|
|
1,102,143
|
|
Clinical trial related
|
|
|
2,435,953
|
|
|
|
3,408,032
|
|
Manufacturing development related
|
|
|
806,032
|
|
|
|
210,577
|
|
Product development
|
|
|
-
|
|
|
|
49,200
|
|
Other
|
|
|
56,677
|
|
|
|
137,920
|
|
Total
|
|
$
|
4,800,486
|
|
|
$
|
5,166,224
|
|
In December 2015, the
Company entered into a Master Service Agreement and Work Orders (the “Master Service Agreement”) with a clinical research
organization (“CRO”) to help the Company conduct its LOCK-IT-100 Phase 3 multicenter, double-blind, randomized active
control study to demonstrate the safety and effectiveness of Neutrolin in preventing catheter-related bloodstream infections and
blood clotting in subjects receiving hemodialysis therapy as treatment for end stage renal disease.
During 2018, the
Company contested a substantial amount of the unpaid clinical trial expense accrued during 2018 due to the unexpected delay and
additional costs the Company incurred in preparing for the interim analysis of the LOCK-IT-100 study. Negotiations with the CRO
concluded in November 2018 with the signing of a confidential settlement agreement. In parallel with the settlement agreement,
a new work order under the Master Service Agreement was executed specifying certain services the CRO will continue to provide to
the Company related to the closeout of the study. The budgeted amount of the new work order was approximately $1.4 million, of
which $1.4 million was incurred through December 31, 2019.
Through December
31, 2019, approximately $30.0 million of clinical trial expense has been recorded in connection with the Master Service Agreement
and new work orders, of which approximately $27.4 million has been paid. During the years ended December 31, 2019 and 2018, the
Company recognized $1.5 and $7.7 million, respectively, in research and development expense related to this agreement. At December
31, 2019, the Company had accrued approximately $2.4 million in accounts payable and accrued expenses related to the settlement
agreement and the new work order.
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 at December 31,
2019 and 2018 amounted to approximately $2,000 and $11,000, respectively.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Series C non-voting preferred stock
|
|
|
104,000
|
|
|
|
508,000
|
|
Series D non-voting preferred stock
|
|
|
-
|
|
|
|
295,848
|
|
Series E voting preferred stock
|
|
|
391,953
|
|
|
|
391,953
|
|
Series F non-voting preferred stock
|
|
|
-
|
|
|
|
2,469,136
|
|
Series G voting preferred stock
|
|
|
5,560,137
|
|
|
|
-
|
|
Shares issuable upon conversion of convertible debt
|
|
|
-
|
|
|
|
1,000,000
|
|
Restricted stock units
|
|
|
2,490
|
|
|
|
5,817
|
|
Shares issuable for payment of deferred board compensation
|
|
|
33,597
|
|
|
|
28,578
|
|
Shares underlying outstanding warrants
|
|
|
341,328
|
|
|
|
3,319,003
|
|
Shares underlying outstanding stock options
|
|
|
1,376,394
|
|
|
|
1,011,265
|
|
Total potentially dilutive shares
|
|
|
7,809,899
|
|
|
|
9,029,600
|
|
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 includes 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.
Debt
Issuance Costs
The
Company accounts for debt issuance costs as a direct deduction from the carrying amount of the respective debt liability, consistent
with debt discounts. The Company amortizes the debt discount, including debt issuance costs over the term of the associated debt
using the effective interest method.
Recently Adopted Authoritative Pronouncements
In June 2018, the Financial Accounting Standards
Board (“FASB”) issued new guidance which expands the scope of the FASB’s Accounting Standards Codification (“ASC”)
718, to include share-based payment transactions for acquiring goods and services from nonemployees. Early adoption is permitted
and the Company elected to adopt the guidance effective in the first quarter of fiscal year 2019. This adoption on January 1, 2019
did not have a material impact on the Company’s consolidated financial statements.
In July 2017, the FASB issued new guidance
which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features and recharacterizes the indefinite deferral of certain provisions within the guidance for distinguishing liabilities from
equity. Early adoption is permitted and the Company elected to adopt the guidance effective in the first quarter of fiscal year
2019. This adoption on January 1, 2019 did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued new guidance
related to how an entity should recognize lease assets and lease liabilities. The guidance specifies that an entity who is a lessee
under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases
under previous FASB guidance. The Company adopted the standard on January 1, 2019 using the transition method provided by the FASB.
Under this transition method, the Company applied the new requirements to only those leases that exist as of January 1, 2019, rather
than at the earliest comparative period presented in the financial statements. Prior periods will be presented under existing lease
guidance. Upon transition, the Company applied the package of practical expedients permitted under ASC 842 transition guidance.
As a result, the Company did not reassess (1) whether expired or existing contracts contain leases under the new definition of
a lease, including whether an existing or expired contract contains an embedded lease, (2) lease classification for expired or
existing leases and (3) any initial direct costs of existing leases. As a result of the adoption, the Company recorded right-of-use
assets and lease liabilities of approximately $6,000 each. Adoption of the standard did not have a material impact on the Company’s
consolidated statements of operations and comprehensive loss or cash from or used in operating, investing or financing activities
on its consolidated statements of cash flows.
Recent Authoritative Pronouncements
In June 2016, the 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. The Company
has assessed the impact of adopting this guidance and the adoption on January 1, 2020 will not have a significant impact on its
consolidated financial statements.
In August 2018, the FASB issued a new guidance
which modifies the disclosure requirements on fair value measurements. The guidance is effective for the Company beginning in the
first quarter of fiscal year 2020. Early adoption is permitted. The Company assessed the impact of adopting this guidance and the
adoption on January 1, 2020 will not have a significant impact on its 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 requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction
together with revenue recognized under contracts with customers is precluded. The guidance is effective for the Company beginning
in the first quarter of fiscal year 2020. Early adoption is permitted. The Company has assessed the impact of adopting this guidance
and the adoption on January 1, 2020 will not have a significant impact on its consolidated financial statements.
In November 2019, the FASB issued new guidance
which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in
ASC 718. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted.
The Company has assessed the impact of adopting this guidance and the adoption on January 1, 2020 will not have a significant impact
on its consolidated financial statements.
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,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
(20,943,703
|
)
|
|
$
|
(25,882,114
|
)
|
Foreign
|
|
|
(550,149
|
)
|
|
|
(947,516
|
)
|
Total
|
|
$
|
(21,493,853
|
)
|
|
$
|
(26,829,630
|
)
|
There were no current or deferred income
tax provision for the years ended December 31, 2019 and 2018 because the Company has incurred operating losses since inception.
The Company’s deferred tax assets
consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net operating loss carryforwards – Federal
|
|
$
|
33,494,000
|
|
|
$
|
29,303,000
|
|
Net operating loss carryforwards – State
|
|
|
6,171,000
|
|
|
|
8,441,000
|
|
Net operating loss carryforwards – Foreign
|
|
|
2,128,000
|
|
|
|
1,876,000
|
|
Capitalized licensing fees
|
|
|
757,000
|
|
|
|
912,000
|
|
Stock-based compensation
|
|
|
2,892,000
|
|
|
|
2,447,000
|
|
Accrued compensation
|
|
|
349,000
|
|
|
|
307,000
|
|
Other
|
|
|
24,000
|
|
|
|
110,000
|
|
Totals
|
|
|
45,815,000
|
|
|
|
43,396,000
|
|
Less valuation allowance
|
|
|
(45,815,000
|
)
|
|
|
(43,396,000
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had the following potentially
utilizable net operating loss tax carryforwards:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Federal
|
|
$
|
155,400,000
|
|
|
$
|
139,538,000
|
|
State
|
|
$
|
82,700,000
|
|
|
$
|
118,719,000
|
|
Foreign
|
|
$
|
7,091,000
|
|
|
$
|
6,250,000
|
|
The net operating loss tax generated before
January 1, 2019 carryforwards will start to expire in 2027 for Federal purposes and have already begun to expire for state purposes.
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 current 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.
The Company’s effective tax rate varied
from the statutory rate as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory federal tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax rate (net of federal)
|
|
|
7.2
|
%
|
|
|
4.5
|
%
|
Effect of foreign operations
|
|
|
0.8
|
%
|
|
|
1.1
|
%
|
Federal deferred tax rate change
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
NJ NOL adjustment
|
|
|
6.2
|
%
|
|
|
0.0
|
%
|
Other permanent differences
|
|
|
(0.4
|
)%
|
|
|
(0.3
|
)%
|
Effect of valuation allowance
|
|
|
(11.3
|
)%
|
|
|
(26.3
|
)%
|
Effective tax rate
|
|
|
23.6
|
%
|
|
|
0.0
|
%
|
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, 2019 and 2018,
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, 2019
|
|
$
|
43,396,000
|
|
|
$
|
2,449,000
|
|
|
$
|
(30,000
|
)
|
|
$
|
45,815,000
|
|
December 31, 2018
|
|
$
|
36,346,000
|
|
|
$
|
7,082,000
|
|
|
$
|
(32,000
|
)
|
|
$
|
43,396,000
|
|
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, 2019 and 2018. 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.
In April 2019, the Company sold a portion
of its unused net operating losses (“NOL”) carryforwards through the State of New Jersey’s Economic Development
Authority (“NJEDA”) Technology Business Tax Certificate Transfer program which allowed the Company to sell $5,413,000
of its total $6,085,000 in available NOL tax benefits for the state fiscal year 2018. The Company realized net proceeds of $5,061,000
from the sale of its NOL.
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. 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 note was a
senior obligation, secured by all of the Company’s assets. The note bore interest at a rate of 10.0% per annum, compounded
quarterly. Interest was first payable on January 2, 2019, and on the first trading day of each month thereafter, until its cancellation.
The note was to mature on December 30, 2021. Any accrued but unpaid interest for the applicable interest period was added to the
principal outstanding under the notes. The note had a conversion price of $7.50 per share. The conversion price was subject to
appropriate adjustment in the event of stock dividends and distributions, stock splits, stock combinations, or reclassifications
affecting the Company’s common stock. The noteholder was able to convert its outstanding note principal amount, and
any accrued and unpaid interest, at any time into shares of common stock at the conversion rate. Additionally, the note would automatically
convert into shares of common stock if, prior to the maturity date, the average closing sale price of the Company’s common
stock for any 20 trading days during any consecutive 30 trading days equals or exceeds 150% of the conversion price. The Company
held the right to pay any accrued interest in cash for any calendar month during which the average closing sale price of its common
stock averaged at least 150% of the conversion price of the notes. On or after July 1, 2020, the Company was able to prepay any
principal amount outstanding on the notes in amounts of $2,000,000 (or in full, if less than $2,000,000), provided that if the
prepayment occurs between July 2, 2020 and March 30, 2021, the prepayment amount would have equaled 110% of the principal amount
being repaid and if the prepayment occurs after March 31, 2021, the prepayment amount would have equaled 105% of the principal
amount being repaid. For year ended December 31, 2019, approximately $462,000 was recognized as interest expense on the consolidated
statement of operations and comprehensive loss. The senior secured convertible note, including accrued interest, was exchanged
as a result of the Exchange Agreement.
The warrant was
immediately exercisable, had 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 had a term of five years. The closing of
the note and warrant sale and purchase occurred simultaneously with entry into the securities purchase agreement. No placement
agent or underwriter was involved in the offering.
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.
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
|
|
|
New Warrants
|
|
|
|
At Issuance Date
|
|
|
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
|
%
|
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 what other defenses the Defendants may raise, or the ultimate outcome of either of
these related matters. At present, the EPO has revoked the Prosl European Patent as invalid, and the Company has filed an appeal,
which is currently pending.
In the same complaint against the same Defendants,
the Company also alleged an infringement (requesting the same remedies) of ND Partners’ utility model DE 20 2005 022 124
U1 (the “Utility Model”), which the Company believes is fundamentally identical to the Prosl European Patent in its
main aspects and claims. The Court separated the two proceedings and the Prosl European Patent and the Utility Model claims are
now being tried separately. TauroPharm has filed a cancellation action against the Utility Model before the German Patent and Trademark
Office (the “German PTO”) based on the similar arguments as those in the opposition against the Prosl European Patent.
On March 27, 2015, the District Court held
a hearing to evaluate whether the Utility Model has been infringed by TauroPharm in connection with the manufacture, sale and distribution
of its TauroLock-HEP100TM and TauroLock-HEP500TM products. A hearing before the same court was held on January
30, 2015 on the separate, but related, question of infringement of the Prosl European Patent by TauroPharm.
The Court issued its decisions on May 8,
2015, staying both proceedings. In its decisions, the Court found that the commercialization by TauroPharm in Germany of its TauroLock
catheter lock solutions Hep100 and Hep500 infringes both the Prosl European Patent and the Utility Model and further that
there is no prior use right that would allow TauroPharm to continue to make, use or sell its product in Germany. However, the Court
declined to issue an injunction in favor of the Company that would preclude the continued commercialization by TauroPharm based
upon its finding that there is a sufficient likelihood that the EPO, in the case of the Prosl European Patent, or the German PTO,
in the case of the Utility Model, may find that such patent or utility model is invalid. Specifically, the Court noted the possible
publication of certain instructions for product use that may be deemed to constitute prior art. As such, the District Court determined
that it will defer any consideration of the request by the Company for injunctive and other relief until such time as the EPO or
the German PTO made a final decision on the underlying validity of the Prosl European Patent and the Utility Model. It is safe
to assume that the complaint regarding the infringement of the Utility Model will be dismissed now that the German PTO has voided
the Utility Model (see below). This does, however, not have a direct effect on the infringement proceedings concerning the Prosl
European Patent.
The opposition proceeding against the Prosl
European Patent before the EPO is ongoing. The EPO held a hearing in the opposition proceeding on November 25, 2015. In its preliminary
consideration of the matter, the EPO (and the German PTO) had regarded the patent as not inventive or novel due to publication
of prior art. However, the EPO did not issue a decision at the end of the hearing but adjourned the matter due to the fact that
the panel was of the view that Claus Herdeis, one of the managing directors of TauroPharm, has 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.
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 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.
In October 2016, TauroPharm submitted a
further writ to the EPO requesting a date for the hearing and bringing forward further arguments, in particular in view of the
June 2016 decision of the German PTO on the invalidity of the utility model. On November 22, 2017, the EPO in Munich, Germany held
a further oral hearing in this matter. At the hearing, the panel held that the Prosl European Patent would be invalidated because
it did not meet the requirements of novelty based on a technical aspect of the European intellectual property law. The Company
disagrees with this decision and, after the written opinion was issued by the Opposition Division in September 2018, has appealed
the decision. The Company continues to believe that the Prosl European Patent is indeed novel and that its validity should be maintained.
There can be no assurance that the Company will prevail in this matter. In addition, the ongoing Unfair Competition litigation
brought by the Company against TauroPharm is not affected and will continue.
On January 16, 2015, the Company filed a
complaint against TauroPharm GmbH and its managing directors in the District Court of Cologne, Germany. In the
complaint, the Company alleges violation of the German Unfair Competition Act by TauroPharm for the unauthorized use of its proprietary
information obtained in confidence by TauroPharm. The Company alleges that TauroPharm is improperly and unfairly using
its proprietary information relating to the composition and manufacture of Neutrolin, in the manufacture and sale of TauroPharm’s
products TauroLockTM, TauroLock-HEP100 and TauroLock-HEP500. The Company seeks a cease and desist order against
TauroPharm from continuing to manufacture and sell any product containing taurolidine (the active pharmaceutical ingredient (“API”)
of Neutrolin) and citric acid in addition to possible other components, damages for any sales in the past and the removal
of all such products from the market. An initial hearing in the District Court of Cologne, Germany was held on November 19, 2015
to consider the Company’s claims. In this hearing, the presiding judge explained that the court needed more information with
regard to several aspects of the case. As a consequence, the court issued an interim decision in the form of a court order outlining
several issues of concern that relate primarily to the court's interest in clarifying the facts and reviewing any and all available
documentation, in particular with regard to the question which specific know-how was provided to TauroPharm by whom and when. The
Company's legal team has prepared the requested reply and produced the respective documentation. TauroPharm has also filed another
writ within the same deadline and both parties have filed further writs at the end of April 2016 setting out their respective argumentation
in more detail. A further oral hearing in this matter was held on November 15, 2016. In this hearing, the court heard arguments
from CorMedix and TauroPharm concerning the allegations of unfair competition. The court made no rulings from the bench and indicated
that it is prepared to further examine the underlying facts of the Company's allegations. On March 7, 2017, the court issued another
interim decision in the form of a court order outlining again several issues relating to the argumentation of both sides in the
proceedings. In particular the court requested the Company to further specify its requests and to further substantiate in even
more detail which know-how was provided by Biolink (the company who developed Neutrolin that was acquired by ND Partners) to TauroPharm
by whom and when. The court also raised the question whether the know-how provided at the time to TauroPharm could still be considered
to be secret know-how or may have become public in the meantime. The court granted both sides the opportunity to reply to this
court order and provide additional facts and evidence until May 15, 2017. Both parties have submitted further writs in this matter
and the court scheduled a further hearing on May 8, 2018. After having been rescheduled several times, the hearing took place on
November 20, 2018. A decision was rendered by the court on December 11, 2018, dismissing the complaint in its entirety. However,
the Company intends to continue to pursue this matter, and still believes firmly that its claims are well-founded. The Company
therefore appealed in January 2019 and filed its grounds of appeal in March 2019. An oral hearing was held on September 6, 2019
in which the legal counsel of the Company brought forward further arguments for the fact that the manufacturing process of the
respective catheter locking solution is indeed protectable as a trade secret. In view of these new arguments, the court issued
an evidentiary order on September 27, 2019 ordering an expert opinion. Next steps will be taken after the receipt of the expert
opinion.
In connection with the aforementioned
patent and utility model infringement and unfair competition proceedings against TauroPharm, the Company was required by the
District Courts of Mannheim and Cologne to provide security deposits of an aggregate of approximately $170,000, to cover
legal fees in the event TauroPharm is entitled to reimbursement of these costs. The Company recorded the deposits as
restricted cash on the consolidated balance sheets.
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, 2019 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, 2019 and 2018. 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, 2019 and 2018.
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
In September 2017, the Company entered
into a sublease agreement for approximately 6,960 square feet of office space in Berkeley Heights, New Jersey, which sublease
runs from September 15, 2017 to June 29, 2020. This sublease is rent-free to the Company. A notice of an intention not to
renew the Company’s current lease has been received and as a result, the Company is actively seeking for a new space to
lease that will meet its current needs.
Note 8 — Stockholders’ Equity:
Common Stock:
The Company had a prior sales agreement
with 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, 2019 and 2018, the Company sold 1,768,012 and 7,177,755 shares of common stock under the new and expired ATM programs,
respectively, and realized net proceeds of approximately $15.2 million and $22.0 million during the years ended December 31, 2019
and 2018, respectively. At December 31, 2019, the Company has approximately $4.6 million available under its current ATM program
and $30.3 million available under its current shelf registration for the issuance of equity, debt or equity-linked securities unrelated
to the current ATM program (see note 11 for subsequent event sales under ATM).
Restricted Stock Units
During the year ended December 31, 2019
and 2018, the Company granted an aggregate of 24,850 and 18,900 restricted stock units (“RSUs”) to its officers and
directors under its 2013 Stock Incentive Plan with a weighted average grant date fair value of $8.33 and $3.50 per share, respectively.
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, 2019 and 2018, compensation expense recorded for these RSUs was $198,000 and $93,000, respectively. Unrecognized
compensation expense as of December 31, 2019 and 2018 was $11,000 and $23,000, respectively. The expected weighted average period
for the expense to be recognized is 0.19 years. During the year ended December 31, 2019, 2,830 RSU’s were forfeited and no
RSUs were forfeited during the year ended December 31, 2018. At December 31, 2019, there were 2,490 RSUs outstanding to vest.
During the year ended December 31, 2019,
the Company issued an aggregate of 25,346 shares of its common stock upon the vesting of restricted stock units issued to the Company’s
board of directors.
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, 2019
|
|
|
As of December 31, 2018
|
|
|
|
Preferred
Shares
Outstanding
|
|
|
Liquidation
Preference
(Per Share)
|
|
|
Total
Liquidation
Preference
|
|
|
Preferred
Shares
Outstanding
|
|
|
Liquidation
Preference
(Per Share)
|
|
|
Total
Liquidation
Preference
|
|
Series C-2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
$
|
10.00
|
|
|
$
|
1,500,000
|
|
Series C-3
|
|
|
52,000
|
|
|
$
|
10.00
|
|
|
$
|
520,000
|
|
|
|
104,000
|
|
|
$
|
10.00
|
|
|
$
|
1,040,000
|
|
Series D
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,962
|
|
|
$
|
21.00
|
|
|
$
|
1,553,202
|
|
Series E
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
Series F
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
|
$
|
1,000.00
|
|
|
$
|
2,000,000
|
|
Series G
|
|
|
100,000
|
|
|
$
|
187.36
|
|
|
$
|
18,736,452
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
|
|
419,585
|
|
|
|
|
|
|
$
|
10,502,654
|
|
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. Based on the terms of the Series F Stock, the conversion price
was $0.81. The conversion price of the Series F Stock was subject to anti-dilution adjustment for customary recapitalization events
such as stock splits, as well as full ratchet anti-dilution protection in the event that the Company did not obtain the subordination
of the Series C-3 preferred stock to that of the Series F Stock or obtain stockholder approval, if required by NYSE American rules,
of the issuance of common stock that exceeds NYSE American rules. 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.
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.
During the year ended December 31, 2019,
the Company issued 104,000 shares of its common stock upon conversion of 52,000 shares of Series C-3 non-voting preferred stock.
The following rights, privileges, terms
and condition apply to the outstanding preferred stock at December 31, 2019:
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.
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.
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.
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:
The Company’s 2013 Stock Incentive
Plan (the “2013 Plan”) was approved by the shareholders in July 2013. The 2013 Plan provides for the issuance of equity
grants in the form of options, restricted stock, stock awards and other forms of equity compensation. Awards under the 2013 Plan
may be made to directors, officers, employees and consultants. Initially, an aggregate of 1,000,000 shares of the Company’s
common stock was reserved for issuance under the 2013 Plan. On January 19, 2016, the shareholders approved an increase of the shares
issuable under the 2013 Plan from 1,000,000 to 1,600,000 and on June 13, 2016 from 1,600,000 to 2,200,000.
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 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 (the “2006 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, 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, 2019
and 2018, total compensation expense for stock options issued to employees, directors, officers and consultants was $2,242,000
and $1,018,000, respectively. As of December 31, 2019, there was $1,856,000 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
1.6 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,
|
|
|
2019
|
|
2018
|
Risk-free interest rate
|
|
1.51% - 2.74%
|
|
2.63% - 2.96%
|
Expected volatility
|
|
103% - 110%
|
|
93% - 103%
|
Expected term (years)
|
|
5 – 10 years
|
|
5 years
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
Weighted-average grant date fair value of options granted during the period
|
|
$6.11
|
|
$8.00
|
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, 2019:
|
|
Shares Underlying Stock Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at beginning of year
|
|
|
1,011,266
|
|
|
$
|
9.32
|
|
|
|
6.7
|
|
|
$
|
1,006,743
|
|
Granted
|
|
|
496,300
|
|
|
$
|
7.64
|
|
|
|
|
|
|
|
156,744
|
|
Exercised
|
|
|
(38,090
|
)
|
|
$
|
3.22
|
|
|
|
|
|
|
|
154,589
|
|
Expired/Canceled
|
|
|
(7,093
|
)
|
|
$
|
10.29
|
|
|
|
|
|
|
|
664
|
|
Forfeited
|
|
|
(85,989
|
)
|
|
$
|
7.73
|
|
|
|
|
|
|
|
53,047
|
|
Outstanding at end of year
|
|
|
1,376,394
|
|
|
$
|
8.98
|
|
|
|
6.8
|
|
|
$
|
1,232,545
|
|
Vested at end of year
|
|
|
932,959
|
|
|
$
|
9.31
|
|
|
|
6.0
|
|
|
$
|
950,659
|
|
Expected to vest in the future
|
|
|
443,435
|
|
|
$
|
8.28
|
|
|
|
8.6
|
|
|
$
|
281,887
|
|
The total intrinsic value of stock options
exercised during the years ended December 31, 2019 and 2018 was $154,589 and $42,400, respectively. 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.
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, 2018
|
|
|
3,319,008
|
|
|
$
|
5.50
|
|
|
|
3.1
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,948,207
|
)
|
|
$
|
4.45
|
|
|
|
-
|
|
Canceled in connection with the Exchange Agreement
|
|
|
(892,973
|
)
|
|
$
|
4.68
|
|
|
|
-
|
|
Expired
|
|
|
(136,500
|
)
|
|
$
|
12.50
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
341,328
|
|
|
$
|
6.24
|
|
|
|
1.42
|
|
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
|
%
|
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, 2019,
the Company issued an aggregate of 1,948,207 shares of its common stock upon exercise of warrants, resulting in net proceeds of
$8,674,000.
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, 2019 and 2018, the amount of compensation that was deferred under this plan was $36,500
and $30,000, respectively.
Note 9 — Concentrations:
At December 31, 2019 and 2018, no net accounts
receivable was due from a customer that exceeded 10%. During the year ended December 31, 2019, the Company had revenue from four
customers that exceeded 10% of its total sales (42%, 18%, 17% and 12%) and the Company had revenue from a single customer that
exceeded 10% of its total sales (70%) for the year ended December 31, 2018.
Note 10 — Leases:
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.
Prior to the adoption of ASC 842, operating
lease expense of approximately $6,000 was recognized in the Company’s consolidated statements of operations and comprehensive
loss for the year ended December 31, 2019.
Operating lease expense in the Company’s
consolidated statements of operations and comprehensive loss for the year ended December 31, 2019 was approximately $6,000, which
includes costs associated with leases for which ROU assets have been recognized as well as short-term leases.
At December 31, 2019, the Company has a
total operating lease liability of $4,000. Approximately $2,000 each are included in accrued expenses and operating lease liabilities,
net of current portion on the consolidated balance sheet. Operating ROU assets as of December 31, 2019 is $5,000 and is included
in property and equipment, net on the consolidated balance sheet.
For the year ended December 31, 2019, cash
paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases was $6,000.
The weighted average remaining lease term
and weighted average discount rate for operating leases were 2.8 years and 10%, respectively, as of December 31, 2019.
As of December 31, 2019, maturities of lease
liabilities were as follows:
2020
|
|
$
|
2,000
|
|
2021
|
|
|
2,000
|
|
2022
|
|
|
1,000
|
|
Total future minimum lease payments
|
|
|
5,000
|
|
Less imputed interest
|
|
|
(1,000
|
)
|
Total
|
|
$
|
4,000
|
|
Note 11 — Subsequent Events:
During January
2020, the Company sold an aggregate of 368,144 shares of its common stock under the at-the-market program and realized net proceeds
of approximately $2.5 million.
In January 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.
F-31