CorMedix Inc. Debt Disclosure

Note 6 — Senior Secured Convertible Note, Related Party:

On December 31, 2018, the Company entered into a securities purchase agreement with Elliott for the purchase and sale of a 10% senior secured convertible note in the aggregate principal amount of $7,500,000 and a warrant to purchase up to an aggregate of 90,000 shares of the Company’s common stock, for gross proceeds of $7,500,000. For year ended December 31, 2019, $462,000 was recognized as interest expense on the consolidated statement of operations and comprehensive loss. The senior secured convertible note, including accrued interest, and warrant to purchase up to an aggregate of 90,000 shares of the Company’s common stock were cancelled in connection with the terms of the Exchange Agreement.

On the same date, and in connection with the sale of the note and warrant, the Company amended and restated the following warrants held by Elliott and its affiliates to reduce the exercise price of each warrant to $0.005 per share: warrants issued in May 2013 to purchase up to an aggregate of 100,000 shares of the Company’s common stock with a pre-amendment exercise price of $3.25 per share and an expiration date of May 30, 2019, which was subsequently extended to August 16, 2019 (the “May 30, 2019 Warrants”), (see Note 4); and warrants issued in October 2013 to purchase up to an aggregate of 150,000 shares of the Company’s common stock with a pre-amendment exercise price of $4.50 per share and an expiration date of October 22, 2019 (the “October 22, 2019 Warrants”). These warrants were subsequently cancelled in connection with the Exchange Agreement, (see Note 8).

Also in conjunction with the December 2018 securities purchase agreement, the Company and Elliott and certain of its affiliates that hold shares of various series of the Company’s preferred stock and warrants to purchase shares of the Company’s common stock agreed to waive any rights of conversion or exercise for all of the shares of its Series C-2, D, E and F preferred stock and shares issuable upon the exercise of certain warrants (collectively with the shares of Series C-2, D, E, and F preferred stock, the “Elliott Derivative Securities”), until the earliest to occur of (i) the effective date on which the Company’s Certificate of Incorporation is amended to increase the number of authorized shares of common stock, (ii) the effective date on which the Company effects a reverse stock split of its common stock, (iii) one business day immediately prior to the consummation of a fundamental transaction (as defined in the instruments governing the applicable Elliott Derivative Securities), and (iv) April 30, 2019. The 1-for-5 reverse stock split that was effective on March 26, 2019 satisfied this condition, however, with the exception of the Series E preferred stock, the Elliot Derivative Securities were cancelled in connection with the Exchange Agreement.

The Company was required to have a majority of the Series C-2, Series D, Series E and Series F non-voting preferred stock consent to any indebtedness other than trade payables incurred in the ordinary course of business consistent with past practice, and letters of credit incurred in an aggregate amount of $3,000,000 at any point in time. At the time of the securities purchase agreement, Elliott was the holder of all of the shares of the Series C-2, Series D, Series E and Series F non-voting preferred stock and implicitly consented to the convertible note financing. Elliott is currently the holder of all of the shares of the Series E and Series G preferred stock.

The $7,500,000 in gross proceeds, along with the legal fees of approximately $267,000, were allocated between the senior secured convertible note and warrants based on their relative fair values. The portion of the proceeds allocated to the warrants of approximately $396,000, net of allocated fees of approximately $6,000, was accounted for as additional paid-in capital. The remainder of the proceeds of approximately $7,000,000, net of allocated fees of approximately $103,000 was allocated to the senior convertible note, with the fair value of the warrants resulting in a debt discount. In addition, the incremental cost of approximately $710,000 associated with the warrant modification was recorded as a debt discount. An additional debt discount of approximately $143,000 was recorded as a beneficial conversion feature as the stock price was greater than the effective conversion price (after allocation of the total proceeds) on the measurement date.

The debt discount was being amortized to interest expense using the effective interest method in accordance with ASC 835 over the term of the agreement. For the year ended December 31, 2019, approximately $313,000 was recognized as amortization of debt discount and is included in interest expense on the consolidated statement of operations and comprehensive loss.

The Company used a hybrid valuation model to determine the fair value of the senior secured convertible note. The hybrid model incorporated both a present value analysis and the use of the Black Scholes option pricing model to reflect the senior secured convertible note’s conversion feature. The Black-Scholes option pricing model was also used to determine the fair value of the warrants in order to allocate the gross proceeds based on relative fair values (see Note 1). ASC 820, “Fair Value Measurements,” states that the reporting entity should use the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability. Market participants price options based on expected volatility, not historical volatility. In estimating the expected volatility of the Company’s common stock, the Company followed the guidance of ASC 820 and considered a number of factors - including the implied volatility of put and call options on the Company’s common stock that are traded over the counter.

A summary of the assumptions used in the Black Scholes pricing model are as follows:

As part of the Exchange Agreement, the senior secured convertible note, along with certain warrants and the Series C-2, Series D and Series F preferred stock, and the payment of $2,000,000, was exchanged for 100,000 shares of Series G preferred stock. As a result of this transaction, the Company recognized a deemed dividend of $26,733,098 on its consolidated statement of operations and comprehensive loss for the year ended December 31, 2019 (see Note 8).