CORMEDIX INC. AND SUBSIDIARIES
CORMEDIX INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization, Business and Basis of Presentation:
Organization
and Business
CorMedix Inc., together with its wholly owned
subsidiaries (collectively “CorMedix” or the “Company”), is a biopharmaceutical company focused on developing
and commercializing therapeutic products for the prevention and treatment of infectious and inflammatory diseases. The Company’s
primary focus is on the development of its lead product candidate, Defencath™, for potential commercialization
in the United States (“U.S.”), and other key markets as a catheter lock solution (“CLS”). The name Defencath
is the U.S. proprietary name conditionally approved by the U.S. Food and Drug Administration (“FDA”), while the name
Neutrolin® is currently used in the European Union (“EU”) and other territories where the Company has received
CE-Mark approval for the commercial distribution of Neutrolin as a CLS regulated as a medical device.
The Company has in-licensed the worldwide rights
to develop and commercialize Defencath and Neutrolin. The CLS is a formulation of 1.35% taurolidine, 3.5% citrate, and 1000 u/ml
heparin and is regulated by the FDA as an investigational new drug, where it is being developed to prevent catheter-related blood
stream infections (“CRBSIs”) and thrombosis in patients using central venous catheters (“CVCs”) for hemodialysis.
CRBSIs and thrombosis represent key complications among hemodialysis, intensive care, cancer and total parenteral nutrition (“TPN”)
patients with CVCs. These complications can lead to treatment delays and increased costs to the healthcare system when they occur
due to hospitalizations, need for intravenous (“IV”), antibiotic treatment, long-term anticoagulation therapy, removal/replacement
of the CVC, related treatment costs and increased mortality. The Company initially expects to sell Defencath directly to dialysis
centers and hospitals, but also plans to expand its usage into intensive care, oncology and TPN patients using central venous catheters.
The Company believes Defencath addresses a significant unmet medical need and a potential large market opportunity in the U.S.
In late 2013, the Company met with the FDA to
determine the regulatory pathway for U.S. marketing approval of Defencath and began discussions on the clinical development program.
In January 2015, the FDA granted Fast Track designation to Defencath, which is a program designed to facilitate development of
drugs that are intended to treat serious and life-threatening conditions and to address an unmet medical need. Fast Track designation
provides eligibility to request Priority Review of the marketing application. The FDA informs the applicant of a Priority Review
designation within 60 days of the receipt of the complete New Drug Application (“NDA”), if it determines the criteria
have been met.
Also,
in January 2015, the FDA designated Defencath as a Qualified Infectious Disease Product (“QIDP”), which provides an
additional five years of marketing exclusivity to be added to any exclusivity for which the application qualifies upon approval.
For example, an additional five years of marketing exclusivity will be added to the five years granted to a New Chemical Entity
(“NCE”) upon approval of the NDA. QIDP designation also confers eligibility for Priority Review of the NDA.
The
Company launched its Phase 3 Prospective, Multicenter, Double-blind, Randomized, Active Control Study to Demonstrate Safety &
Effectiveness of Defencath/Neutrolin in Preventing Catheter related Bloodstream Infection in Subjects on Hemodialysis for End
Stage Renal Disease (“LOCK-IT-100”) in patients with hemodialysis catheters in the U.S. in December 2015. The clinical
trial was designed to demonstrate the safety and effectiveness of Defencath compared to the standard of care CLS, Heparin, in
preventing CRBSIs. The primary endpoint for the trial assessed the incidence of CRBSI and time to CRBSI for each study subject.
Secondary endpoints were catheter patency, which was defined as required use of tissue plasminogen activating factor (“tPA”),
or removal of catheter due to dysfunction, and removal of catheter for any reason.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In July 2018, 28 potential
cases of CRBSI were identified in LOCK-IT-100 that occurred through early December 2017. As previously agreed with the FDA, an
interim efficacy analysis was performed. Based on these first 28 cases, there was a highly statistically significant 72% reduction
in CRBSI by Defencath relative to the active control of heparin (p=0.0034). Because the pre-specified level of statistical significance
was reached for the primary endpoint and efficacy had been demonstrated with no safety concerns, the independent Data Safety Monitoring
Board (“DSMB”) recommended early termination. Following discussions with the FDA, we proceeded with an orderly termination
of LOCK-IT-100. The study had continued enrolling and treating subjects until study termination, and the final analysis was based
on a total of 795 subjects. The Company remained blinded until the topline results of the full data set of LOCK-IT-100 were announced
in late January 2019. In a total of 41 cases, there was a 71% reduction in CRBSI by Defencath relative to heparin, which was highly
statistically significant (p=0.0006), with a good safety profile. During 2019, CorMedix had a series of meetings with the FDA to
discuss the analyses of data from LOCK-IT-100, including an end of Phase 3 meeting, a pre-NDA meeting and a CMC meeting, in preparation
for submission of the NDA.
The
FDA granted the Company’s request for a rolling submission and review of the NDA, which is designed to expedite the approval
process for products being developed to address an unmet medical need. Although the FDA usually requires two pivotal clinical
trials to provide substantial evidence of safety and effectiveness for approval of the NDA, the FDA will in some cases accept
one adequate and well-controlled trial, where it is a large multicenter trial with a broad range of subjects and study sites that
has demonstrated a clinically meaningful and statistically very persuasive effect on a disease with potentially serious outcome.
In March 2020, the Company began the modular submission process for the NDA for Defencath for the prevention of CRBSI in hemodialysis
patients, and recently announced on July 8, 2020, that submission of all modules for the NDA was completed. The Company requested
Priority Review of the NDA, which if granted, would provide for a goal for the FDA of a six-month review period, instead of ten
months for applications under standard review. The Company has not been informed of any delays by the FDA in the review of the
NDA, but the FDA has limited international and domestic travel due to COVID-19, and pre-approval inspections are required for
manufacturing sites. The FDA has 60 days to evaluate the submission for completeness for a substantive review to accept for filing
and make a determination for priority or standard review. If the FDA determines that the application is materially incomplete
or identifies electronic submission issues that render the application unreviewable, the FDA will refuse to file the application.
In that case, the deficiencies will need to be corrected and the application resubmitted for review to be accepted for filing.
The
FDA also previously agreed that the Company could request consideration of Defencath for approval under the Limited Population
Pathway for Antibacterial and Antifungal Drugs (“LPAD”). LPAD, passed as part of the 21st Century Cures
Act, is a new program intended to expedite the development and approval of certain antibacterial and antifungal drugs to treat
serious or life-threatening infections in limited populations of patients with unmet medical needs. Given that the LPAD pathway
provides for a streamlined clinical development program for a limited population that may involve smaller, shorter, or fewer clinical
trials, the Company believes that LPAD will provide additional flexibility for the FDA to approve Defencath to prevent CRBSIs
in the limited population of adult patients with end-stage renal disease receiving hemodialysis through a CVC.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The
Company was granted a deferral by the FDA under the Pediatric Research Equity Act (“PREA”) that requires sponsors
to conduct pediatric studies for NDAs for a new active ingredient, such as taurolidine in Defencath, unless a waiver or deferral
is obtained from the FDA. A deferral acknowledges that a pediatric assessment is required but permits the applicant to submit
the pediatric assessment after the submission of an NDA. The Company has made a commitment to conduct the pediatric study after
approval of the NDA for use in adult hemodialysis patients. Pediatric studies for an approved product conducted under PREA may
qualify for pediatric exclusivity, which if granted would provide an additional six months of marketing exclusivity. Defencath
would then have the potential to receive a total marketing exclusivity period of 10.5 years, including exclusivity pursuant to
NCE and QIDP.
The Company anticipates that Medicare reimbursement
could be available for Defencath in hemodialysis and other catheter indications in intensive care, oncology and TPN through relevant
hospital inpatient diagnosis-related groups (“DRGs”), or outpatient ambulatory payment classifications (“APCs”),
the End-Stage Renal Disease Prospective Payment System (“ESRD PPS”), base payment, or under the Durable Medical Equipment,
Prosthetics, Orthotics, and Supplies (“DMEPOS”), Fee Schedule, depending on the setting of care. The Company also plans
to seek separate reimbursement as a drug, where available under Medicare, through mechanisms such as pass-through status under
the Hospital Outpatient Prospective Payment System, the transitional drug add-on payment adjustment (“TDAPA”), under
the ESRD PPS, or reimbursement as a drug used with a DMEPOS infusion pump. The Company has engaged U.S. Centers for Medicare &
Medicaid Services (“CMS”), in preliminary discussions concerning the reimbursement for Defencath under TDAPA; however,
qualifications cannot be determined until after FDA approval and CMS evaluates the request for coverage in a quarterly review.
If approved under TDAPA, reimbursement of Defencath would be calculated based on its average selling price.
Although
the Company cannot fully anticipate changes in reimbursement requirements and mechanisms in the coming years, the Company expects
Defencath would be eligible for and would obtain TDAPA. To be eligible for TDAPA, an innovative new renal drug or biologic must
be, among other things, identified as having an end action effect that treats or manages a condition or conditions associated
with ESRD and as not fitting into an established ESRD PPS functional category. The Company believes that in addition to the Fast
Track and QIDP designations granted by the FDA, Defencath meets the criterion of being a new renal dialysis product used to treat
or manage a condition associated with ESRD, since infections are the second leading cause of death in patients with ESRD and CVCs
are a significant risk factor for infection-associated mortality.
In
the EU, Neutrolin is regulated as a Class 3 medical device. In July 2013, the Company received CE Mark approval for Neutrolin.
In December 2013, the Company started commercial sales of Neutrolin in Germany for the prevention of CRBSI, and maintenance
of catheter patency in hemodialysis patients using a tunneled, cuffed CVC for vascular access. To date, Neutrolin is
registered and may be sold in certain European Union and Middle Eastern countries for such treatment.
In
September 2014, the TUV-SUD and The Medicines Evaluation Board of the Netherlands (“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 CVC. The expansion also adds patients receiving medication and IV fluids via CVC in intensive or critical care
units (cardiac care unit, surgical care unit, neonatal critical care unit, and urgent care centers). An indication for use in
total parenteral nutrition was also approved.
In May 2020, the Company began forming a
wholly-owned Spanish subsidiary, CorMedix Spain, S.L.U.
The
Company intends to pursue additional indications for Defencath use as a CLS in populations with an unmet medical need that also
represent a significant market opportunity. For example, the Company intends to pursue marketing authorization in the U.S. for
use as a CLS to reduce CRBSIs in oncology and total parenteral nutrition patients using a CVC.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
In
addition to the CLS, the Company is sponsoring a pre-clinical research collaboration for the use of taurolidine as a possible
treatment for pediatric tumors. In February 2018, the FDA granted orphan drug designation to taurolidine for the treatment of
neuroblastoma in children. The Company may seek one or more strategic partners or other sources of capital to help with the development
and commercialization of taurolidine for the treatment of neuroblastoma in children. The Company is also evaluating opportunities
for the possible expansion of taurolidine as a platform compound for use in certain medical devices. Patent applications have
been filed in several indications, including wound closure, surgical meshes, and wound management. Based on initial feasibility
work, the Company is advancing pre-clinical studies for taurolidine-infused surgical meshes, suture materials and hydrogels. The
Company will seek to establish development/commercial partnerships as these programs advance.
The
FDA regards taurolidine as an NCE and therefore it is currently an unapproved new drug. The Company may in the future pursue product
candidates that would involve devices impregnated with taurolidine, and the Company believes that at the current time such products
would be combination products subject to device premarket submission requirements, while subject also, under review by the FDA,
to the standards for drug approvability. Consequently, given that there is no appropriate predicate medical device currently marketed
in the U.S. on which a 510(k) approval process could be based and that taurolidine is not yet approved in any application, the
Company anticipates that it would be required to submit a premarket approval application, or PMA, for marketing authorization
for any medical device indications that the Company may pursue for devices containing taurolidine. In the event that an NDA for
Defencath is approved by the FDA, the regulatory pathway for these medical device product candidates may be revisited with the
FDA. Although there may be no appropriate predicate, de novo Class II designation can be proposed, based on a risk assessment
and a reasonable assurance of safety and effectiveness.
In
December 2019, the novel coronavirus disease, COVID-19, was identified in Wuhan, China. This virus has been declared a pandemic
and has spread to multiple global regions. The outbreak and government measures taken in response have also had a significant
impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted;
facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies,
has spiked, while demand for other goods and services, such as travel, has fallen. In response to the COVID-19 outbreak, “shelter
in place” orders and other public health guidance measures have been implemented across much of the United States, Europe
and Asia, including in the locations of the Company’s offices, clinical trial sites, key vendors and partners. The Company’s
program timelines may be negatively affected by COVID-19, which could materially and adversely affect its business, financial
condition and results of operations.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions
for Form 10-Q and Article 8 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include
all information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered
necessary to fairly state the interim results. Interim operating results are not necessarily indicative of results that may be
expected for the full year ending December 31, 2020 or for any subsequent period. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited financial statements and notes thereto of the Company which are included
in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March
16, 2020. The accompanying condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial
statements included in such Form 10-K.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Recently
Adopted Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance which replaces the incurred loss
impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to inform credit loss estimates. This adoption on January 1, 2020 did
not have a material impact on the Company’s condensed consolidated financial statements.
In
August 2018, the FASB issued a new guidance which modifies the disclosure requirements on fair value measurements. The guidance
was effective for the Company beginning in the first quarter of fiscal year 2020. This adoption on January 1, 2020 did not have
a material impact on the Company’s condensed consolidated financial statements.
In
November 2018, the FASB issued new guidance to clarify the interaction between the authoritative guidance for collaborative arrangements
and revenue from contracts with customers. The new guidance clarifies that, when the collaborative arrangement participant is
a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account
guidance to collaborative arrangements guidance, and that, in a transaction with a collaborative arrangement participant who is
not a customer, precludes presenting the transaction together with revenue recognized under contracts with customers. The guidance
was effective for the Company beginning in the first quarter of fiscal year 2020. This adoption on January 1, 2020 did not have
a material impact on the Company’s condensed consolidated financial statements.
In
November 2019, the FASB issued new guidance which requires that an entity measure and classify share-based payment awards granted
to a customer by applying the guidance in FASB’s Accounting Standards Codification (“ASC”) 718. The guidance
was effective for the Company beginning in the first quarter of fiscal year 2020. This adoption on January 1, 2020 did not have
a material impact on the Company’s condensed consolidated financial statements.
Recently
Issued Authoritative Pronouncements
In
December 2019, the FASB issued new guidance which removes certain exceptions to the general principles of the accounting for income
taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The guidance
is effective for the company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is assessing
the impact of adopting this guidance on its consolidated financial statements.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies:
Liquidity
and Uncertainties
The financial statements have been prepared
in conformity with GAAP which contemplate continuation of the Company as a going concern. To date, the Company’s commercial
operations have not generated sufficient revenues to enable profitability. As of June 30, 2020, the Company had an accumulated
deficit of $204.8 million, and incurred losses from operations of $3.8 million and $0.7 million for the three months ended June
30, 2020 and 2019, respectively and $9.3 million and $5.9 million for the six months ended June 30, 2020 and 2019, respectively.
The Company currently estimates that as of June 30, 2020 it has sufficient cash, cash equivalents and short-term investments on
hand to fund operations for at least twelve months after the filing date of this report, after taking into consideration the net
proceeds received from the public offering (see Note 7) and the initial preparations for commercial launch of Defencath.
In
April 2020, the Company received approximately $5.2 million, net of expenses, from the sale of most of its remaining unused New
Jersey net operating losses (“NOL”) eligible for sale under the State of New Jersey’s Economic Development Authority’s
New Jersey Technology Business Tax Certificate Transfer program (“NJEDA Program”). The NJEDA Program allowed the Company to
sell approximately $5.5 million of its total $6.0 million in available NOL tax benefits for the state fiscal year 2019.
In
April 2020, the Company received from the FDA a refund for the NDA application fee in the amount of $2.9 million, which was
paid in the first quarter of 2020. The Company met the conditions of the Federal Food, Drug, and Cosmetic Act for the small business
waiver of the user fees and its request for a waiver of an application user fee was granted by the FDA.
The Company’s continued
operations will depend on its ability to raise additional capital through various potential sources, such as equity and/or
debt financings, strategic relationships, or out-licensing of its products, to commercially launch Defencath upon NDA
approval, and until profitability is achieved, if ever. Management can provide no assurances that such financing or strategic
relationships will be available on acceptable terms, or at all. At June 30, 2020, the Company had approximately $2.1 million
available under its current ATM program and $30.3 million available under its current shelf registration statement for the
issuance of equity, debt or equity-linked securities unrelated to the current ATM program. After taking into consideration
the equity financing that closed in July 2020, the current shelf registration statement has a balance of approximately $7.3
million available to be drawn (see Note 7).
The
Company’s operations are subject to a number of other factors that can affect its operating results and financial condition.
Such factors include, but are not limited to: the ability to obtain regulatory approval to market the Company’s products;
ability to manufacture successfully; competition from products manufactured and sold or being developed by other companies; the
price of, and demand for, Company products; the Company’s ability to negotiate favorable licensing or other manufacturing
and marketing agreements for its products; the results of clinical testing and trial activities of the Company’s product
candidates; and the Company’s ability to raise capital to support its operations.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Basis
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company, CorMedix Europe GmbH and CorMedix Spain, S.L.U.
its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Financial
Instruments
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents
and short-term investments. The Company maintains its cash and cash equivalents in bank deposit and other interest-bearing accounts,
the balances of which, at times, may exceed federally insured limits.
The
following table is the reconciliation of the accounting standard that modifies certain aspects of the recognition, measurement,
presentation and disclosure of financial instruments as shown on the Company’s consolidated statement of cash flows:
|
|
June
30,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
16,493,967
|
|
|
$
|
16,350,237
|
|
Restricted cash
|
|
|
175,160
|
|
|
|
174,950
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
16,669,127
|
|
|
$
|
16,525,187
|
|
The
appropriate classification of marketable securities is determined at the time of purchase and reevaluated as of each balance sheet
date. Investments in marketable debt classified as available-for-sale and equity securities are reported at fair value. Fair value
is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets
or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. Changes in fair value that are considered temporary are reported in the condensed consolidated
statement of operations. Realized gains and losses, amortization of premiums and discounts and interest and dividends earned are
included in other income (expense). For declines in the fair value of equity securities that are considered other-than-temporary,
impairment losses are charged to other income (expense), net. The Company considers available evidence in evaluating potential
impairments of its investments, including the duration and extent to which fair value is less than cost. There were no deemed
permanent impairments at June 30, 2020 or December 31, 2019.
The
Company’s marketable securities are highly liquid and consist of U.S. government agency securities, high-grade corporate
obligations and commercial paper with original maturities of more than 90 days. As of June 30, 2020, and December 31, 2019, all
of the Company’s investments had contractual maturities of less than one year. As of June 30, 2020, no allowance for credit
loss was recorded. The following table summarizes the amortized cost, unrealized gains and losses and the fair value at June
30, 2020 and December 31, 2019:
June 30, 2020:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Losses
|
|
|
Gross
Unrealized
Gains
|
|
|
Fair
Value
|
|
Money Market Funds included in Cash Equivalents
|
|
$
|
1,675,906
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,675,906
|
|
U.S. Government Agency Securities
|
|
|
1,700,336
|
|
|
|
-
|
|
|
|
1,443
|
|
|
|
1,701,779
|
|
Corporate Securities
|
|
|
3,589,612
|
|
|
|
-
|
|
|
|
6,663
|
|
|
|
3,596,275
|
|
Commercial Paper
|
|
|
649,596
|
|
|
|
-
|
|
|
|
384
|
|
|
|
649,980
|
|
Subtotal
|
|
|
5,939,544
|
|
|
|
-
|
|
|
|
8,490
|
|
|
|
5,948,034
|
|
Total June 30, 2020
|
|
$
|
7,615,450
|
|
|
$
|
-
|
|
|
$
|
8,490
|
|
|
$
|
7,623,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds included in Cash Equivalents
|
|
$
|
3,472,043
|
|
|
$
|
-
|
|
|
$
|
51
|
|
|
$
|
3,472,094
|
|
U.S. Government Agency Securities
|
|
|
2,691,091
|
|
|
|
(42
|
)
|
|
|
869
|
|
|
|
2,691,918
|
|
Corporate Securities
|
|
|
6,058,265
|
|
|
|
(1,438
|
)
|
|
|
440
|
|
|
|
6,057,267
|
|
Commercial Paper
|
|
|
3,234,583
|
|
|
|
(16
|
)
|
|
|
405
|
|
|
|
3,234,972
|
|
Subtotal
|
|
|
11,983,939
|
|
|
|
(1,496
|
)
|
|
|
1,714
|
|
|
|
11,984,157
|
|
Total December 31, 2019
|
|
$
|
15,455,982
|
|
|
$
|
(1,496
|
)
|
|
$
|
1,765
|
|
|
$
|
15,456,251
|
|
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Fair
Value Measurements
The
Company’s financial instruments recorded in the condensed consolidated balance sheets include cash and cash equivalents,
accounts receivable, investment securities, accounts payable and accrued expenses. The carrying value of certain financial
instruments, primarily cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their
estimated fair values based upon the short-term nature of their maturity dates.
The
Company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets
for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value
fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant
to the fair value measurement of the instrument. Financial assets recorded at fair value on the Company’s condensed consolidated
balance sheets are categorized as follows:
|
●
|
Level
1 inputs—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs— Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for
identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest
rate and yield curves, and market-corroborated inputs).
|
|
●
|
Level
3 inputs—Unobservable inputs for the asset or liability, which are supported by little or no market activity and are valued
based on management’s estimates of assumptions that market participants would use in pricing the asset or liability.
|
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The
following table provides the carrying value and fair value of the Company’s financial assets measured at fair value on a
recurring basis as of June 30, 2020 and December 31, 2019:
June 30, 2020:
|
|
Carrying Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
1,675,906
|
|
|
$
|
1,675,906
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government Agency Securities
|
|
|
1,701,779
|
|
|
|
1,701,779
|
|
|
|
-
|
|
|
|
-
|
|
Corporate Securities
|
|
|
3,596,275
|
|
|
|
-
|
|
|
|
3,596,275
|
|
|
|
-
|
|
Commercial Paper
|
|
|
649,980
|
|
|
|
-
|
|
|
|
649,980
|
|
|
|
-
|
|
Subtotal
|
|
|
5,948,034
|
|
|
|
1,701,779
|
|
|
|
4,246,225
|
|
|
$
|
-
|
|
Total June 30, 2020
|
|
$
|
7,623,940
|
|
|
$
|
3,377,685
|
|
|
$
|
4,246,255
|
|
|
$
|
-
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds and Cash Equivalents
|
|
$
|
3,472,094
|
|
|
$
|
3,472,094
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. Government Agency Securities
|
|
|
2,691,918
|
|
|
|
2,691,918
|
|
|
|
-
|
|
|
|
-
|
|
Corporate Securities
|
|
|
6,057,267
|
|
|
|
-
|
|
|
|
6,057,267
|
|
|
|
-
|
|
Commercial Paper
|
|
|
3,234,972
|
|
|
|
-
|
|
|
|
3,234,972
|
|
|
|
-
|
|
Subtotal
|
|
|
11,984,157
|
|
|
|
2,691,918
|
|
|
|
9,292,239
|
|
|
|
-
|
|
Total December 31, 2019
|
|
$
|
15,456,251
|
|
|
$
|
6,164,012
|
|
|
$
|
9,292,239
|
|
|
$
|
-
|
|
Foreign
Currency Translation and Transactions
The
condensed consolidated financial statements are presented in U.S. Dollars (“USD”), the reporting currency of the Company.
For the financial statements of the Company’s foreign subsidiaries, whose functional currency is the EURO, foreign currency
asset and liability amounts, are translated into USD at end-of-period exchange rates. Foreign currency income and expenses are
translated at average exchange rates in effect during the period in which the income and expenses were recognized. Translation
gains and losses are included in other comprehensive income (loss).
The
Company has intercompany loans between the parent company based in New Jersey and its German subsidiary. The intercompany loans
outstanding are not expected to be repaid in the foreseeable future and unrealized foreign exchange movements related to long-term
intercompany loans are recognized in other comprehensive income (loss).
Foreign
currency exchange transaction gain (loss) is the result of re-measuring transactions denominated in a currency other than the
functional currency of the entity recording the transaction.
Restricted
Cash
As of June 30, 2020, and December 31,
2019, the Company has restricted cash in connection with the patent and utility model infringement proceedings against
TauroPharm (see Note 4). The Company was required by the District Courts of Mannheim to provide a security deposit of
an aggregate of approximately $124,000 (€110,000) to cover legal fees in the event TauroPharm is entitled to
reimbursement of these costs. The company furthermore had to provide a deposit in the amount of $40,000 (€36,000) and
$11,000 (€10,000) for the first and second instances, respectively, in connection with the unfair competition
proceedings in Cologne. During the six months ended June 30, 2020, the Company accrued an expense of $12,000 in connection
with the utility model infringement proceedings, which will be deducted from restricted cash when settled.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Prepaid
Research and Development and Other Prepaid Expenses
Prepaid expenses consist of payments made
in advance to vendors relating to service contracts for clinical trial development, manufacturing, preclinical development, deposits
on equipment and insurance policies. These advanced payments are amortized to expense either as services are performed or over
the relevant service period using the straight-line method.
Other prepaid expenses consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Deposit on equipment
|
|
$
|
500,822
|
|
|
$
|
-
|
|
Insurance expense
|
|
|
123,142
|
|
|
|
244,828
|
|
Subscription fees
|
|
|
147,778
|
|
|
|
97,983
|
|
Software costs
|
|
|
296,574
|
|
|
|
10,081
|
|
Other
|
|
|
60,439
|
|
|
|
93,523
|
|
Total
|
|
$
|
1,128,755
|
|
|
$
|
446,415
|
|
Inventories,
net
Inventories
are valued at the lower of cost or net realizable value on a first in, first out basis. Inventories consist of raw materials (including
labeling and packaging), work-in-process, and finished goods, if any, for the Defencath product. Inventories consist of the following:
|
|
June
30,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
6,893
|
|
Finished goods
|
|
|
407,998
|
|
|
|
461,735
|
|
Inventory reserve
|
|
|
(130,163
|
)
|
|
|
(130,163
|
)
|
Total
|
|
$
|
277,835
|
|
|
$
|
338,465
|
|
Leases
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, current portion of operating lease liabilities, and operating lease liabilities, net of current portion, on the condensed
consolidated balance sheet.
Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of future
payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that
the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the
lease term.
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.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Accrued
Expenses
Accrued
expenses consist of the following:
|
|
June
30,
2020
|
|
|
December 31,
2019
|
|
Professional and consulting fees
|
|
$
|
313,578
|
|
|
$
|
214,777
|
|
Accrued payroll and payroll taxes
|
|
|
1,255,554
|
|
|
|
1,287,047
|
|
Clinical trial related
|
|
|
2,434,310
|
|
|
|
2,435,953
|
|
Manufacturing development related
|
|
|
234,378
|
|
|
|
806,032
|
|
Other
|
|
|
90,213
|
|
|
|
56,677
|
|
Total
|
|
$
|
4,328,033
|
|
|
$
|
4,800,486
|
|
In
December 2015, the Company contracted a clinical research organization (“CRO”) to help conduct its LOCK-IT-100 Phase
3 multicenter, double-blind, randomized active control study to demonstrate the safety and effectiveness of Defencath/Neutrolin
in preventing catheter-related bloodstream infections and blood clotting in subjects receiving hemodialysis therapy as treatment
for end stage renal disease.
Through
June 30, 2020, approximately $30.0 million of clinical trial expense has been recorded, of which approximately $27.5 million has
been paid. During the three and six months ended June 30, 2020, the Company recognized $12,000 and $34,000, respectively, in research
and development expense related to this agreement and $185,000 and $702,000 during the three and six months ended June 30, 2019.
At June 30, 2020, the Company had accrued approximately $2.4 million in accounts payable and accrued expenses.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” ASC 606 prescribes
a five-step model for recognizing revenue which includes (i) identifying contracts with customers; (ii) identifying performance
obligations; (iii) determining the transaction price; (iv) allocating the transaction price; and (v) recognizing revenue.
The
Company recognizes net sales upon shipment of product and upon meeting the five-step model prescribed by ASC 606 outlined above.
Loss
Per Common Share
Basic
loss per common share excludes any potential dilution and is computed by dividing net loss by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. However, since their effect is anti-dilutive, the Company has excluded potentially
dilutive shares. The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share
as their effect would be anti-dilutive.
|
|
Six
Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Number
of Shares of
Common Stock Issuable)
|
|
Series C non-voting preferred stock
|
|
|
104,000
|
|
|
|
408,000
|
|
Series D non-voting preferred stock
|
|
|
-
|
|
|
|
295,848
|
|
Series E non-voting preferred stock
|
|
|
391,953
|
|
|
|
391,953
|
|
Series F non-voting preferred stock
|
|
|
-
|
|
|
|
2,469,137
|
|
Series G non-voting preferred stock
|
|
|
5,560,137
|
|
|
|
-
|
|
Shares issuable upon conversion of convertible debt
|
|
|
-
|
|
|
|
1,000,000
|
|
Restricted stock units
|
|
|
105
|
|
|
|
13,642
|
|
Shares issuable for payment of deferred board compensation
|
|
|
40,556
|
|
|
|
30,553
|
|
Shares underlying outstanding warrants
|
|
|
183,148
|
|
|
|
3,197,163
|
|
Shares underlying outstanding stock options
|
|
|
2,300,937
|
|
|
|
1,297,793
|
|
Total potentially dilutive shares
|
|
|
8,580,836
|
|
|
|
9,104,089
|
|
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Stock-Based
Compensation
Share-based
compensation cost for stock options granted to employees is measured at grant date using the Black-Scholes stock option pricing
model in accordance with ASC No. 718, “Compensation-Stock Compensation”, based on the estimated fair value
of the award for options with service or performance-based conditions and is recognized as expense over the requisite service
period on a straight-line basis. For stock options with performance-based vesting provisions, share-based compensation cost is
recorded when the achievement of the performance condition is probable.
Research
and Development
Research and development costs are charged
to expense as incurred. Research and development include fees associated with operational consultants, contract clinical research
organizations, contract manufacturing organizations, clinical site fees, contract laboratory research organizations, contract
central testing laboratories, licensing activities, and allocated executive, human resources, facilities expenses and costs related
to the manufacturing of the product that could potentially be available to support the commercial launch prior to marketing approval.
For the six months ended June 30, 2020, costs related to the manufacturing of commercial pre-launch inventory that were expensed
amounted to approximately $3.7 million. The Company accrues for costs incurred as the services are being provided by monitoring
the status of the activities and the invoices received from its external service providers. Costs related to the acquisition of
technology rights and patents for which development work is still in process are charged to operations as incurred and considered
a component of research and development expense.
Note
3 — Stockholders’ Equity:
Common
Stock
The Company is a party to a sales
agreement with B. Riley dated March 9, 2018 for the sale of up to $14.7 million of the Company’s common stock under the
Company’s ATM program, pursuant to a registration statement filed on March 9, 2018 for an aggregate of $70.0 million of
the Company’s securities, which became effective on April 16, 2018. In November 2018, the ATM program amount was
increased by $25.0 million. Under the ATM program, the Company may issue and sell common stock from time to time through B.
Riley acting as agent, subject to limitations imposed by the Company and subject to B. Riley’s acceptance, such as the
number or dollar amount of shares registered under the registration statement to which the offering relates. B. Riley is
entitled to a commission of up to 3% of the gross proceeds from the sale of common stock sold under the ATM program. At June
30, 2020, 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. After taking into consideration the equity financing that closed in July 2020, the current shelf registration
statement has a balance of approximately $7.3 million available to be drawn (see Note 7).
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
During
the six months ended June 30, 2020 and 2019, the Company sold 368,144 and 1,768,012 shares of common stock under the ATM program,
respectively, and realized net proceeds of approximately $2.5 million and $15.2 million, respectively.
During
the six months ended June 30, 2020 and 2019, the Company issued an aggregate of 91,500 and 121,845 shares of its common stock
upon exercise of warrants, respectively, resulting in net proceeds to the Company of $412,000 and $634,000, respectively.
During
the six months ended June 30, 2020 and 2019, the Company issued an aggregate of 2,385 and 12,942 shares of its common stock, respectively,
upon the vesting of restricted stock units issued to the Company’s board of directors.
During
the six months ended June 30, 2019, the Company issued an aggregate of 35,840 shares of its common stock upon exercise of stock
options, resulting in net proceeds of $113,000 to the Company. No stock options were exercised during the six months ended June
30, 2020.
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 June 30, 2020
|
|
|
As
of December 31, 2019
|
|
|
|
Preferred
Shares
Outstanding
|
|
|
Liquidation
Preference
(Per Share)
|
|
|
Total
Liquidation
Preference
|
|
|
Preferred
Shares
Outstanding
|
|
|
Liquidation
Preference
(Per Share)
|
|
|
Total
Liquidation
Preference
|
|
Series C-3
|
|
|
52,000
|
|
|
$
|
10.00
|
|
|
$
|
520,000
|
|
|
|
52,000
|
|
|
$
|
10.00
|
|
|
$
|
520,000
|
|
Series E
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
|
|
89,623
|
|
|
$
|
49.20
|
|
|
$
|
4,409,452
|
|
Series G
|
|
|
100,000
|
|
|
$
|
187.36
|
|
|
$
|
18,736,452
|
|
|
|
100,000
|
|
|
$
|
187.36
|
|
|
$
|
18,736,452
|
|
Total
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
|
|
241,623
|
|
|
|
|
|
|
$
|
23,665,904
|
|
Stock
Options
During
the six months ended June 30, 2020, the Company granted ten-year qualified and non-qualified stock options covering an aggregate
of 960,234 shares of the Company’s common stock under the 2019 Stock Incentive Plan. The weighted average exercise price
of these options is $5.17 per share.
During
the three and six months ended June 30, 2020, total compensation expense for stock options issued to employees, directors, officers
and consultants was $693,000 and $1,362,000, respectively, and $557,000 and $1,317,000 for the three and six months ended June
30, 2019, respectively.
As
of June 30, 2020, there was approximately $3,881,000 in total unrecognized compensation expense related to stock options granted,
which expense will be recognized over an expected remaining weighted average period of 1.7 years.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The
fair value of each stock option award estimated on the grant date is determined using the Black-Scholes option pricing model with
the following assumptions, for the six months ended June 30, 2020:
Expected
term, years
|
5 - 10
|
Volatility
|
102.73% - 107.87%
|
Dividend
yield
|
0.0%
|
Risk-free
interest rate
|
0.36% - 1.67%
|
Weighted
average grant date fair value of options granted during the period
|
$3.58
|
The
Company estimated the expected term of the stock options granted based on anticipated exercises in future periods. The expected
term of the stock options granted to consultants is based upon the full term of the respective option agreements. The expected
stock price volatility for the Company’s stock options is calculated based on the historical volatility since the initial
public offering of the Company’s common stock in March 2010. The expected dividend yield of 0.0% reflects the Company’s
current and expected future policy for dividends on the Company’s common stock. To determine the risk-free interest rate,
the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term
of the Company’s awards which is 5 years for employees and 10 years for non-employees.
The
following table summarizes the Company’s stock options activity and related information for the six months ended June 30,
2020:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at beginning of period
|
|
|
1,376,394
|
|
|
$
|
8.98
|
|
|
|
6.8
|
|
|
$
|
880,902
|
|
Granted
|
|
|
960,234
|
|
|
$
|
5.17
|
|
|
|
|
|
|
$
|
1,132,914
|
|
Forfeited
|
|
|
(28,800
|
)
|
|
$
|
9.01
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(6,891
|
)
|
|
$
|
12.53
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Outstanding at end of period
|
|
|
2,300,937
|
|
|
$
|
7.38
|
|
|
|
7.6
|
|
|
$
|
2,013,816
|
|
Exercisable at end of period
|
|
|
1,143,055
|
|
|
$
|
8.62
|
|
|
|
5.9
|
|
|
$
|
909,506
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise prices of the underlying options and the quoted
closing price of the common stock of the Company at the end of the reporting period for those options that have an exercise price
below the quoted closing price. There were no stock options exercised during the six months ended June 30, 2020.
Restricted
Stock Units
During
the six months ended June 30, 2020, the Company issued an aggregate of 2,385 shares of its common stock upon the vesting of RSUs
issued to the Company’s board of directors.
During
the three and six months ended June 30, 2020, compensation expense recorded for the RSUs was $3,000 and $10,000, respectively,
and $49,000 and $99,000 for the three and six months ended June 30, 2019, respectively. Unrecognized compensation expense for
these RSUs amounted to $400. The expected weighted average period for the expense to be recognized is 0.03 years
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Warrants
During
the six months ended June 30, 2020 and 2019, the Company issued an aggregate of 91,500 and 121,845 shares of its common stock
upon exercise of warrants, respectively, resulting in net proceeds to the Company of $412,000 and $634,000, respectively.
As
of June 30, 2020, there were 183,148 outstanding warrants with a weighted average exercise price of $4.96 per share and a weighted
average remaining contractual life of 2.1 years.
Note
4 — Commitments and Contingencies:
Contingency
Matters
On
September 9, 2014, the Company filed in the District Court of Mannheim, Germany, a patent infringement action against TauroPharm
GmbH and Tauro-Implant GmbH as well as their respective CEOs (the “Defendants”) claiming infringement of the Company’s
European Patent EP 1 814 562 B1, which was granted by the European Patent Office (the “EPO”) on January 8, 2014 (the
“Prosl European Patent”). The Prosl European Patent covers the formulation of taurolidine and citrate with low
dose heparin in a catheter lock solution for maintaining patency and preventing infection in hemodialysis catheters. In this action,
the Company claims that the Defendants infringe on the Prosl European Patent by manufacturing and distributing catheter locking
solutions to the extent they are covered by the claims of the Prosl European Patent. The Company believes that its
patent is sound and is seeking injunctive relief and raising claims for information, rendering of accounts, calling back, destruction
and damages. Separately, TauroPharm has filed an opposition with the EPO against the Prosl European Patent alleging that it lacks
novelty and inventive step. The Company cannot predict what other defenses the Defendants may raise, or the ultimate
outcome of either of these related matters. At present, the EPO has revoked the Prosl European Patent as invalid, and the Company
has filed an appeal, which is currently pending.
In
the same complaint against the same Defendants, the Company also alleged an infringement (requesting the same remedies) of ND
Partners’ utility model DE 20 2005 022 124 U1 (the “Utility Model”), which the Company believes is fundamentally
identical to the Prosl European Patent in its main aspects and claims. The Court separated the two proceedings and the Prosl European
Patent and the Utility Model claims are now being tried separately. TauroPharm has filed a cancellation action against the Utility
Model before the German Patent and Trademark Office (the “German PTO”) based on the similar arguments as those in
the opposition against the Prosl European Patent.
On
March 27, 2015, the District Court held a hearing to evaluate whether the Utility Model has been infringed by TauroPharm in connection
with the manufacture, sale and distribution of its TauroLock-HEP100TM and TauroLock-HEP500TM products. A
hearing before the same court was held on January 30, 2015 on the separate, but related, question of infringement of the Prosl
European Patent by TauroPharm.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The
Court issued its decisions on May 8, 2015, staying both proceedings. In its decisions, the Court found that the commercialization
by TauroPharm in Germany of its TauroLock catheter lock solutions Hep100 and Hep500 infringes both the Prosl European Patent
and the Utility Model and further that there is no prior use right that would allow TauroPharm to continue to make, use or sell
its product in Germany. However, the Court declined to issue an injunction in favor of the Company that would preclude the continued
commercialization by TauroPharm based upon its finding that there is a sufficient likelihood that the EPO, in the case of the
Prosl European Patent, or the German PTO, in the case of the Utility Model, may find that such patent or utility model is invalid.
Specifically, the Court noted the possible publication of certain instructions for product use that may be deemed to constitute
prior art. As such, the District Court determined that it will defer any consideration of the request by the Company for injunctive
and other relief until such time as the EPO or the German PTO made a final decision on the underlying validity of the Prosl European
Patent and the Utility Model. We expect that the complaint regarding the infringement of the Utility Model will be dismissed now
that the German PTO has voided the Utility Model (see below). This does not, however, have a direct effect on the infringement
proceedings concerning the Prosl European Patent.
The
opposition proceeding against the Prosl European Patent before the EPO is ongoing. The EPO held a hearing in the opposition proceeding
on November 25, 2015. In its preliminary consideration of the matter, the EPO (and the German PTO) had regarded the patent as
not inventive or novel due to publication of prior art. However, the EPO did not issue a decision at the end of the hearing but
adjourned the matter due to the fact that the panel was of the view that Claus Herdeis, one of the managing directors of TauroPharm,
had to be heard as a witness in a further hearing in order to close some gaps in the documentation presented by TauroPharm as
regards the publication of the prior art.
The
German PTO held a hearing in the validity proceedings relating to the Utility Model on June 29, 2016, at which the panel affirmed
its preliminary finding that the Utility Model was invalid based upon prior publication of a reference to the benefits that may
be associated with adding heparin to a taurolidine based solution. The Company filed an appeal against the ruling on September
7, 2016. An oral hearing was held on September 17, 2019 in which the German Federal Patent Court affirmed the first instance decision
that the Utility Model was invalid. The decision has only a declaratory effect, as the Utility Model had expired in November 2015.
On April 28, 2020, the Company filed a withdrawal of the complaint on the German utility model, thereby waiving its claims on
these proceedings. The Company estimates that the expense will be less than €40,000.
In
October 2016, TauroPharm submitted a further writ to the EPO requesting a date for the hearing and bringing forward further arguments,
in particular in view of the June 2016 decision of the German PTO on the invalidity of the utility model. On November 22, 2017,
the EPO in Munich, Germany held a further oral hearing in this matter. At the hearing, the panel held that the Prosl European
Patent would be invalidated because it did not meet the requirements of novelty based on a technical aspect of the European intellectual
property law. The Company disagrees with this decision and, after the written opinion was issued by the Opposition Division in
September 2018, has appealed the decision. The Company continues to believe that the Prosl European Patent is indeed novel and
that its validity should be maintained. There can be no assurance that the Company will prevail in this matter. In addition, the
ongoing Unfair Competition litigation brought by the Company against TauroPharm is not affected and will continue.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
On
January 16, 2015, the Company filed a complaint against TauroPharm GmbH and its managing directors in the District Court
of Cologne, Germany. In the complaint, the Company alleges violation of the German Unfair Competition Act by TauroPharm
for the unauthorized use of its proprietary information obtained in confidence by TauroPharm. The Company alleges that
TauroPharm is improperly and unfairly using its proprietary information relating to the composition and manufacture of Neutrolin,
in the manufacture and sale of TauroPharm’s products TauroLockTM, TauroLock-HEP100 and TauroLock-HEP500. The
Company seeks a cease and desist order against TauroPharm from continuing to manufacture and sell any product containing taurolidine
(the active pharmaceutical ingredient (“API”) of Neutrolin) and citric acid in addition to possible other components,
damages for any sales in the past and the removal of all such products from the market. An initial hearing in the District
Court of Cologne, Germany was held on November 19, 2015 to consider the Company’s claims. In this hearing, the presiding
judge explained that the court needed more information with regard to several aspects of the case. As a consequence, the Court
issued an interim decision in the form of a court order outlining several issues of concern that relate primarily to the court's
interest in clarifying the facts and reviewing any and all available documentation, in particular with regard to the question
which specific know-how was provided to TauroPharm by whom and when. The Company's legal team prepared the requested reply and
produced the respective documentation. TauroPharm had also filed another writ within the same deadline and both parties have filed
further writs at the end of April 2016 setting out their respective argumentation in more detail. A further oral hearing in this
matter was held on November 15, 2016. In this hearing, the court heard arguments from CorMedix and TauroPharm concerning the allegations
of unfair competition. The Court made no rulings from the bench and indicated that it is prepared to further examine the underlying
facts of the Company's allegations. On March 7, 2017, the Court issued another interim decision in the form of a court order outlining
again several issues relating to the argumentation of both sides in the proceedings. In particular the court requested the Company
to further specify its requests and to further substantiate in even more detail which know-how was provided by Biolink (the company
who developed Neutrolin that was acquired by ND Partners) to TauroPharm by whom and when. The Court also raised the question whether
the know-how provided at the time to TauroPharm could still be considered to be secret know-how or may have become public in the
meantime. The Court granted both sides the opportunity to reply to this court order and provide additional facts and evidence
until May 15, 2017. Both parties have submitted further writs in this matter and the Court scheduled a further hearing on May
8, 2018. After having been rescheduled several times, the hearing took place on November 20, 2018. A decision was rendered by
the court on December 11, 2018, dismissing the complaint in its entirety. However, the Company intends to continue to pursue this
matter, and still believes firmly that its claims are well-founded. The Company therefore appealed in January 2019 and filed its
grounds of appeal in March 2019. An oral hearing was held on September 6, 2019 in which the legal counsel of the Company brought
forward further arguments for the fact that the manufacturing process of the respective catheter locking solution is indeed protectable
as a trade secret. In view of these new arguments, the Court issued an evidentiary order on September 27, 2019 ordering an expert
opinion. The expert opinion was not in the Company's favor but the Company has filed a response to the expert opinion in reaction
to which the Court asked the expert to supplement his opinion to address the issues brought forward in the Company's submission.
Next steps will be taken after the receipt of the supplementary 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
$175,000, to cover legal fees in the event TauroPharm is entitled to reimbursement of these costs. The
Company recorded the deposits as restricted cash on the consolidated balance sheets. During the six months ended June 30, 2020,
the Company accrued an expense of $12,000 in connection with the utility model infringement proceedings, which will be deducted
from restricted cash when settled.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 June 30, 2020 is 21,832 shares of common stock. The maximum aggregate amount of cash payments due upon achievement
of milestones is $3,000,000 with the balance being $2,500,000 as of June 30, 2020 and 2019. Events that trigger milestone payments
include but are not limited to the reaching of various stages of regulatory approval and upon achieving certain worldwide net
sales amounts. There were no milestones achieved during the quarters ended June 30, 2020 and 2019.
The
NDP License Agreement may be terminated by the Company on a country-by-country basis upon 60 days prior written notice. If the
NDP License Agreement is terminated by either party, the Company’s rights to the NDP Technology will revert back to NDP.
Employment
Agreements
On
April 30, 2020, the Company entered into an employment agreement with Dr. Matthew David, pursuant to which Dr. David became
the Company’s Executive Vice President and Chief Financial Officer effective on May 11, 2020. After the initial
three-year term of the employment agreement, the agreement will automatically renew for additional successive one-year
periods, unless either party notifies the other in writing at least 90 days before the expiration of the then current term
that the agreement will not be renewed. In connection with Dr. David’s employment, the Company granted him stock
options to purchase 250,000 shares of common stock, 166,000 of which vest in four equal installments over four years
beginning one year after his start date and continuing on each of the next three anniversaries, subject to Dr. David’s
continued employment with the Company, and 84,000 of which vest upon the achievement of designated performance milestones,
subject to Dr. David’s continued employment with the Company.
If
the Company terminates Dr. David’s employment other than for Cause (as defined in the agreement), death, disability, or
by notice of nonrenewal, or if he resigns for Good Reason (as defined in the agreement), including in each case within 24 months
of a Change of Control (as defined in the agreement), Dr. David will receive his base salary and benefits for a period of nine
months following the effective date of the termination of his employment, and all unvested stock options held by him that are
scheduled to vest on or before the next succeeding anniversary of the date of termination will be accelerated and deemed to have
vested as of the termination date, provided that any milestone option whose vesting requirements have not been met as of the termination
date will be terminated.
If
the Company terminates Dr. David’s employment for Cause (as defined in the agreement), Dr. David will be entitled to receive
only the accrued compensation due to him as of the date of such termination, rights to indemnification and directors’ and
officers’ liability insurance, and as otherwise required by law. All outstanding equity awards and all outstanding stock
options then held by Dr. David that are granted on or after the effective date of his employment agreement, whether or not vested,
will be forfeited to us as of such date.
CORMEDIX INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note
5 — Leases:
The
Company entered into a seven-year operating lease agreement in March 2020 for an office space at 300 Connell Drive, Berkeley Heights,
New Jersey 07922. The lease agreement, with a monthly average cost of approximately $17,000, is expected to commence in the late
third quarter or early fourth quarter of 2020 upon the Company’s occupation of the premises. The Company’s lease on
its current premises terminates on November 30, 2020.
The
Company entered into an operating lease for office space in Germany that began in July 2017. The rental agreement has a three-month
term which automatically renews and includes a monthly cost of 400 Euros. The Company elected to apply the short-term practical
expedient to the office lease. The Company also has an operating lease for office equipment.
Operating
lease expense in the Company’s condensed consolidated statements of operations and comprehensive loss for each of the three
and six months ended June 30, 2020 and 2019 was approximately $2,000 and $4,000, respectively, which includes costs associated
with leases for which ROU assets have been recognized as well as short-term leases.
At
June 30, 2020, the Company has a total operating lease liability of $3,000. Approximately $1,000 and $2,000, respectively, are
included in accrued expenses and operating lease liabilities, net of current portion on the condensed consolidated balance sheet.
Operating ROU assets as of June 30, 2020 are $4,000 and are included in property and equipment, net on the condensed consolidated
balance sheet.
For
the three and six months ended June 30, 2020 and 2019, cash paid for amounts included in the measurement of lease liabilities
in operating cash flows from operating leases was $2,000 and $4,000 respectively.
The
weighted average remaining lease term as of June 30, 2020 and 2019 were 2.1 and 2.5 years, respectively, and the weighted average
discount rate for operating leases was 10.0% each as of June 30, 2020 and 2019.
As
of June 30, 2020, maturities of lease liabilities were as follows:
2020 (excluding the six months ended June 30, 2020)
|
|
$
|
1,000
|
|
2021
|
|
|
2,000
|
|
2022
|
|
|
1,000
|
|
Total future minimum lease payments
|
|
|
4,000
|
|
Less imputed interest
|
|
|
(1,000
|
)
|
Total
|
|
$
|
3,000
|
|
Note
6 — Concentrations:
At June 30, 2020, 97% of net accounts receivable
was due from three customers that exceeded 10% of the Company’s accounts receivable (55%, 27% and 15%) and at December 31,
2019, no customer exceeded 10% of the Company’s accounts receivable. During the three months ended June 30, 2020, the Company
had revenue from five customers that exceeded 10% of its total sales (30%, 30%, 15%, 15% and 10%) and for the six months ended
June 30, 2020, the Company had revenue from three customers that each exceeded 10% of its total sales (50%, 16% and 14%). During
the three months ended June 30, 2019, the Company had revenue from one customer that exceeded 10% of its totals sales (96%) and
for the six months ended June 30, 2019, the Company had revenue from three customers that each exceeded 10% of its total sales
(59%, 18% and 17%).
Note
7 — Subsequent Event:
On July 30, 2020, the Company completed an underwritten
public offering of its common stock, par value $0.001 per share, which yielded gross proceeds, before underwriting commissions
and estimated expenses, of approximately $23.0 million. The public offering was made pursuant to an underwriting agreement with
SunTrust Robinson Humphrey, Inc. and JMP Securities LLC (collectively, the “Underwriters”), relating to the issuance
and sale of an aggregate of 5,111,110 shares of common stock, including 666,666 shares of common stock pursuant to the full exercise
of the Underwriters’ option, at a public offering price of $4.50 per share. The offering was made pursuant to the Company’s
effective registration statement on Form S-3 Registration Statement No. 333-223562 previously filed with and declared effective
by the SEC and a prospectus supplement and accompanying prospectus filed with the SEC.