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3. Summary of Significant Accounting Policies
 12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Significant Risks and Uncertainties

 

The Company’s operations are subject to a number of 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 products, the Company’s ability to obtain regulatory approval to market its products, 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.

 

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.

 

Cash and Cash Equivalents:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. 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.

 

Foreign Currency:

 

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 loss.

 

Geographic Information:

 

The Company reported revenues of $189,274 and $2,001 for the years ended December 31, 2014 and 2013, respectively.  Of the Company’s 2014 revenue, $185,598 was attributable to its European and Mideast operations which are based in Germany.  All of the Company’s 2013 revenue was attributable to its European operations.  Total assets at December 31, 2014 and 2013 were $5,097,762 and $2,967,801, respectively, of which $4,416,074 and $2,826,274 were located in the United States at December 31, 2014 and 2013, respectively, with the remainders in Germany.  Net property and equipment at December 31, 2014 and 2013 were $41,458 and $36,061, respectively, of which $1,089 and $2,497 was located in the United States at December 31, 2014 and 2013, respectively, with the remainders located in Germany.

 

 Restricted Cash:

 

As of December 31, 2014, the Company has no restricted cash.  During the year ended December 31, 2013, the Company invested in a twelve-month 0.14% certificate of deposit held by the bank as collateral for a letter of credit in connection with the Company’s purchase of raw materials due to be delivered in the next twelve months.  The certificate of deposit terminated without penalties once the transaction covered by the letter of credit was completed.  The certificate of deposit is recorded on the consolidated balance sheet as restricted cash.

 

Prepaid Expenses:

 

Prepaid expenses consist of payments made in advance to vendors relating to service contracts for clinical trial development, manufacturing, preclinical 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 market 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,

2014

    

December 31,

2013

  
Raw materials   $ 293,976     $ 77,103  
Work in process     166,807       -  
Finished goods     2,246       2,918  
Total   $ 463,029     $ 80,021  

 

 

 

The Company has an inventory reserve of $175,000 and $0 at December 31, 2014 and 2013, respectively.

 

Property and Equipment:

 

Property and equipment consist primarily of furnishings, fixtures, leasehold improvements, office equipment and computer equipment which are recorded at cost. Repairs and maintenance costs are expensed in the period incurred.  Depreciation of property and equipment 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, 2014 and 2013 were $41,458 and $36,061, respectively, net of accumulated depreciation of $77,277 and $62,283, 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

 

Accrued Expenses:

 

Accrued expenses consist of the following at December 31:

 

    2014     2013  
Licensing fee   $ -     $ 500,000  
Royalty fee     10,000       -  
Accrued payroll and payroll taxes     13,393       197,969  
Professional and consulting fees     225,726       12,000  
Market research     137,345       -  
Monitoring program fees     82,861       -  
Other     52,200       3,210  
Total   $ 521,525     $ 713,179  

 

Deferred Revenue:

 

In August 2014, the Company entered into an exclusive distribution agreement (the “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 Korea.  Upon execution of the Agreement, 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 the Republic of Korea (the “Territory”).  The term of the 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.

 

Revenue Recognition:

 

CorMedix recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”), as amended by SAB No. 104, Revenue Recognition (“SAB 104”) and FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”).  This guidance requires that revenue is recognized from product sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

 

CorMedix’s product Neutrolin received its CE Mark in Europe in July 2013 and product shipments to dialysis centers began in December 2013.  Orders are processed through a distributor; however, Neutrolin is drop-shipped via a pharmacy directly to the Company’s customer, the dialysis center. The Company recognizes net sales upon shipment of product to the dialysis centers.

 

 

Stock-Based Compensation:

 

The Company accounts for stock options according to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 718, “Compensation — Stock Compensation” (“ASC 718”).  Under ASC 718, share-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as expense net of expected forfeitures, over the employee’s requisite service period on a straight-line basis.

 

The Company accounts for stock options granted to non-employees on a fair value basis using the Black-Scholes option pricing model in accordance with ASC 718 and ASC 505.  The non-cash charge to operations for non-employee options with time based vesting provisions is based upon the change in the fair value of the options and amortized to expense over the related vesting period.

 

For the purpose of valuing options and warrants granted to directors, officers, employees and consultants, the Company used the Black-Scholes option pricing model.  For the purpose of valuing performance based options granted to non-employees, the Company uses the guidelines in accordance with FASB ASC No. 505-50 (“ASC 505”), “Equity-Based Payments to Non-Employees.”  The non-cash charge to operations for non-employee options with performance based vesting provisions is recorded when the achievement of the performance condition is probable to be achieved which is typically when the performance condition is satisfied.

 

Valuations incorporate several variables, including expected term, expected volatility, expected dividend yield and a risk-free interest rate.  The Company estimates the expected term of the options granted based on anticipated exercises in future periods.  The expected stock price volatility for our stock options is calculated by examining historical volatilities for publicly traded industry peers, since the Company has limited trading history for its common stock.  The Company will continue to analyze the expected stock price volatility and expected term assumptions as more historical data for its common stock becomes available. The expected dividend yield reflects our current and expected future policy for dividends on its common stock.  To determine the risk-free interest rate, the Company utilizes the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of its awards. 

 

Stock compensation expense is recognized by applying the expected forfeiture rate during the vesting period to the fair value of the award.  The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, compensation expense may need to be revised.  The Company considers many factors when estimating expected forfeitures for stock awards granted to employees, officers and directors, including types of awards, employee class, and an analysis of its historical forfeitures. 

 

The Company records compensation expense associated with stock options and other forms of equity compensation using the Black-Scholes option-pricing model and the following assumptions:

 

    Year Ended December 31,  
    2014     2013  
Risk-free interest rate     1.5% - 2.9 %     0.34% - 2.88 %
Expected volatility     74% - 113 %     86% - 131 %
Expected life of options in years   5 - 10 years     2 - 10 years  
Expected dividend yield     0.0 %     0.0 %

 

Embedded Derivative Liabilities and Warrant Liabilities:

 

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks; however, the Company has several series of preferred stock and warrants that contained embedded derivatives.  The Company evaluates all its financial instruments to determine if those instruments or any potential embedded components of those instruments qualify as derivatives that need to be separately accounted for in accordance with FASB ASC 815, “Derivatives and Hedging”.  Embedded derivatives satisfying certain criteria are recorded at fair value at issuance and marked-to-market at each balance sheet date with the change in the fair value recorded as income or expense.  In addition, upon the occurrence of an event that requires the derivative liability to be reclassified to equity, the derivative liability is revalued to fair value at that date.  

 

The Company accounts for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.  Stock warrants that allow for cash settlement or provide for certain modifications of the warrant exercise price were accounted for as derivative liabilities.  For those liability-classified warrants that have down-round provisions which allow the exercise price to be adjusted as a result of certain future financing transactions, the Company uses level 3 inputs to value those warrants. The estimated fair values of the warrant liabilities with downround protection were determined using a Monte Carlo option pricing model which takes into account the probabilities of certain events occurring over the life of the warrants.  The derivative liabilities were adjusted to their estimated fair values at each reporting period, with any decrease or increase in the estimated fair value being recorded in other income (expense).  The significant inputs and assumptions are as follows:

 

Stock price – Due to the historical volatility of the Company’s common stock price, a one month volume-weighted average stock price was used as of each valuation date.

 

Conversion/redemption strike price – These assumptions incorporate both the initial contractual conversion price as well as subsequent downward adjustments  (wherever applicable) based on management’s estimate of the probabilities of additional future financings that would  include a stock price or conversion price that is lower than the then existing conversion price.

 

Volatility – The Company used a weighted average of (i) the historical volatility of the Company’s common stock for approximately five years,  (ii) the volatility used for prior period valuations, and (iii) the volatilities of comparable companies (provided by the Company’s management) from the date product approval is received to the various valuation dates.  Then, appropriate weights were applied to these data points to arrive at the weighted average historical volatility.

 

Term – Although the Series C, D and E preferred stocks do not have a specified contracted life, the Company has assumed a five year life from the date of inception for the purpose of the valuations.

 

Risk-free Rate – The U.S. Treasury Bond Rate with a term approximating the term of the instrument was used as the risk-free interest rate in the valuation.

 

Credit adjusted discount rate – Management believes that its debt, if rated, would be equivalent to Moody’s C rated bonds or lower.

 

Dividend rate - Management does not expect to pay any dividends during the term of the hybrid instrument.

 

As discussed in Note 8, the warrants issued in March 2014, which do not have downround protection, were valued using a Black Scholes option pricing model. 

 

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:

 

Under ASC 740, “Income Taxes” (“ASC 740”), 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. Under ASC 740, 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.

 

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 reflect 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.  Since the Company has only incurred losses, basic and diluted loss per share are the same.  The following potentially dilutive shares have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive.

 

 

    December 31,  
    2014     2013  
Series B non-voting preferred stock     454,546       454,546  
Series C non-voting preferred stock     3,290,000       2,900,000  
Series D non-voting preferred stock     1,479,240       1,148,000  
Series E non-voting preferred stock     2,021,358       1,104,280  
Shares underlying outstanding warrants     11,520,762       10,422,525  
Shares underlying outstanding stock options     3,664,500       3,453,630  
Total     22,430,406       19,482,981  

 

Foreign Currency Exchange Transaction Gain (Loss):

 

The Company has intercompany loans that are in place between the parent company based in New Jersey and its German subsidiary.  Effective October 1, 2014, the Company concluded that the intercompany loans outstanding are not expected to be repaid in the foreseeable future and the nature of the funding advanced is of a long-term investment nature. As such, beginning October 1, 2014, unrealized foreign exchange movements related to long-term intercompany loans are recognized in other comprehensive income totaling approximately $108,000 gain for the year ended December 31, 2014.

 

Fair Value Option:

 

As permitted under FASB ASC 825, Financial Instruments, (“ASC 825”), the Company elected the fair value option to account for its convertible notes that were issued during the year ended December 31, 2012 and matured during the year ended December 31, 2013.   ASC 825 requires that the Company record the financial asset or financial liability at fair value rather than at historical cost with changes in fair value recorded in the statement of operations.  In addition, it requires that upfront costs and fees related to items for which the fair value option is elected be recognized in earnings as incurred and not deferred.

 

Accounting Standards Updates:

 

In May 2014, the FASB issued new guidance related to how an entity should recognize revenue. The guidance specifies that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In addition, the guidance expands the required disclosures related to revenue and cash flows from contracts with customers. The guidance is effective for us beginning in the first quarter of 2017. Early adoption is not permitted and retrospective application is required. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

 

In June 2014, the FASB issued an accounting standard that clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period.  The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.   The amendments are effective for interim and annual reporting periods beginning after December 15, 2015.  Earlier adoption is permitted.  The standard may be applied prospectively to all awards granted or modified after the effective date; or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.  The Company is currently evaluating the impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.