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EX-32 - EXHIBIT 32 - Nuo Therapeutics, Inc.ex_110103.htm
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EX-10.22 - EXHIBIT 10.22 - Nuo Therapeutics, Inc.ex_110104.htm
 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission file number 001-32518

 

 

NUO THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

23-3011702

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

207A Perry Parkway, Suite 1

Gaithersburg, MD 20877

(Address of principal executive offices) (Zip Code)

 

(240) 499-2680

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b)

of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, $0.0001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   ☐   No   ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ☐   No   ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ☒   No   ☐

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒   No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

 

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ☐   No   ☒

 

The aggregate market value of voting common stock, $0.0001 par value (the “New Common Stock”) held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.2 million. The registrant does not have any non-voting common stock outstanding.

 

As of April 12, 2018, the number of shares outstanding of the registrant’s New Common Stock, $0.0001 par value, was 22,722,400.

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check make whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes   ☒   No   ☐

 

 

 

NUO THERAPEUTICS, INC.

 

TABLE OF CONTENTS

 

PART I

1

ITEM 1. Business

1

ITEM 1A. Risk Factors

14

ITEM 1B. Unresolved Staff Comments

29

ITEM 2. Properties

29

ITEM 3. Legal Proceedings

29

ITEM 4. Mine Safety Disclosures

29

PART II

30

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

30

ITEM 6. Selected Financial Data

31

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

39

ITEM 8. Financial Statements and Supplementary Data

39

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

39

ITEM 9A. Controls and Procedures

39

ITEM 9B. Other Information

40

PART III

41

ITEM 10. Directors, Executive Officers and Corporate Governance

41

ITEM 11. Executive Compensation

47

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

50

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

52

ITEM 14. Principal Accounting Fees and Services

56

PART IV

57

ITEM 15. Exhibits, Financial Statement Schedules

57

 

 

 

Explanatory Note

 

As used in this Annual Report on Form 10-K, or this Annual Report, the terms “we,” “us,” “Nuo Therapeutics,” “Nuo” and the “Company” refer to Nuo Therapeutics, Inc., and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. As described in the section titled “Item 1. Business – Bankruptcy and Emergence from Bankruptcy,” the Company emerged from bankruptcy protection effective May 5, 2016 in accordance with the Modified First Amended Plan of Reorganization of the Debtor under Chapter 11 of the Bankruptcy Code, as confirmed by the April 25, 2016 Order Granting Final Approval of Disclosure Statement and Confirming Debtor’s Plan of Reorganization. We refer to May 5, 2016 as the Effective Date, to the order as the Confirmation Order and to the plan of reorganization, as confirmed by the Confirmation Order, as the Plan of Reorganization.

 

This Annual Report contains the Company’s audited consolidated financial statements as of December 31, 2017 and 2016, for the year ended December 31, 2017, and the periods between January 1, 2016 and May 4, 2016, and between May 5, 2016 and December 31, 2016, and the accompanying footnotes, or the Financial Statements, as well as a discussion comparing the Company’s results of operations for the periods ended December 31, 2017 and 2016 and related financial condition in the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We refer to this discussion as the Period-to-Period Comparison.  The historical financial and share-based information contained in the Financial Statements and the Period-to-Period Comparison as of and relating to periods ending on dates prior to the Effective Date reflects the Company’s financial condition and results of operations prior to its emergence from bankruptcy, and therefore is not indicative of the Company’s current financial condition or results of operations from and after May 5, 2016.

 

More specifically, following the consummation of the Plan of Reorganization, the Company’s financial condition and results of operations from and after May 5, 2016 are not comparable to the financial condition or results of operations reflected in the Company’s prior financial statements (including those for the period ending on May 4, 2016 included in this Annual Report) due to the Company’s application of fresh start accounting to time periods beginning on and after May 5, 2016. Fresh start accounting requires the Company to adjust its assets and liabilities contained in its financial statements immediately before its emergence from bankruptcy protection to their estimated fair values using the acquisition method of accounting.  Those adjustments are material and affect the Company’s financial condition and results of operations from and after May 5, 2016. For that reason, it is difficult to assess our performance in periods beginning on or after May 5, 2016 in relation to prior periods.

 

Special Note Regarding Forward Looking Statements

 

Some of the information in this Annual Report (including the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest,” “will,” “will be,” “will continue,” “will likely result,” “could,” “may” and words of similar import. These statements reflect the Company’s current view of future events and are subject to certain risks and uncertainties as noted in this Annual Report and in other reports filed by us with the Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K. These risks and uncertainties include, among others, the following:

 

the rapid depletion of our cash resources, our need for immediate and substantial additional financing and our ability to obtain that financing, especially in light of our unsuccessful registered offering and refinancing of our Series A preferred stock in early summer 2017 and the low share price of our common stock on the OTCQX market;

   

our limited sources of working capital, the fact that Aurix currently represents our sole revenue-generating product, and continuing challenges with meaningfully increasing the level of enrollment in our Coverage with Evidence Development, or CED, program;

 

our history of losses and expectation that, even if we were to obtain sufficient financing immediately to continue operating, we will incur losses in the foreseeable future;

 

our limited operating experience;

 

satisfactory completion of the CED program;

   
acceptance of our products by the medical community and patients, especially in light of uncertainties surrounding CED programs in general;

 

 

our ability to obtain adequate reimbursement from third-party payors;

 

whether the Centers for Medicare & Medicaid Services, or CMS, will establish a standard national payment rate for physicians for the use of Aurix that provides an adequate payment to physicians to increase such use sufficiently;

   
whether the advisory opinion issued in response to a petition to the Office of Inspector General, or OIG, of the Department of Health and Human Services, or DHHS, effectively permitting the petitioning hospital to reduce or waive Medicare patients’ 20% co-payment with respect to the Aurix CED program in certain cases, will in fact cause other healthcare providers to make similar waivers;

 

our and Restorix Health, Inc.’s, or Restorix’, successful implementation of our Collaboration Agreement;

 

whether CMS will continue to consider their treatment of the geometric mean cost of the services underlying the Aurix System, or Aurix, to be comparable to the geometric mean cost of APC 5054 in the future;

 

our ability to maintain classification of Aurix as APC 5054;

 

whether CMS will continue to maintain the current national average reimbursement rate of $1,568 per Aurix treatment, and, more generally, our ability to continue to be reimbursed at a profitable national average rate per application in the future;

 

uncertainties surrounding the price at which our common stock will continue trading on the OTCQX market (with such price having declined substantially) and the very limited trading volume or liquidity of our common stock;

 

our reliance on several single source suppliers and our ability to source raw materials at affordable costs;

 

our ability to protect our intellectual property;

 

our compliance with governmental regulations;

 

the success of our clinical study protocols under our CED program;

 

our ability to contract with healthcare providers;

 

our ability to successfully sell and market the Aurix System (as defined below);

 

our ability to attract and retain key personnel; and

 

our ability to successfully pursue strategic collaborations to help develop, support or commercialize our products.

 

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from those anticipated in these forward-looking statements.

 

In addition to the risks identified under the heading “Item 1A. Risk Factors” in this Annual Report and the other filings referenced above, other sections of this report may include additional factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 

The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

 

Trademark Notice

 

The Company owns or has rights to various copyrights, trademarks and trade names used in its business, including, but not limited to, Aurix™ and AutoloGel™. This Annual Report also includes discussions of or references to other trademarks, service marks and trade names of other companies. Other trademarks and trade names appearing in this Annual Report are the property of the holder of such trademarks and trade names.

 

 

PART I

 

ITEM 1. Business

 

Corporate Overview

 

Nuo Therapeutics, Inc. is a Delaware corporation organized in 1998 under the name Informatix Holdings, Inc. As used in this report, the terms “we,” “us,” “Nuo Therapeutics,” “Nuo” and the “Company” refer to Nuo Therapeutics, Inc., and its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. In 1999, Autologous Wound Therapy, Inc., or AWT, an Arkansas Corporation, merged with and into Informatix Holdings, Inc. and the name of the surviving corporation was changed to Autologous Wound Therapy, Inc. In 2000, AWT changed its name to Cytomedix, Inc., or Cytomedix. In 2001, Cytomedix, filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, after which Cytomedix was authorized to continue to conduct its business as a debtor and debtor-in-possession. Cytomedix emerged from bankruptcy in 2002 under a Plan of Reorganization. At that time, all of Cytomedix’s securities or other claims against or equity interest in Cytomedix, were canceled and of no further force or effect. Holders of certain securities, other claims or equity interests were entitled to receive new securities from Cytomedix in exchange for their securities, other claims or equity interests prior to the bankruptcy. In September 2007, Cytomedix received 510(k) clearance for the Aurix System, or Aurix (formerly known as the AutoloGelTM System), from the U. S. Food and Drug Administration, or FDA. In April 2010, Cytomedix acquired the Angel® Whole Blood Separation System, referred to as Angel or the Angel® Business, from Sorin Group USA, Inc., or Sorin. In February 2012, Cytomedix, acquired Aldagen, Inc., or Aldagen, a privately held developmental cell-therapy company located in Durham, NC. In 2014, Cytomedix changed its name to Nuo Therapeutics, Inc. In 2016, Nuo Therapeutics filed for and emerged from bankruptcy under Chapter 11 as described below under “- Bankruptcy and Emergence from Bankruptcy.” Aldagen is a wholly-owned subsidiary of Nuo Therapeutics. Our principal offices are located at 207A Perry Parkway, Suite 1, Gaithersburg, Maryland 20877; and our telephone number is (240) 499-2680.

 

Financial Information about Segments and Geographic Regions

 

Through December 31, 2017, Nuo Therapeutics had only one operating segment. Nuo Therapeutics primarily operates in the United States (“U.S.”). Revenues from sales generated outside the U.S. are separately presented in this report under “Item 8. Financial Statements and Supplementary Data.” 

 

Our Business

 

We are a regenerative therapies company developing and marketing products for chronic wound care primarily within the U.S. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long-term recovery in inherently complex chronic conditions with significant unmet medical needs.

 

Our current commercial offering consists of a point of care technology for the safe and efficient separation of autologous (i.e., the patient’s own) blood to produce a platelet based therapy for the chronic wound care market (“Aurix” or the “Aurix System”). The U.S. Food and Drug Administration, or FDA, cleared the Aurix System for marketing in 2007 as a device under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA. Aurix is the only platelet derived product cleared by the FDA for chronic wound care use and is indicated for most exuding wounds. The advanced wound care market, within which Aurix competes, is composed of advanced wound care dressings, wound care devices, and wound care biologics, and is estimated to be an approximate $13.4 billion global market, with the number of patients suffering from all forms of chronic wounds projected to increase worldwide at a rate of approximately eight percent per year through 2025.    

 

The Aurix System produces a platelet rich plasma, or PRP, gel at the point of care using the patient’s own platelets and plasma. Aurix comprises a natural, endogenous complement of protein and non-protein signal molecules that contribute to effective healing. During treatment, the patient’s platelets are activated and release hundreds of growth factor proteins and other signaling molecules that form a biologically active hematogel. Aurix delivers concentrations of the natural complement of cytokines, growth factors and chemokines that are known to regulate angiogenesis (i.e., the development of new blood vessels), cell growth and the formation of new tissue. Once applied to the prepared wound bed, the biologically active Aurix hematogel can restore the balance in the wound environment to transform a non-healing wound to a wound that heals naturally.

 

A 2012 Medicare National Coverage Determination, or NCD, from the Centers for Medicare & Medicaid Services, or CMS, reversed a twenty year old non-coverage decision for autologous blood derived products used in wound care; this NCD allows for Medicare coverage under the Coverage with Evidence Development, or CED, program.

 

 

The most significant near term growth opportunity for Aurix are the clinical studies being conducted under this CED program. Under the CED program, CMS provides reimbursement for items or services on the condition that they be furnished in approved clinical protocols or in the collection of additional clinical data. Current sales outside of the Federal Supply Schedule and Medicare reimbursement are practically limited to patients participating in certain Company-sponsored clinical studies approved by CMS under the CED program. The Company’s ongoing collaboration with Restorix Health, Inc., or Restorix, is intended to expand patient enrollment in three distinct Company-sponsored open-label clinical study protocols. Under these three protocols, Aurix can be used for venous, pressure and diabetic foot ulcers for wound types of all severities and for patients with various and often difficult comorbidities. Under the CED program, a facility treating a patient with Aurix is reimbursed by Medicare when health outcomes data are collected to inform future coverage decisions. The intent of the CED program is to evaluate the outcomes of Aurix therapy for the broader Medicare population when it is used in a “real world” continuum of care.  Thus far, the Company and Restorix have been unsuccessful in meaningfully expanding patient enrollment in the three clinical study protocols. 

 

If and only if the CED program is successfully completed, if supported by the health outcomes data generated, CMS may expand Medicare reimbursement for treatment of chronic non-healing wounds with Aurix as an autologous platelet-rich plasma product. By contrast, if the data generated show no substantial improvement in health outcomes for patients using Aurix therapy, CMS may determine not to provide unrestricted coverage for the Aurix System. CED programs have been employed for a variety of other therapies, including transcatheter aortic valve repair and cochlear implantation.  

 

Although FDA cleared the Aurix System for marketing in 2007 under Section 510(k) of the FDCA, CMS only established economically viable reimbursement for the product beginning in 2016. For 2018, the CMS national average reimbursement rate for the Aurix System is $1,568 per treatment, which we believe provides appropriate payment to facilities for product usage and a compelling market opportunity for us. The Company markets the Aurix System at a cost of $700 per treatment to wound care facilities operating in the CED program.

 

Growth opportunities for the Aurix System in the United States in the near to intermediate term include the treatment of chronic wounds with Aurix in (i) the Medicare population under the NCD, when health outcomes data is collected under the CED program of CMS and (ii) the Veterans Affairs, or VA, healthcare system and other federal accounts settings.

 

Our Strategy

 

Our near-term strategic focus is on the successful execution and completion of the three clinical protocols for Aurix under the CMS CED program. The expansion of reimbursement to patients outside these protocols can be achieved only after successful conclusion of the data collection and submission of the resulting data to CMS. There are no assurances that broad access and reimbursement can be achieved. Because Medicare beneficiaries represent the majority of chronic wound patients in the United States and since commercial insurance coverage determinations often follow CMS coverage and reimbursement decisions, we believe that successful conclusion of the CED program would substantially increase the commercial value of Aurix. Thus, we believe that the market for innovative technologies that harness the innate regenerative capacity of the human body to trigger natural healing represents a significant opportunity from both a clinical and a business perspective.

 

Assuming that we are able to obtain immediate and substantial additional financing, our goal is to successfully commercialize the Aurix System in the U.S. for the treatment of chronic wounds. Key elements of our strategy to achieve this goal include steps to secure broad CMS reimbursement under the CED program:

 

 

We secured a CMS coverage and reimbursement decision for Aurix therapy under the CED program in 2012 via the NCD and economically viable reimbursement rates beginning in 2016. The CED protocols require the collection of wound healing data including Quality of Life metrics for a population of approximately 2,200 Medicare beneficiaries across three separate and distinct wound etiologies.

 

 

With the goal of executing the CED program efficiently and in a timely manner, we initiated a collaboration with Restorix in May 2016 to expand the number of study centers and to increase the rate of patient enrollment beyond what we have established independently. Restorix is a leading wound care management company overseeing day-to-day operations in approximately 200 outpatient wound care centers. The three protocols for the CED program are prospective, open-label, randomized (1:1) studies treating Medicare beneficiaries only. The studies will compare usual and customary care, or UCC, with Aurix plus UCC. The primary outcome measurement is time to heal. The three protocols comprise:

 

 

o

Diabetic Foot Ulcers: The study endpoint is the earlier of complete healing or 12 weeks following enrollment and the estimated enrollment is 760 randomized patients. The first patient was enrolled in May 2015, and 122 patients have enrolled to date.

 

o

Venous Leg Ulcers: The study endpoint is the earlier of complete healing or 12 weeks following enrollment and the estimated enrollment is 640 patients. The first patient was enrolled in March 2015, and 96 patients have enrolled to date.

 

o

Pressure Ulcers: The study endpoint is the earlier of complete healing or 16 weeks following enrollment and the estimated enrollment is 800 patients. The first patient was enrolled in April 2015, and 46 patients have enrolled to date.

 

 

 

To increase the opportunity for greater enrollment in our CED program, we have been in discussion with CMS’ Division of Practitioner Services regarding the fee paid (if any) by Medicare to the treating physician for services rendered during an Aurix treatment application under CED.  Unlike the facility fee reimbursed by Medicare as mandated by the CED National Coverage Determination, or NCD, for the Aurix product itself, any physician fee was to be established by the regional Medicare Administrative Contractors, or MACs, at their discretion. Given the Company's assessment of the MAC’s apparent lack of familiarity with CED generally as a CMS national initiative and Aurix as a product with limited usage and history in Medicare’s databases, establishment of a consistent physician fee reflective of the underlying work performed by a treating physician when utilizing Aurix therapy has been difficult. Our discussions with CMS have emphasized the potential benefit to the Aurix CED program in establishing a standard national payment rate applied consistently to all physicians treating patients in the CED protocols that provides an adequate payment to the physician for utilizing Aurix. See additional discussion at Risk Factors “The Lack of an Economically Appropriate Physician Fee for Aurix Treatments May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols”.  

  

 

To support our CED efforts, we have hired and deployed a small team of clinical affairs professionals. The clinical affairs group is focused on both support of health care providers and facilities - through the Restorix collaboration and those we have initiated outside the Restorix relationship - in their use of Aurix as well as facilitating the collection of the clinical data required to fulfill the Aurix Medicare CED requirements

 

Based on guidance from the CMS Coverage and Analysis Group (CAG), a CED cycle is considered complete when CMS completes a reconsideration of the existing National Coverage Determination and removes the requirement for study participation as a condition of coverage. The request for reconsideration would typically follow the same nine-month timetable as other NCD requests.  Each protocol operates independently and the diabetic foot protocol is expected to reach complete enrollment first, although we can provide no assurances to this effect. We can provide no assurances that the pace of enrollment will increase as expected or that any of the three protocols will reach their required enrollment levels. Each protocol also includes the option for Nuo to perform an interim analysis based on 50% enrollment with a view towards earlier submission of study data for publication and subsequent submission to CAG for consideration.

 

Assuming that we are able to obtain immediate and substantial additional financing, while we are focused primarily on the commercialization of our FDA-cleared Aurix System in the U.S., a secondary priority for us is to develop and commercialize our products in markets outside the U.S. Accordingly, as of December 31, 2014, we signed an exclusive licensing and distribution agreement for the Aurix System with Rohto Pharmaceutical Co., Ltd., or Rohto, providing them with an exclusive license and the right to develop and commercialize Aurix in Japan. The agreement stipulates royalty payments based on the net sales of Aurix in Japan and an additional future cash payment in the event a specific reimbursement milestone is met.  Rohto has assumed all responsibility for securing the marketing authorization from Japan’s Ministry of Health, Labor and Welfare while we will provide relevant product information, as well as clinical and other data to support Rohto’s regulatory activities.

 

Additionally, on May 5, 2016, we entered into an exclusive licensing and distribution agreement for the Aurix System with Boyalife Hong Kong Ltd., or Boyalife. Under this agreement, Boyalife received a non-transferable, exclusive license, with limited right to sublicense, to use certain of the intellectual property relating to our Aurix System. Boyalife is entitled to import, use for development, promote, market, sell and distribute Aurix in greater China (China, Hong Kong, Taiwan and Macau) for all regenerative medicine applications, including but not limited to wound care and topical dermatology applications in human and veterinary medicine.

 

We require significant additional capital to fully support an expanded commercialization initiative designed to increase market adoption and penetration of Aurix after completion of the CED protocols. See “– Liquidity and Capital Resources.”

 

The Science Underlying Aurix/Platelet Rich Plasma

 

Normal Wound Healing

 

The science underlying wound healing is well-established. An immediate early event critical for wound healing is the influx of platelets to the wound site. Platelets bind to elements within damaged tissue such as collagen fragments and endogenous thrombin molecules and are activated to release a diversity of growth factors and other biomolecules from their alpha and dense granules (Reed 2000, Nieswandt, 2003). These biomolecules provide signals essential for biological responses regulating hemostasis and effective tissue regeneration.

 

 

Chronic Wounds

 

Dysregulation of numerous cellular and biological responses contribute to the chronic wound phenotype. Chronic wounds have reduced levels of growth factors and concomitant decreases in cellular proliferation (Mast 1996). There is increased cellular senescence (Telgenhoff 2005), and there generally is a lack of perfusion that can inhibit the delivery of nutrients and cells required for regeneration (Guo 2010). As the body attempts to stave off infection, elevated concentrations of free radicals accumulate in the chronic wound and further damage surrounding tissue (Moseley 2004, James 2003).

 

Aurix Therapy

 

Aurix has been cleared by FDA as safe and effective with an indication for chronic wounds such as leg ulcers, pressure ulcers, and diabetic ulcers and other exuding wounds such as mechanically or surgically-debrided wounds. The Aurix therapeutic is formed by mixing a sample of a patient’s platelets and plasma with pharmaceutical grade thrombin and ascorbic acid. The thrombin activates platelets while ascorbic acid drives the synthesis of high tensile strength collagen, clears damaging free radicals and controls gel consistency. The topical dermal application of Aurix gel bypasses the lack of local perfusion to provide immediate signals for new tissue formation and ultimately healing.

 

The Efficacy of Aurix Relates to Biological Activity Released by Platelets

 

Regenerative Capacity

 

More than 300 proteins are released by human platelets in response to thrombin activation (Coppinger, 2004). Important examples include vascular endothelial cell growth factor (VEGF), platelet derived growth factor (PDGF), epidermal growth factor (EGF), fibroblast growth factor (FGF) and transforming growth factor-beta (TGF-B) (Eppley 2004, Everts 2006). These proteins are critical for organized wound healing, regulating responses such as vascularization, cell proliferation, cell differentiation, and deposition of new extracellular matrix (Goldman 2004). Platelets also release chemokines such as Interleukin-8 (IL-8), stromal cell derived factor-1 (SDF-1), and platelet factor-4 (PF-4) (Chatterjee 2011, Gear 2003) that control the mobilization and migration of stem cells and fibroblasts, (Werner 2003 and Gillitzer 2001) that contribute to tissue regeneration.

 

Anti-infective Activity

 

Populations of bioburden in chronic wounds vary over time and wounds invariably retain or become re-infected with some level of bacteria that is detrimental to healing (Howell-Jones 2005). In addition to regenerative capacity, platelets release anti-microbial peptides effective against a broad range of pathogens including Methicillin Resistant Staphylococcus Aureus (MRSA) (Moojen 2007, Jia 2010, Tang 2002, Bielecki 2007).

 

Clinical Efficacy

 

Multiple efficacy and effectiveness studies have been published in peer reviewed journals documenting the impact of using Aurix to treat chronic wounds. Key data include:

 

 

In a double blinded randomized controlled trial, 81% of the most common-sized diabetic foot ulcers healed with Aurix compared with 42% of control wounds. Mean time to healing was 6 weeks. (Driver V, Hanft J, Fylling, C et al.:  A Prospective, Randomized, Controlled Trial of Autologous Platelet-Rich Plasma Gel for the Treatment of Diabetic Foot Ulcers. Ostomy Wound Management, 2006; 52(6): 68-87.) 

 

 

In 285 chronic wounds in 200 patients, 96.5% of the wounds had a positive response within an average of 2.2 weeks with an average of 2.8 Aurix treatments (de Leon J, Driver VR, Fylling CP, Carter MJ, Anderson C, Wilson J, et al.:  The Clinical Relevance of Treating Chronic Wounds With an Enhanced Near-physiological Concentration of Platelet-Rich Plasma (PRP) Gel.  Advances in Skin and Wound Care, 2011; 24(8), 357-368.) 

 

 

In a retrospective, longitudinal study of 40 Wagner grade II through IV diabetic foot ulcers, most with critical limb ischemia, wounds increased in size in the approximate 100 days prior to the initiation of comprehensive wound care treatment. Upon treatment with debridement, revascularization, antibiotics and off-loading, the wounds continued to increase in size over a subsequent 75 day period. Once they were then treated with Aurix, the wounds immediately changed healing trajectory and 83% of the wounds healed with an average of 6.1 Aurix treatments per wound (Sakata, J., Sasaki, S., Handa, K., et al.  A Retrospective, Longitudinal Study to Evaluate Healing Lower Extremity Wounds in Patients with Diabetes Mellitus and Ischemia Using Standard Protocols of Care and Platelet-Rich Plasma Gel in a Japanese Wound Care Program. Ostomy Wound Management, 2012; 58(4):36-49.)

 

 

Aurix Licensing and Collaboration Arrangements

 

In September 2009, we entered into an original license and distribution agreement with Millennia Holdings, Inc., or Millennia (collectively with its affiliates), for the Company’s Aurix System in Japan.

 

As of December 31, 2014, we granted to Rohto Pharmaceutical Co., Ltd., or Rohto, a royalty bearing, nontransferable, exclusive license, with limited right to sublicense, to use certain of the Company’s intellectual property for the development, import, use, manufacturing, marketing, sale and distribution for all wound care and topical dermatology applications of the Aurix System and related intellectual property and know-how in human and veterinary medicine in Japan in exchange for an upfront payment from Rohto of $3.0 million. The agreement also contemplates additional royalty payments based on the net sales of Aurix in Japan and an additional cash payment of $1.0 million if and when the reimbursement price for the national health insurance system in Japan has been achieved after marketing authorization as described below.

 

In conjunction with the Rohto license, we amended, as of December 31, 2014, our licensing and distribution agreement with Millennia to terminate the agreement and to allow us to transfer the Japanese exclusivity rights from Millennia to Rohto. In connection with this amendment, we paid a one-time, non-refundable fee of $1.5 million to Millennia upon our receipt of the $3.0 million upfront payment from Rohto and are required to make a one-time, non-refundable payment of $0.5 million upon our receipt of the $1.0 million reimbursement milestone payment from Rohto, and may be required to make future royalty payments up to a maximum of $5 million to Millennia based upon net sales in Japan.  Millennia has been instrumental in establishing the advanced wound care market in Japan, and will continue to work with Rohto to develop the market for Aurix in that market. Further, Rohto has assumed responsibility for securing the marketing authorization from Japan’s Ministry of Health, Labor, and Welfare, while we will provide relevant product information, as well as clinical and other data to support Rohto’s regulatory initiatives.

 

On March 22, 2016, we entered into a collaboration agreement, or the Collaboration Agreement, with Restorix, pursuant to which we agreed to provide Restorix with certain limited geographic exclusivity benefits over a defined period of time for the usage of the Aurix System in up to 30 of the approximately 125 hospital outpatient wound care clinics with which Restorix has a management contract, or the RXH Partner Hospitals, in exchange for Restorix making minimum commitments of patients enrolled in three prospective clinical research studies primarily consisting of patient data collection, or the Protocols, necessary to maintain exclusivity under the Collaboration Agreement. The Collaboration Agreement will initially continue for a two-year period, subject to one or more extensions with the mutual consent of the parties.

 

Pursuant to the Collaboration Agreement, the Company agreed to provide: (i) clinical support services by its clinical staff as reasonably agreed between the Company and Restorix as necessary and appropriate, (ii) reasonable and necessary support regarding certain reimbursement activities, (iii) coverage of Institutional Review Board, or IRB, fees and payment to Restorix for certain training costs subject to certain limitations, (iv) an administrative fee for each fully completed and transmitted patient data set, and (v) community-focused public relations materials for participating RXH Partner Hospitals to promote the use of Aurix and participation in the Protocols.  Under the Collaboration Agreement, each RXH Partner Hospital will pay the Company the then-current product price ($700 in 2016, and no greater than $750 for the remainder of the initial term) as set forth in the Collaboration Agreement.  In the agreement, Restorix agreed to: (i) provide access and support as reasonably necessary and appropriate at up to 30 RXH Partner Hospitals to identify and enroll patients into the Protocols, including senior executive level support and leadership to the collaboration and its enrollment goals and (ii) reasonably assist the Company to correct through a query process, any patient data submitted having incomplete or inaccurate data fields.

 

Subject to the satisfaction of certain conditions, during the term of the Collaboration Agreement: (i) Restorix will have site specific geographic exclusivity for usage of Aurix in connection with treatment of patients in the Protocols within a 30 mile radius of each RXH Partner Hospital, and (ii) other than with respect to existing CED sites, the Company will not provide corporate exclusivity with any other wound management company operating in excess of 19 wound care facilities for any similar arrangement.

 

The Collaboration Agreement may be terminated by either party for a material breach, subject to a 60 day cure period. The Agreement is further subject to certain covenants regarding confidentiality, assignment, indemnification and limitations on liability, as well as certain representations and warranties of the parties.

 

 

Effective as of May 5, 2016, the Company and Boyalife Hong Kong Ltd., or Boyalife, an entity affiliated with the Company’s significant stockholder, Boyalife Investment Fund I, Inc., entered into an Exclusive License and Distribution Agreement with an initial term of five years, unless the agreement is terminated earlier in accordance with its terms. We refer to this agreement as the Boyalife Distribution Agreement. Under this agreement, Boyalife received a non-transferable, exclusive license, with limited right to sublicense, to use certain of the Company’s intellectual property relating to its Aurix System for the purposes and in the territory specified below. Under the agreement, Boyalife is entitled to import, use for development, promote, market, sell and distribute the Aurix Products in greater China (China, Hong Kong, Taiwan and Macau) for all regenerative medicine applications, including but not limited to wound care and topical dermatology applications in human and veterinary medicine. For purposes of this agreement, “Aurix Products” are defined as the combination of devices to produce a wound dressing from the patient’s blood - as of May 5, 2016 consisting of centrifuge, wound dressing kit and reagent kit. Under the Boyalife Distribution Agreement, Boyalife is obligated to pay the Company (a) $500,000 within 90 days of approval of the Aurix Products by the China Food and Drug Administration, but no earlier than December 31, 2018, and (b) a distribution fee per wound dressing kit and reagent kit of $40, payable quarterly, subject to an agreement by the parties to discuss in good faith the appropriate distribution fee if the pricing of such kits exceeds the current general pricing in greater China. Under the agreement, Boyalife is entitled, with the Company’s approval (not to be unreasonably withheld or delayed) to procure devices from a third party in order to assemble them with devices supplied by the Company to make the Aurix Products. Boyalife also has a right of first refusal with respect to the Aurix Products in specified countries in the Asia Pacific region excluding Japan and India, exercisable in exchange for a payment of no greater than $250,000 in the aggregate. If Boyalife files a new patent application for a new invention relating to wound dressings, the Aurix Products or the Company’s technology, Boyalife will grant the Company a free, non-exclusive license to use such patent application outside greater China during the term of the Boyalife Distribution Agreement.

 

Angel Product Line

 

The Company formerly owned the Angel cPRP System. This system, acquired from Sorin Group USA, Inc. in April 2010, is designed for single-patient use at the point of care, and provides a simple and flexible means for producing quality concentrated PRP and platelet poor plasma, or PPP, from a small sample of whole blood or bone marrow. The Angel cPRP System is a multi-functional cell separation device which produces cPRP for use in the operating room and clinic and is generally used in a range of orthopedic indications.

 

In August 2013, we entered into a Distributor and License Agreement with Arthrex. Under the terms of this agreement, Arthrex obtained the exclusive rights to sell, distribute, and service the Angel cPRP System and activAT throughout the world for all uses other than chronic wound care. We granted Arthrex a limited license to use our intellectual property as part of enabling Arthrex to sell these products. Pursuant to this license, Arthrex purchased these products from us at cost to distribute and service in exchange for payments based on a certain royalty rate depending on volume of the products sold. As described below, we have assigned the right to this royalty stream to Deerfield SS, LLC, the Assignee, pursuant to the Plan of Reorganization.

 

On October 16, 2015, the Company entered into an Amended and Restated License Agreement, or the Amended Arthrex Agreement, with Arthrex, which amended and restated the original agreement. Under the terms of the Amended Arthrex Agreement, the Company granted Arthrex an exclusive, irrevocable, worldwide, sub-licensable, transferable license to the Angel patents to research, develop, make, have made, use, sell, offer for sale, have sold, distribute and have distributed, import and have imported, the Angel® Concentrated Platelet System, or Angel, product line and certain new enhanced products within a defined field of use and a non-exclusive, irrevocable, worldwide, sub-licensable, transferable license to the Angel patents to research, develop, make, have made, use, sell, offer for sale, have sold, distribute and have distributed, import and have imported, Angel and certain new enhanced products within certain specified markets. The Company also transferred to Arthrex all of its rights and title to product registration and intellectual property (other than patents) related to Angel. In connection with the Amended Arthrex Agreement, Deerfield (as defined below) irrevocably released their liens on the product registration rights and intellectual property assets (other than patents) transferred by the Company to Arthrex. The Amended Arthrex Agreement provided that, on a date to be determined by Arthrex, but not later than March 31, 2016, Arthrex would assume all rights related to the manufacture and supply of the Angel product line. The Amended Arthrex Agreement, as supplemented in April 2016, is referred to collectively as the Arthrex Agreement.

 

Under the Arthrex Agreement, the Company had the right to receive certain royalties through 2024. However, pursuant to the Plan of Reorganization, on May 5, 2016, the Company entered into an Assignment and Assumption Agreement with the Assignee, as the designee of Deerfield, to assign to the Assignee the Company’s rights, title and interest in and to the Arthrex Agreement, and to transfer and assign to the Assignee associated intellectual property and royalty and payment rights owned by the Company and licensed thereunder. Pursuant to the Plan of Reorganization, on May 5, 2016, the Company and the Assignee also entered into a Transition Services Agreement pursuant to which the Company agreed to continue to service the Arthrex Agreement for a transition period. The Transition Services Agreement generally contemplated that, during this transition period, we will continue to provide for the manufacture and supply to Arthrex of the Angel product line in accordance with the terms of the Arthrex Agreement, and to provide our full cooperation, as commercially reasonable, to assist Arthrex with the manufacture and supply of the Angel product line, notwithstanding the original March 31, 2016 assumption deadline for Arthrex described above. Initially, our obligation to provide such transition services was not to extend beyond October 15, 2016 unless agreed between the Company and the Assignee.

 

On October 20, 2016, the Company entered into the Three Party Letter Agreement with Arthrex and the Assignee, which extended the transition period under the Transition Services Agreement through January 15, 2017. Under the terms of the Three Party Letter Agreement, subject to Arthrex making a payment of $201,200 to the Company on October 28, 2016, (a) the Company has sold, conveyed, transferred and assigned to Arthrex its title and interest in the Company’s inventory of Angel products (including spare parts therefor) and production equipment, and (b) the Assignee is obligated to make three equal payments of $33,333.33 each to the Company as consideration for the extension of the transition period. Under the terms of the Three Party Letter Agreement, the Company has no further obligations under the Transition Services Agreement or the Amended Arthrex Agreement after January 15, 2017. The agreement contains a full and irrevocable release of Arthrex by the Company with respect to any actions, claims or other liabilities for payments of Royalty (as defined in the Amended Arthrex Agreement) owed to the Company based on sales of Angel products occurring on or before June 30, 2016, and a full and irrevocable release of the Company and the Assignee by Arthrex with respect to any actions, claims or other liabilities arising under the Amended Arthrex Agreement as of the date of the Three Party Letter Agreement. Neither Arthrex nor the Assignee assumed any liabilities or obligations of the Company in connection with the Three Party Letter Agreement.

 

 

Bankruptcy and Emergence from Bankruptcy

 

On January 26, 2016, the Company filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, seeking relief under Chapter 11 of Title 11 of the United States Code, or the Bankruptcy Code, which is administered under the caption "In re: Nuo Therapeutics, Inc.", Case No. 16-10192 (MFW). We refer to this petition and the related case as the Chapter 11 Case. During the pendency of the Chapter 11 Case, the Company continued to operate its business as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

 

The Company emerged from bankruptcy protection effective May 5, 2016 in accordance with the Modified First Amended Plan of Reorganization of the Debtor under Chapter 11 of the Bankruptcy Code, as confirmed by the April 25, 2016 Order Granting Final Approval of Disclosure Statement and Confirming Debtor's Plan of Reorganization. We refer to May 5, 2016 as the Effective Date, to the order as the Confirmation Order and to the plan of reorganization, as confirmed by the Confirmation Order, as the Plan of Reorganization.

 

Pursuant to the Plan of Reorganization, as of the Effective Date all equity interests of the Company, including shares of the Company's common stock (including its redeemable common stock), warrants and options, outstanding immediately prior to the Effective Date were cancelled, and the Company issued new common stock, warrants and Series A preferred stock. We refer to the Company's common stock outstanding immediately prior to the Effective Date as the Old Common Stock. Unless the context otherwise indicates, references in this report to common stock or New Common Stock are to the new common stock, par value $0.0001 per share issued by the Company on and after the Effective Date.

  

On the Effective Date, the Company filed a Certificate of Designations of Series A Preferred Stock, or Certificate of Designations, with the Delaware Secretary of State, designating 29,038 shares of the Company's undesignated preferred stock, par value $0.0001 per share, as Series A preferred stock, or Series A Preferred Stock. On the Effective Date, the Company issued 29,038 shares of Series A Preferred Stock to creditors affiliated with Deerfield Management Company, L.P., in accordance with the Plan of Reorganization. We refer to Deerfield Management Company, L.P. and its affiliates Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., and Deerfield Special Situations Fund, L.P. collectively as Deerfield. The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of New Common Stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction. For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect one member of our Board of Directors. Lawrence S. Atinsky serves as the designee of the holders of Series A Preferred Stock, which are all currently affiliates of Deerfield Management Company, L.P., of which Mr. Atinsky is a Partner. The Series A Preferred Stock have voting rights, voting with the New Common Stock as a single class, with each share of Series A Preferred Stock having the right to five votes, currently representing less than 1% of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock have the right to approve certain transactions. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limits the Company's ability to (i) issue securities that are senior or pari passu with the Series A Preferred Stock, (ii) incur debt (other than for working capital purposes not in excess of $3.0 million), (iii) issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, (iv) pay dividends on or purchase shares of its capital stock, and (v) change the authorized number of members of its Board of Directors to a number other than five, in each case without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock.

 

In accordance with the Plan of Reorganization, as of the Effective Date, the Company issued 7,500,000 shares of common stock and warrants to purchase 6,180,000 shares of common stock to certain accredited investors in a private placement exempt from registration. The warrants terminate on May 5, 2021 and are exercisable at any time at exercise prices ranging from $0.50 per share to $0.75 per share.

 

A significant majority of the accredited investors who purchased shares of common stock on the Effective Date furthermore executed backstop commitments to purchase up to 12,800,000 additional shares of common stock for an aggregate purchase price of up to $3,000,000. We refer to these commitments as the Backstop Commitments or the Backstop Commitment.  During the year ended December 31, 2017, the Company exercised its rights under the Backstop Commitment in full and issued an aggregate of 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3.0 million. 

 

 

As of the Effective Date, the Company entered into a registration rights agreement, or the Registration Rights Agreement, with the investors. The Registration Rights Agreement provides certain resale registration rights to the investors with respect to the shares of New Common Stock issued in the Recapitalization Financing. Pursuant to the Registration Rights Agreement, the Company filed a registration statement (File No. 333-214748) registering the resale of the New Common Stock issued in the Recapitalization Financing. The Company has agreed under the Registration Rights Agreement to use its best efforts to keep the registration statement continuously effective under the Securities Act until the earliest of (i) the date when all registrable securities under the registration statement may be sold without registration or restriction pursuant to Rule 144(b) under the Securities Act or any successor provision or (ii) the date when all registrable securities under the registration statement have been sold, subject to the Company's ability to suspend sales under the registration statement in certain circumstances. As the Company does not qualify for forward incorporation by reference, the Company has caused the suspension of sales under the registration statement pending the filing and effectiveness of a post-effective amendment containing updated financial information.

 

Customer Concentration

 

In 2017, our revenues consisted of product sales of approximately $0.5 million and royalties of approximately $0.2 million. In 2017, revenue from STEMCELL Technologies accounted for approximately 26% of our total revenue.

 

In 2016, our revenues consisted of product sales of approximately $1.3 million, license fee revenue of approximately $0.1 million and royalties of approximately $0.8 million. In the combined 2016 period, revenue from Arthrex accounted for approximately 61% of our total revenue.  For the Successor Company, revenue from STEMCELL Technologies and St. Luke's Hospital System accounted for approximately 22% and 16%, respectively, of total revenue for the period from May 5, 2016 through December 31, 2016.  For the Predecessor Company, revenue from Arthrex accounted for approximately 78% of total revenue for the period from January 1, 2016 through May 4, 2016. No other single customer accounted for more than 10% of total revenue during those periods.

 

Patents, Licenses, and Property Rights

 

Nuo Therapeutics relies on a combination of patents, trademarks, trade secrets, and copyright laws, as well as confidentiality agreements, contractual provisions, and other similar measures, to establish and protect its intellectual property.

 

Historically, the Company has been party to certain royalty agreements relating to its intellectual property under which it pays certain fees, and has acquired additional royalty agreements as part of the acquisition of Aldagen. Currently, the Company is subject to royalty obligations under the following agreements in the following circumstances:

 

 

The inventor is entitled to receive a royalty equal to 5% of gross profits on revenues generated from reliance on the Worden Patents (U.S. patents 6,303,112 and 6,524,568), covering the formulation of Aurix. In conjunction with the release of a security interest in the applicable patents securing our payment obligations under a royalty agreement, we paid the inventor a lump sum $500,000 payment in February 2013 in satisfaction of all remaining minimum monthly royalty payments. In addition, the annual maximum royalty payment was raised to $625,000 from $600,000 in conjunction with the amendment. Finally, the Company has no annual royalty obligation unless and until the calculated annual royalty obligation exceeds $100,000 in a given year. This agreement terminates with the expiration of the patents in 2019.

     
 

Under our license agreement with Duke, Duke has granted us an exclusive, worldwide license under its patents and applications that relate to methods for isolating and manufacturing ALDH Bright Cell populations, or the Duke Patents. Under the terms of the Duke license agreement, we are obligated to pay up to a 1% royalty to Duke on all revenues relating to the Duke Patents, subject to an annual minimum of $5,000 per year beginning in the calendar year after the first commercial sale of a licensed product (which will increase to $25,000 upon the achievement of specified development and commercialization milestones). The Company bears all costs to maintain the patents. This agreement terminates with the expiration of the patents in 2018.   In light of the lack of any clinical response of statistical significance and limited remaining patent life, the Company sees no further realistic path for development of the Bright Cell technology, and it does not expect to maintain the international patent rights around the related intellectual property.  

 

Nuo Therapeutics’ patent strategy, designed to maximize value, seeks to: (i) assist the Company in establishing significant market positions for its products, (ii) attract strategic partners for collaborative research, development, marketing, distribution, or other agreements, which could include milestone payments to the Company, and (iii) generate revenue streams via out-licensing agreements.

 

 

Nuo Therapeutics’ current patent portfolio consists of domestic and international patents that generally fall into the following families:

 

Process, formulation, and methods for utilizing platelet releasates to heal damaged tissue, related to PCT/US99/02981 and US Patent Nos. 7,112,342 and 6,524,568; 

 

 Patents having claims to medical devices, corresponding to PCT/US2010/051892 and US Patent No. 7,927,563;

 

ALDH Bright Cell populations, related to US Patent Nos. 7,863,043, 8,986,744, and 6,537,807; and

 

Specific chemistries for isolating and manufacturing ALDH Bright Cell populations, related to US Patent Nos. 6,627,759, 6,991,897, and 7,754,480.

 

The above patent families encompass the Company’s Aurix product, homologous growth factors, wound-healing biomarkers and ALDH Bright Cell populations.   These patents have expiration dates ranging from 2018 to 2030. As described in “Angel Product Line” above, the Company has assigned to the Assignee the Company’s rights, title and interest in and to the Arthrex Agreement, and transferred and assigned to the Assignee associated intellectual property and royalty and payment rights owned by the Company and licensed thereunder.   In addition, as described in "ALDHbr, or Bright Cell, Technology" above, the Company does not intend to maintain the international patent rights surrounding the Bright Cell technology.  As such, international patent rights relating to the Bright Cell technology do not appear above.

 

Government Regulation

 

Government authorities in the U.S., Canada, the European Union, and other countries extensively regulate pharmaceutical products, biologics, and medical devices. The Company’s products and product candidates are subject to approval or clearance by the governing bodies prior to and during the marketing and distribution of a product. Regulatory requirements apply to, but are not limited to, research and development, safety and efficacy, clinical studies, manufacturing, labeling, distribution, advertising and marketing, and the import and export of products. Before a product candidate is approved by the governing bodies for commercial marketing, rigorous preclinical and human clinical testing may be necessary to conduct to determine the safety and efficacy or effectiveness of the product. If the Company fails to comply with the applicable laws and regulations at any time during the product development process, approval or clearance process, or during commercialization, it may become subject to administrative and/or judicial sanctions. These sanctions may include, but are not limited to, refusal to approve or clear pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of the Company’s operations, injunctions, fines, civil penalties and/or criminal prosecution. Any enforcement action could have a material adverse effect on the Company. 

 

Medical Device Regulation

 

The Company currently manufactures and distributes the Aurix System. As such, this and future products manufactured and/or distributed by the Company may be subject to regulations by the applicable governing bodies, including but not limited to, the FDA, Health Canada, the European Medicines Agency, the Japanese Ministry of Health & Welfare, and other regulatory agencies. The Company currently has limited business development initiatives outside of the U.S. Each of the foreign governing bodies noted above serve a similar function as the FDA. As such, the Company and its products and product candidates are subject to the regulations enforced by the outside governing bodies. These regulations include, but are not limited to, product clearance, documentation requirements, good manufacturing practices and medical device reporting. Labeling and promotional activities are also subject to regulation by the U.S. Federal Trade Commission, in certain circumstances. Current enforcement policies prohibit the marketing of approved medical devices for unapproved uses. Each governing body reviews the labeling and advertising of medical devices to ensure that unapproved uses are not promoted. Before a new medical device can be introduced to the market, the manufacturer must obtain clearance or approval from the applicable regulatory agency, depending upon the device classification. In the U.S., medical devices are classified into one of three classes — Class I, II, or III. The regulations enforced by the FDA and/or the appropriate governing bodies to the medical device(s) provide reasonable assurance that the device is safe and effective. In the U.S., Class I devices are non-critical products that the FDA believes can be adequately regulated by “general controls” which include provisions relating to labeling, manufacturer registration, defect notification, records and reports, and current good manufacturing practices, or cGMP, based on the FDA’s Quality Systems Regulations. Most Class I devices are exempt from pre-market notification and some are also exempt from cGMP requirements. Class II devices are products for which the general controls of Class I devices, by themselves, are not sufficient to assure safety and effectiveness and, therefore, require additional controls. Additional controls for Class II devices may include performance standards, post-market surveillance patient registries, and the use of FDA guidelines. Standards may include both design and performance requirements. Class III devices have the most restrictive controls and require pre-market approval by the FDA. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. All of the governing bodies with responsibility over the Company’s products have the ability to inspect medical device manufacturers, order recalls of medical devices in some circumstances, seize non-complying medical devices, and to pursue prosecution of either civil or criminal violations.

 

Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA, requires individuals or companies manufacturing medical devices intended for human use to file a notice with the FDA at least ninety days before intending to introduce the device into the market. This notice, commonly referred to as a 510(k) premarket notification, must identify the type of classified device into which the product falls, the class of that type, and a specific product already being marketed or cleared by the FDA and to which the product is “substantially equivalent.” In some instances, the 510(k) must include data from human clinical studies to establish “substantial equivalence.” The FDA must agree with the claim of “substantial equivalence” before the device can be marketed. The statutory time frame for clearance of a 510(k) is ninety days, though it often takes longer. Nuo Therapeutics currently markets only products that are subject to 510(k) clearance.

 

 

The Company currently markets the Aurix System, consisting of the Aurix Wound Dressing Kit, Aurix Reagent Kit, and Aurix System Centrifuge II. Each System’s component is a legally-marketed product that has been cleared by FDA and/or the appropriate governing body. The Aurix System Centrifuge II, when used with the Aurix Wound Dressing Kit and Aurix Reagent Kit, are suitable for use on exuding wounds such as leg ulcers, pressure ulcers and diabetic ulcers, and for the management of mechanically or surgically-debrided wounds.

 

As a specification developer, manufacturer and distributor of medical devices, Nuo Therapeutics complies with, among other standards and regulations, e.g., the FDCA and implementing regulations at 21 CFR et seq. and ISO 13485.  As a manufacturer and distributor of medical devices, the Company, and in some instances its subcontractors, is required to register its facilities and products manufactured annually with the appropriate governing bodies and certain state agencies.  Additionally, the Company is subject to periodic inspections by the governing bodies to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state or local agencies. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. 

 

Bio-pharmaceutical Product Regulation

 

To the extent the Company again develops bio-pharmaceuticals, such as its former ALDH Bright Cells product candidates, in the future, they would also be regulated by the FDA. Under the U.S. regulatory scheme, the development process for new such products can be divided into two distinct phases:

 

 

Preclinical Phase. The preclinical phase involves the discovery, characterization, product formulation and animal testing necessary to prepare an Investigational New Drug application, or IND, for submission to the FDA. The IND must be accepted by the FDA before the product candidate can be tested in humans. The review period for an IND submission is thirty days, after which, if no comments are made by the FDA, the product candidate can be studied in Phase I clinical trials. Certain preclinical tests must be conducted in compliance with the FDA’s good laboratory practice regulations and the U.S. Department of Agriculture’s Animal Welfare Act.

 

 

Clinical Phase. The clinical phase of development follows a successful IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy, and dosage of the product candidate in humans, as well as, the ability to manufacture the drug in accordance with cGMP requirements. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study and the parameters to be used in assessing the safety and the efficacy of the product candidate. Each clinical protocol is submitted to the FDA as part of the IND prior to beginning the trial. Each trial is reviewed, approved, and conducted under the auspices of an investigational review board, or IRB, and each trial, with limited exceptions, must include the patient’s informed consent. Typically, clinical evaluation involves the following time-consuming and costly three-phase sequential process:

 

Phase 1. In Phase 1 clinical trials, typically a small number of healthy individuals (although in some instances individuals with the disease or condition for which an indication is being sought for the product candidate are enrolled) are tested with the product candidate to determine safety and tolerability, and includes biological analyses to determine the availability and metabolism of the active ingredient following administration.

 

Phase 2. Phase 2 clinical trials involve administering the product candidate to individuals who suffer from the target disease or condition to determine the optimal dose and potential efficacy. These clinical trials are well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects.

 

Phase 3. Phase 3 clinical trials are performed after preliminary evidence suggesting efficacy of a product candidate has been obtained and safety, tolerability, and an optimal dosing regimen have been established. Phase 3 clinical trials are intended to gather additional information about efficacy and safety that is needed to evaluate the overall benefit-risk relationship and to complete the information needed to provide adequate instructions for the use of the product candidate. Phase 3 trials usually include from several hundred to a few thousand subjects.

 

Throughout the clinical phase, samples of the product made in different batches are tested for stability to establish shelf-life constraints. In addition, large-scale production protocols and written standard operating procedures for each aspect of commercial manufacture and testing must be developed. These trials require scale up for manufacture of increasingly larger batches of bulk chemical. These batches require validation analyses to confirm the consistent composition of the product.

  

 

Phase 1, 2, and 3 testing may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted under an IND and may, at its discretion, reevaluate, alter, suspend (place on “clinical hold”), or terminate the trials based upon the data accumulated to that point and the agency’s assessment of the risk/benefit ratio to the patient. The FDA may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request that additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory approval of products under development. Furthermore, IRBs, which are independent entities constituted to protect human subjects at the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials at their respective institutions at any time for a variety of reasons, including safety issues. 

 

After the successful completion of Phase 3 clinical trials, the sponsor of the new bio-pharmaceutical submits a Biologics License Application, or BLA, to the FDA requesting approval to market the product for one or more indications. A BLA is a comprehensive, multi-volume application that includes, among other things, the results of all preclinical studies and clinical trials, information about the product candidate’s composition and manufacturing, and the sponsor’s plans for manufacturing, packaging, and labeling the drug. Under the Pediatric Research Equity Act of 2003, an application also is required to include an assessment, generally based on clinical study data, of the safety and efficacy of product candidates for all relevant pediatric populations before the BLA is submitted. The statute provides for waivers or deferrals in certain situations. In most cases, the BLA must be accompanied by a substantial user fee. In return, the FDA assigns a goal of 10 months from acceptance of the application to return of a first “complete response,” in which the FDA may approve the product or request additional information.

 

The submission of the application is no guarantee that the FDA will find it complete and accept it for filing. The FDA reviews all BLA’s submitted before it accepts them for filing. It may refuse to accept the application and request additional information rather than accept the application for filing, in which case, the application must be resubmitted with the supplemental information. After the application is deemed filed and accepted by the FDA, agency staff reviews a BLA to determine, among other things, whether a product is safe and efficacious for its intended use. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the data submitted in its BLA. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of physicians, for review, evaluation, and an approval recommendation. The FDA is not bound by the opinion of the advisory committee. Products that successfully complete BLA review and receive clearance (i.e., approval) may be marketed in the U.S., subject to all conditions imposed by the FDA.

 

Prior to granting approval, the FDA conducts an inspection of the facilities, including outsourced facilities, that will be involved in the manufacture, production, packaging, testing, and control of the product candidate for cGMP compliance. The FDA will not approve the application unless cGMP compliance is satisfactory. If FDA determines that the marketing application, manufacturing process, or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the marketing application does not satisfy the regulatory criteria for approval and refuse to approve the application by issuing a “complete response” letter communicating it cannot approve the application in its current form. The length of the FDA’s review may range from a few months to several years.

 

If the FDA approves the BLA, the product becomes available for physicians to prescribe in the U.S. After approval, the BLA holder is still subject to continuing regulation by the FDA, including record keeping requirements, submitting periodic reports to the FDA, reporting of any adverse experiences with the product, and complying with drug sampling and distribution requirements. In addition, the BLA holder is required to maintain and provide updated safety and efficacy information to the FDA. The BLA holder is also required to comply with requirements concerning advertising and promotional labeling, including prohibitions against promoting any non-FDA approved or “off-label” indications of products. Failure to comply with those requirements could result in significant enforcement action by the FDA, including warning letters, orders to pull the promotional materials, and substantial fines. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval.

 

Biologics manufacturers and their subcontractors are required to register their facilities and products manufactured annually with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state or local agencies. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. 

 

In addition, following the FDA approval of a product, discovery of problems with a product or the failure to comply with requirements may result in restrictions on a product, manufacturer, or holder of an approved marketing application, including withdrawal or recall of the product from the market or other voluntary or the FDA-initiated action that could delay further marketing. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contra-indications. Also, the FDA may require post-market testing and surveillance to monitor the product’s safety or effectiveness, including additional clinical studies, known as Phase 4 trials, to evaluate long-term effects.

 

Other regulatory agencies, including Health Canada and the European Medicines Agency, require preclinical and clinical studies, manufacturing validation, facilities inspection, and post-approval record keeping and reporting similar to FDA requirements. In some instances, data generated for consideration by the FDA may be submitted to these agencies for their consideration for approvals in other countries.

 

 

Fraud and Abuse Laws

 

The Company may also be indirectly subject to federal and state anti-kickback and physician self-referral laws. Federal physician self-referral legislation (commonly known as the Stark Law) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member has a financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. The Centers for Medicare & Medicaid Services, or “CMS,” has issued numerous regulations containing exceptions to the prohibitions of the Stark Law. If a physician and a DHS entity have financial relationship subject to the Stark Law, then an exception must be met or else the DHS entity cannot bill for the service. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $15,000 per referral and possible exclusion from federal health care programs such as Medicare and Medicaid. Violations of the Stark Law have also been the basis for False Claims Act actions, discussed below. Various states have corollary laws to the Stark Law (so-called “baby Stark” laws), including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exception for such laws vary from state to state.

 

The Company may also be subject to federal and state anti-kickback laws. Section 1128B (b) of the Social Security Act, commonly referred to as the Anti-Kickback Law, prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare and Medicaid. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are otherwise lawful in businesses outside of the health care industry. The Office of the Inspector General, or OIG, of the U.S. Department of Health and Human Services, or DHHS, has issued regulations, commonly known as “safe harbors” that set forth certain provisions which, if fully met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although full compliance with these provisions ensures against prosecution under the Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. The penalties for violating the Anti-Kickback Law include imprisonment for up to five years, fines of up to $250,000 per violation for individuals and up to $500,000 per violation for companies and possible exclusion from federal health care programs. As with the Stark Law, violations of the Anti-Kickback Law can result in a False Claims Act action. Many states have adopted laws similar to the federal Anti-Kickback Law, and some of these state prohibitions apply to patients for health care services reimbursed by any source, not only federal health care programs such as Medicare and Medicaid.  In this connection, please refer to the Risk Factor titled "The 20% Medicare Co-Payment Presents a Potential Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols." 

 

In addition, there are other U.S. health care fraud laws to which the Company may be subject, one which prohibits knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers (“fraud on a health benefit plan”) and one which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. These laws apply to any health benefit plan, not just Medicare and Medicaid. 

 

The Company may also be subject to other U.S. laws which prohibit submitting, or causing to be submitted, claims for payment or causing such claims to be submitted that are false. Violation of these false claims statutes may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim (or causing the submission of a false claim) or the knowing use of false statements to obtain payment from the U.S. federal government. Under provisions of the Affordable Care Act, the failure to report and refund an overpayment to the Medicare or Medicaid programs within 60 days of the identification of the overpayment may also be an obligation subjecting the defendant to a False Claims Act action. Finally, a recent U.S. Supreme Court case, Universal Health Services v. United States ex rel. Escobar, approved the “implied false certification” theory under which a defendant submits a claim for payment that makes a specific representation about the goods or services provider, but fails to disclose the defendant’s noncompliance with a statutory, regulatory or contractual requirement that would be material to the Government’s payment decision. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. These amounts are likely to increase dramatically in accordance with the provisions of the Bipartisan Budget Act of 2015, under which the U.S. Department of Justice adjusted for inflation civil monetary penalties assessed or enforced by components of the Department. This change will increase the per claim penalty range to $10,781-$21,563. Suits filed under the False Claims Act can be brought by an individual on behalf of the government (a “qui tam action”). Such individuals (known as “qui tam relators”) may share in the amounts paid by the entity to the government in fines or settlement. In addition certain states have enacted laws modeled after the False Claims Act. “Qui tam” actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action.

 

 

Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies, but may apply to all health care products and services, regardless of whether Medicaid or Medicare funds are involved.

 

Employees

 

The Company had 15 employees, all of which were full time employees, including the Company’s management, as of December 31, 2017. The remaining personnel primarily consist of accounting, clinical affairs, operations, sales, and administrative professionals. None of the Company’s employees is covered by a collective bargaining agreement or represented by a labor union. The Company considers its employee relations to be good.

 

Research and Development

 

During the years ended December 31, 2017 and 2016, we spent approximately $1.3 million and $1.6 million on research and development activities, respectively. 

 

Competition

 

While Aurix has no direct competition in the chronic wound care market from any other FDA cleared platelet derived products, we face competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors in the areas of advanced wound care dressings, wound care devices, and wound care biologics. Leading companies in the advanced wound care market include Smith and Nephew, Acelity (KCI, Systegenix, and LifeCell), MoInlycke, and ConvaTec.  Leading competitors in the wound care market that offer other biologic products such as tissue based products include companies such as MiMedx, Osiris, Organogenesis, Aliqua, Derma Sciences, as well as a significant number of smaller companies.  While we believe that Aurix can compete favorably on the basis of broad application across multiple wound etiologies, we expect that many physicians and allied professionals will continue to employ other treatment approaches and technologies, separately and in combination, in an attempt to treat chronic and hard-to heal wounds.  The chronic wound market has many therapies that compete with Aurix that have established habitual use patterns and provider contracts to encourage standardized use.  Furthermore, other companies have developed or are developing products that could be in direct future competition with our current product line.   We may not be able to compete effectively against such companies in the future. Many of these companies have substantially greater capital resources, larger marketing staffs and more experience in commercializing products than we do. See “Item 1A. Risk Factors – Risks Relating to the Company’s Financial Position, Business and Industry - Our Products Have Existing Competition in the Marketplace.

 

Raw Materials

 

A reagent used for our Aurix product, bovine thrombin (Thrombin JMI), is available exclusively through Pfizer. Pfizer may unilaterally raise the price for the reagent. If a temporary or permanent interruption in the supply of the reagent were to occur, or the manufacturing costs charged by Pfizer exceed what we can reasonably afford, it would have a material adverse effect on our business.

 

Available Information

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Many of our SEC filings are also available to the public from the SEC’s website at “http://www.sec.gov.” We make available for download free of charge through our website (http://nuot.com) our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed it electronically with, or furnished it to, the SEC. Information appearing on our website is not part of this Annual Report. 

 

 

ITEM 1A. Risk Factors

 

The Company faces many risks. The risks described below may not be the only risks the Company faces. Additional risks not yet known or currently believed to be immaterial may also impair our business. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our common stock could continue to decline. You should consider the following risks, together with all of the other information in this Annual Report on Form 10-K, before making an investment decision with respect to our securities.

 

Risks Related to the Company’s Financial Position, Business and Industry

 

We Have Almost Depleted our Cash Resources and Our Ability to Continue to Operate is in Immediate Jeopardy

 

We are rapidly depleting our cash resources and our ability to continue to operate is in immediate jeopardy. At December 31, 2017, we had cash and cash equivalents of approximately $0.7 million, total current assets of approximately $1.2 million and total current liabilities of approximately $0.9 million. At April 12, 2018, we had cash and cash equivalents of approximately $0.3 million.

 

Our continuing losses and depleted cash raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds immediately in order to continue to conduct our business.   Our cost reduction measures to date have included the reduction of our full-time employees from 15 at December 31, 2017 to 8 as of April 12, 2018. If we are unable within the next 30-60 days to raise substantial additional funds or otherwise restructure our business, we will likely be forced to cease operations and liquidate our assets. If we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock as a result of the liquidation preference of the holder of our Series A Preferred Stock. See “The Rights of the Holders of our Common Stock and the Value of our Common Stock are Severely Limited by the Liquidation Preference and Other Terms of our Series A Preferred Stock.”

 

Our Revenue Base Is Limited to a Single Product Seeking Market Adoption, We Need Substantial Additional Financing and Our Ability to Effect Such Financing Successfully Is Limited

 

Our current revenue base is limited to our Aurix product, and our Aurix revenue has been minimal. Our revenues have continued to decline significantly comparing 2017 with 2016, and 2016 with 2015.

 

We have a history of losses and are not currently profitable. For the year ended December 31, 2017, we incurred a net loss from operations of approximately $14.9 million. Even assuming we succeed in raising substantial additional funds immediately to avoid liquidation, we expect to incur losses and negative operating cash flows in the foreseeable future. We may never generate sufficient revenues to achieve and maintain profitability.

 

Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, licensing, royalty, and product revenues. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we need to finance future cash needs. It is substantially uncertain whether we will be able to obtain such financing on satisfactory terms or at all.

 

Even assuming we succeed in raising substantial additional funds immediately to avoid liquidation, if we are unable to secure sufficient capital to fund our operating activities beyond the immediate future or we are unable to increase revenues significantly over that time period, we may be forced to delay the completion of, or significantly reduce the scope of, our current business plan, including our plan to penetrate the market serving Medicare beneficiaries and fulfill the related data gathering requirements as stipulated by the Medicare CED coverage determination, delay the pursuit of commercial insurance reimbursement for our wound treatment technologies, and postpone the hiring of new personnel.   If we are unable to secure sufficient capital to fund our operating activities and are unable to increase revenues significantly, we will likely be required to cease operations and liquidate our assets.

 

The Certificate of Designations for our Series A Preferred Stock limits the Company’s ability to (i) issue securities that are senior or pari passu with the Series A Preferred Stock, (ii) incur debt (other than for working capital purposes not in excess of $3.0 million) and (iii) issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, in each case without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock.

 

Any equity financings may cause further substantial dilution to our stockholders and could involve the issuance of securities with rights senior to the common stock. Any allowed debt financings (which are restricted under the terms of the Certificate of Designations for our Series A Preferred Stock) may require us to comply with onerous financial covenants and restrict our business operations. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed equity or debt offering, state of the credit markets at the time of any proposed loan financing, market reception of the Company and perceived likelihood of success of our business model, and on the relevant transaction terms, among other things. We may not be able to obtain additional capital as required to finance our efforts, through asset sales, equity or debt financings, or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.   

 

 

If adequate capital cannot be obtained on a timely basis and on satisfactory terms, it would have a material adverse effect on our ability to implement our business plan, and our revenues and operations and the value of our common stock would be materially negatively impacted and we may be forced to curtail or cease our operations.

 

The Lack of an Economically Appropriate Physician Fee for Aurix Treatments May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols 

 

Beginning in May 2016, the Company initiated conversations with CMS’ Division of Practitioner Services regarding the fee paid (if any) by Medicare to the treating physician for services rendered during an Aurix treatment application under CED. Unlike the facility fee reimbursed by Medicare for the Aurix product itself, which is a payment that is mandated per the CED National Coverage Determination, or NCD, any physician fee was to be established by the regional Medicare Administrative Contractors, or MACs, at their discretion. Given the Company's assessment of the MAC’s apparent lack of familiarity with CED generally as a CMS national initiative and Aurix as a product with limited usage and history in Medicare’s databases, establishment of a consistent physician fee reflective of the underlying work performed by a treating physician when utilizing Aurix therapy has been difficult.

 

The Company’s discussions with CMS have emphasized the potential benefit to the Aurix CED program in establishing a standard national payment rate applied consistently to all physicians treating patients in the CED protocols that provides an adequate payment for the clinical assessment, treatment, time and other Relative Value Unit cost components to physicians utilizing Aurix. While the Company believes, based on recent discussions with the Division of Practitioner Services, that CMS may be willing to establish such a standard national payment rate, the Company can provide no assurances that such a rate would become effective (i) at all, or (ii) at a level high enough to provide an adequate payment for physicians, or (iii) on a timely basis so as to provide a meaningful opportunity to the Company in light of its liquidity constraints. The Company believes that any such standard national payment rate would, assuming that it is established at all, not become effective prior to July 1, 2018, and that information about such rate would not be publicly available to physicians prior to June 1, 2018. Even assuming that a standard rate becomes effective on a timely basis and provides an economically appropriate physician payment, we cannot provide any assurance that the establishment of such a standard rate would in fact have a sufficiently positive impact on patient enrollment in the CED studies.

 

The Success of Our Current and Future Products Is Dependent on Acceptance by the Medical Community, Including Satisfactory Completion of the CED Programs

 

The commercial success of our products and processes will depend upon the medical community and patients accepting the therapies as safe and effective.  With respect to Aurix, it will also depend on our success with implementing the CED program.  The Company's primary growth opportunities in the United States in the near to intermediate term include the treatment of chronic wounds with Aurix in the Medicare population under an NCD when registry data is collected under CMS' CED program.  However, implementation of CED programs in general has been slow.  The cost and complexity required to implement CED programs, including with respect to documentation requirements, as well as the unfamiliarity of many health care providers with CED, may significantly affect the willingness of health care providers to adopt or use Aurix.  See also the risk factors titled “The Lack of an Economically Appropriate Physician Fee for Aurix Treatments May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols” and “The 20% Co-Payment Required under Medicare Rules May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols. Any of this in turn could prevent the Company from increasing its revenues.

 

Based on guidance from the CMS Coverage and Analysis Group, or CAG, a CED cycle is considered complete when CMS completes a reconsideration of the existing National Coverage Determination and removes the requirement for study participation as a condition of coverage. The request for reconsideration would typically follow the same nine-month timetable as other NCD requests. We currently estimate that the three protocols can reach full enrollment during 2018 with each protocol reaching complete enrollment independently and the diabetic foot protocol likely completing enrollment first, although we can provide no assurances to this effect. Each protocol also includes the option for Nuo to perform an interim analysis based on 50% enrollment with a view towards earlier submission of study data for publication and subsequent submission to CAG for consideration.

 

Upon successful completion of the CED program, if supported by the health outcomes data generated, CMS may expand Medicare reimbursement for treatment of chronic non-healing wounds with Aurix as an autologous platelet-rich plasma product. By contrast, if the data generated show no substantial improvement in health outcomes for patients using Aurix therapy, CMS may determine not to provide unrestricted coverage for the Aurix System.

 

Furthermore, the willingness of the medical community to accept or evaluate our products and processes may be impacted by our ability to cause such information to be included in peer-reviewed literature. We may not have the resources necessary to cause such information to be included in peer-reviewed literature. If the medical community and patients do not ultimately accept the therapies as safe and effective, or we are unable to raise awareness of our products and processes, our ability to sell the products may be materially and adversely affected, and the results of our operations may be adversely affected.

 

 

Our Collaboration with Restorix May Not Be Successful

 

To advance the commercialization of Aurix for the treatment of chronic wound care in the U.S., we have a collaboration with Restorix Health, Inc., or Restorix, a leading wound care management company operating approximately 200 outpatient wound care facilities generally as a part of a broader hospital facility. The CED data registry protocols require the collection of wound healing data including Quality of Life metrics for a study population of approximately 2,200 total patients across three prospective clinical research studies. The Restorix collaboration is intended to efficiently and effectively enroll these wound care patients in a coordinated manner. Under the corresponding Collaboration Agreement, we agreed to provide Restorix with certain limited geographic exclusivity benefits over a defined period of time for the usage of the Aurix System in up to 30 of the wound care clinics with which Restorix has a management contract, in exchange for Restorix making minimum commitments of patients enrolled in the three clinical research studies primarily consisting of patient data collection necessary to maintain exclusivity under the Collaboration Agreement. See “Business – Our Business – Aurix Licensing and Collaboration Arrangements” for additional detail on the terms of the Collaboration Agreement with Restorix.

 

We may be unsuccessful in implementing the Collaboration Agreement. For example, as with all collaborations, we are dependent upon the success of the collaborator in performing its responsibilities and its continued cooperation and engagement. We cannot control the amount and timing of the resources that Restorix will devote to performing its obligations under the Collaboration Agreement. As a result, the enrollment of wound care patients in the clinical research studies may be delayed, which would negatively affect our revenues and cash flows.

 

We Have a History of Losses and Expect to Incur Losses for the Foreseeable Future 

 

We have a history of losses, are not currently profitable, and expect to incur losses and negative operating cash flows in the future. We may never generate sufficient revenues to achieve and maintain profitability. We will continue to incur expenses at current or increased levels as we seek to expand our operations, pursue development of our technologies, work to increase our sales, implement internal systems and infrastructure, and hire additional personnel. These ongoing financial losses may adversely affect our stock price.

 

We Have a Short Operating History and Limited Operating Experience

 

We have only in the past few years been implementing our commercialization strategy for Aurix. Thus, we have a very limited operating history. Continued operating losses, together with the risks associated with our ability to gain new customers for Aurix, may have a material adverse effect on our liquidity. We may also be forced to respond to unforeseen difficulties, such as decreased demand for our products and services, downward pricing trends, regulatory requirements and unanticipated market pressures. Since emerging from bankruptcy and continuing through today, we are focused on an intermediate term business model that emphasizes maintaining and addressing third-party reimbursement rates, and executing on the Restorix collaboration in order to complete the CED protocol enrollment requirements while giving consideration to developing a longer term sales and marketing program and assessing opportunities for strategic partnerships. Our current business model assumes that we will be able to raise substantial additional funds immediately and in any event may not be able to accomplish our stated goals.

 

 As a Result of Our Emergence from Bankruptcy and the Application of Fresh Start Accounting, Our Financial Statements Subsequent to May 5, 2016 Are Not Comparable in Many Respects to Our Financial Statements Prior to May 5, 2016

 

Following the consummation of the Plan of Reorganization, our financial condition and results of operations from and after the Effective Date is not comparable to the financial condition or results of operations reflected in our historical financial statements due to the Company’s application of fresh start accounting to time periods beginning on or after May 5, 2016. Fresh-start accounting requires us to adjust the assets and liabilities contained in our financial statements immediately prior to our emergence from bankruptcy protection to their estimated fair values using the acquisition method of accounting. These adjustments are material and will affect our prospective results of operations. As a result, this makes it difficult to assess our performance in relation to prior periods.

 

As a Result of the Transfer of Our Intellectual Property Rights in the Angel Product Line Pursuant to the Plan of Reorganization, Our Focus Post-Reorganization is on the Successful Execution and Completion of the Clinical Data Registry Protocols of Aurix Under the CMS CED Program and We May Not be Successful with Such Execution and Completion, or With Our Overall Sales and Marketing Strategy for Aurix

 

As a result of the assignment of our rights, title and interest in and to the Arthrex Agreement pursuant to the Plan of Reorganization, the related transfer and assignment of associated intellectual property previously owned by us and licensed under the Arthrex Agreement, as well as rights to collect royalty payments thereunder, we no longer hold any rights with respect to the Angel product line. Our corporate and strategic focus is now on the successful execution and completion of the clinical data registry protocols of Aurix under the CED program of CMS. Only upon the successful conclusion of those data collection efforts and the submission of the resulting data to CMS can broad access and expanded commercial reimbursement of Aurix be achieved. And even if we are successful with these data collection efforts and submitting the resulting data to CMS, we can provide no assurances that broad access and commercial reimbursement of Aurix will in fact be achieved.

 

 

Following the 2012 NCD determination by CMS permitting coverage of Aurix under its CED program, we have been focusing our efforts to address the Medicare beneficiary population at wound care facility sites that have traditionally not been available to us due to the previously standing non-coverage determination by CMS. The Company’s efforts in these sales channels may not be successful, and even if successful, they may not yield sufficient sales and profits to realize the Company’s goals and conform to its plans. If and to the extent CMS makes significant changes to its previously issued approval determinations or the currently approved protocols are not enrolled in a timely manner, our sales and marketing strategy may be adversely affected.

 

The Successful Continued Commercialization of Our Aurix System and of Any Future Product Candidates Will Depend on Obtaining Reimbursement from Third-Party Payors

 

In the U.S., the market for any pharmaceutical or biologic product is affected by the availability of reimbursement from third party payors, such as government health administration authorities, private health insurers, health maintenance organizations and pharmacy benefit management companies. If we cannot demonstrate favorable outcomes or a cost-benefit relationship, we may have difficulty obtaining adequate coverage or reimbursement for our products from these payors. Third-party payors may also deny coverage for any of our products if they determine that the product is experimental, unnecessary or inappropriate. Coverage and reimbursement are often determining factors in predicting a product’s success, with some physicians and patients strongly favoring only those products for which they will be reimbursed.

 

The Aurix System is marketed to healthcare providers. Some of these providers, in turn, seek reimbursement from third-party payors such as Medicare, Medicaid, and other private insurers. We may not be successful with our reimbursement strategy, including, without limitation, obtaining additional necessary CMS or other regulatory approvals. For example, CMS may determine that the evidence collected under CED is not sufficient to provide unrestricted Medicare coverage for the Aurix System and autologous Platelet Rich Plasma, or PRP, which, in turn, could have a material adverse effect on our financial condition and results of operations. If it is determined that a new randomized, controlled trial is necessary, it could cause us to incur significant incremental costs and take multiple years to complete. We would almost certainly need to obtain additional, outside financing to fund such a trial. In any case, we may never be successful in securing unrestricted Medicare coverage for our products. Failure to secure final long term Medicare coverage could negatively affect reimbursement by commercial insurance providers as they often use the existence of Medicare coverage as a significant determinant in their commercial coverage decisions.

 

A 2012 NCD from CMS reversed an existing twenty year non-coverage decision for autologous blood derived products used in wound care; this NCD allows for Medicare coverage under the CED program. The most significant near term growth opportunity for Aurix are the clinical trials being conducted under this CED program. CMS previously advised us that payment levels for reimbursement claims with respect to Aurix would be reviewed annually and subject to change. Any decision by CMS to decrease payment rates for reimbursement claims will negatively impact the Company's economic value proposition for Aurix in the market for advanced wound care therapies, and could have material adverse effects on the Company’s financial position and results of operations. For example, CMS could decide to place Aurix at a different payment classification level (it is currently placed at Ambulatory Payment Classification, or APC, 5054 (Level 4 Skin Procedures)), could decide that the geometric mean cost of the services underlying Aurix is no longer comparable to the geometric mean cost of APC 5054, or could otherwise determine that the national average reimbursement rate for Aurix treatments should be lower than the current $1,568 per treatment. The national average reimbursement rate for calendar years 2016 -2018 is significantly higher than it was in calendar years 2015 or 2014 ($430 and $411, respectively). In addition, as described in the risk factor titled “The Lack of an Economically Appropriate Physician Fee for Aurix Treatments May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols”, the 2012 NCD does not apply to physician fees, and as described in the risk factor titled "The 20% Co-Payment Required under Medicare Rules May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols", the 2012 NCD does not apply to the 20% co-payment required under Medicare rules.

 

Should we seek to expand our commercialization internationally, we would be subject to international regulations, where the pricing of prescription pharmaceutical products and services and the level of government reimbursement may be subject to governmental control. In some countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct one or more clinical trials that compare the cost effectiveness of our product candidates or products to other available therapies. Conducting one or more of these clinical trials would be expensive and result in delays in commercialization of our products.

 

Managing and reducing healthcare costs has become a major priority of federal and state governments in the U.S. As a result of healthcare reform efforts, we might become subject to future regulations or other cost-control initiatives that materially restrict the price we can receive for our products. Third-party payors may also limit access and reimbursement for newly approved healthcare products generally or limit the indications for which they will reimburse providers or suppliers who use any products that we may develop. Cost control initiatives could decrease the price for products that we may develop, which would result in lower product revenues to us.

 

 

Our Recent Reduction in Staff May Affect our Ability to Conduct our Operations and Other Functions Effectively

 

Our future success depends on our ability to attract, retain and motivate highly skilled management, scientific and sales personnel.

 

As part of our cost containment efforts, we have recently reduced staff significantly, from 15 full-time employees at December 31, 2017 to 8 full-time employees as of April 12, 2018.

 

Our ability to maintain and provide services to our customers and our ability to provide the necessary support as part of our collaboration with Restorix depends upon our ability to hire and retain business development and scientific and technical personnel with the skills necessary to keep pace with continuing changes in regenerative biological therapy technologies. Our current liquidity situation makes it unlikely that we will be able to hire additional personnel in the immediate future. Even assuming that we can resolve our immediate liquidity concerns, competition for such personnel is intense; we compete with pharmaceutical, biotechnology and healthcare companies with greater access to resources. Our inability to hire qualified personnel may lead to higher recruiting, relocation and compensation costs for such personnel. These increased costs may make hiring new key personnel impractical.

 

In addition, our controller has recently departed the Company, and our reporting obligations as a public company, as well as our need to comply with the requirements of the Sarbanes-Oxley Act of 2002, and the rules and regulations of the SEC, will continue to place significant demands on us.  If we are unable to replace our controller and/or add financial and accounting staff in order to fulfill our reporting responsibilities, we may be unable to meet those responsibilities.

 

The 20% Co-Payment Required under Medicare Rules May Continue to Present an Obstacle to Adequate Levels of Patient Enrollment in the CED Protocols 

 

Under standard Medicare payment rules, Medicare beneficiaries are responsible for a 20% Part B co-payment with respect to the cost of their Aurix treatment.   Providers generally collect this 20% co-payment from the patient or their secondary insurer and are reluctant to reduce or waive this co-payment due to financial concerns and because waivers of co-payments that are not properly substantiated may violate federal laws, including the federal anti-kickback statute, and result in penalties for improper beneficiary inducements.  However, without such waivers, patients who are not otherwise insured and/or who are financially ill-equipped to make the co-payment are often unlikely to participate in the Aurix CED program.   Based on data collected thus far under the Company's CED program, patient enrollment in CED protocols in certain Restorix hospital outpatient wound care center sites continues to be adversely impacted by this situation. As a result, the Company, in conjunction with a healthcare facility participating in the Company's CED trials, petitioned the DHHS Office of Inspector General, or OIG, to issue an advisory opinion that if the facility treating Medicare beneficiaries enrolled in one of the CED study protocols reduced or waived any required co-payments based on an individualized assessment of financial ability, the facility would not be subject to civil or administrative penalties under the Social Security Act and regulations. On June 29, 2017, the OIG issued the requested advisory opinion. Although the advisory opinion may provide guidance to healthcare providers other than the facility that submitted the petition, as a legal matter, the opinion only applies to the parties that requested it.  In addition, the opinion assumes that the facility would follow specified procedures in conducting its individualized assessment of financial need. We therefore cannot provide any assurances that other healthcare providers will in fact reduce or waive the 20% co-payment on the basis of this advisory opinion.  

 

Our Intellectual Property Assets Are Critical to Our Success

 

We regard our patents, trademarks, trade secrets and other intellectual property assets as critical to our success. We rely on a combination of patents, trademarks, and trade secret and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect our intellectual property. The currently marketed Aurix System is covered by patents that expire in 2019. We attempt to prevent disclosure of our trade secrets by restricting access to sensitive information and requiring employees, consultants, and other persons with access to our sensitive information to sign confidentiality agreements. Despite these efforts, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology in the future. Furthermore, policing the unauthorized use of our intellectual property assets is difficult and expensive. Litigation has been necessary in the past and may be necessary in the future in order to protect our intellectual property assets. Litigation could result in substantial costs and diversion of resources. We can provide no assurance that we will be successful in any litigation matter relating to our intellectual property assets. Continuing litigation or other challenges could result in one or more of our patents being declared invalid. In such a case, any royalty revenues from the affected patents would be adversely affected although we may still be able to continue to develop and market our products. Furthermore, the unauthorized use of our patented technology by otherwise potential customers in our target markets may significantly undermine our ability to generate sales. Any infringement or challenge to our patents or other misappropriation of our intellectual property assets could have a material adverse effect on our ability to increase sales of our commercial products and/or continue the development of our pipeline candidates.

 

We Rely on a Single Supplier for the Reagent Used for Aurix and an Interruption in Our Supply Chain Could Have a Material Adverse Effect on Our Business

 

A reagent used for our Aurix product, bovine thrombin (Thrombin JMI), is available exclusively through Pfizer. Pfizer may unilaterally raise the prices for the reagent. If a temporary or permanent interruption in the supply of the reagent were to occur, or the manufacturing costs charged by Pfizer exceed what we can reasonably afford, it would have a material adverse effect on our business.

 

 

Adverse Conditions in the Global Economy and Disruption of Financial Markets May Significantly Restrict Our Ability to Generate Revenues or Obtain Debt or Equity Financing

 

The global economy continues to experience volatility and uncertainty. Such conditions could reduce demand for our products which would significantly jeopardize our ability to achieve meaningful market penetration for Aurix. These conditions could also affect our current and potential strategic partners, which, in turn, could make it much more difficult to execute a strategic collaboration, and therefore significantly jeopardize our ability to fully develop and commercialize our products and product candidates. Global credit and capital markets continue to be relatively challenging. We were unsuccessful in our attempt to complete a public offering of our common stock and related refinancing of our Series A Preferred Stock in 2017 and may continue to be unable to obtain capital through issuance of our equity and/or equity-linked securities. If we are unable to secure funding through strategic collaborations, equity investments, or debt financing, we may not be able to achieve profitability, or fund our research and development, which may result in a cessation of our operations.

 

Business credit and liquidity have tightened in much of the world. Continuing geopolitical instability and volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume. General concerns about the fundamental soundness of domestic and international economies may also cause customers to reduce purchases. Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective. Economic conditions and market turbulence may also impact our suppliers’ ability to supply sufficient quantities of product components in a timely manner, which could impair our ability to fulfill sales orders. It is difficult to determine the extent of the economic and financial market problems and the many ways in which they may affect our suppliers, customers, investors, and business in general. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm sales, profitability and results of operations.

 

Our Products Are Subject to Governmental Regulation

 

Our success is also impacted by factors outside of our control. Our current technology and products are subject to extensive regulation by numerous governmental authorities in the U.S., both federal and state, and in foreign countries by various regulatory agencies. Specifically, our devices and bio-pharmaceutical products are subject to regulation by the U.S. Food and Drug Administration, or FDA, and state regulatory agencies. The FDA regulates drugs, medical devices, and biologics that move in interstate commerce and requires that such products receive clearance or pre-marketing approval based on evidence of safety and efficacy. The regulations of government health ministries in foreign countries are analogous to those of the FDA in both application and scope. In addition, any change in current regulatory interpretations by, or positions of, state regulatory officials where our products are used could materially and adversely affect our ability to sell products in those states. The FDA will require us to obtain clearance or approval of new or modified devices when used for treating specific wounds or marketed with specific wound-healing claims, or for other products under development.

 

We believe all our products for sale are legally marketed. As we expand and offer and/or develop additional products in the U.S. and in foreign countries, clearance or approval from the FDA and comparable foreign regulatory authorities prior to introduction of any such products into the market may be required. We provide no assurance that we will be able to obtain all necessary approvals from the FDA or comparable regulatory authorities in foreign countries for these products. Failure to obtain the required approvals would have a material adverse impact on our business and financial condition.

 

Compliance with FDA and other governmental requirements imposes significant costs and expenses. Further, our failure to comply with these requirements could result in sanctions, limitations on promotional or other business activities, or other adverse effects on our business. Further, recent efforts to control healthcare costs could negatively affect demand for our products and services.

 

We Must Comply With the Physician Payment Sunshine Act

 

We are required to comply with the United States Physician Payment Sunshine Act, which requires certain manufacturers of drugs, medical devices, biologicals and medical supplies that participate in U.S. federal healthcare programs to report certain payments and items of value given to physicians and teaching hospitals. Manufacturers are required to report this information annually to CMS. The period between August 1, 2013 and December 31, 2013 was the first reporting period for which manufacturers were required to report aggregate payment data to CMS by March 31, 2014. Manufacturers are required to report aggregate payment data to CMS by the 90th day of each subsequent calendar year. We cannot assure you that we will collect and report all data timely and accurately. If we fail to accurately and timely report this information, we could suffer severe penalties. While we timely filed our required report under the Sunshine Act for the years 2014 through 2017 we did not timely file our required report for the initial period, and our failure to do so could subject us to certain fines and penalties as set forth below.

 

 

Any applicable manufacturer that fails to timely, accurately, or completely report the information required in accordance with the rules of the Sunshine Act is subject to a civil monetary penalty of not less than $1,000, but not more than $10,000, for each payment or other transfer of value or ownership or investment interest not reported timely, accurately or completely (up to $150,000). For “knowing” failures to report, the penalties increase to not less than $10,000, but not more than $100,000, for each such failure (up to $1,000,000). The amount of civil monetary penalties imposed on each applicable manufacturer or applicable group purchasing organization is aggregated separately. Subject to separate aggregate totals, the maximum combined annual total is $1,150,000. 

  

Several of the U.S. states have parallel reporting laws, sometimes accompanied with “gift bans” prohibiting manufacturers from making gifts or other remunerations to prescribers. Massachusetts and Vermont are two such states. There are various penalties associated with noncompliance with the state laws, as well.

 

Clinical Trials May Fail to Demonstrate the Safety or Efficacy of Our Product Candidates

 

Our product candidates are subject to the risks of failure inherent in the development of biotherapeutic products. The results of early-stage clinical trials do not necessarily predict the results of later-stage clinical trials. Product candidates in later-stage clinical trials may fail to demonstrate desired safety and efficacy traits despite having successfully progressed through initial clinical testing. For example, we discontinued further funding of the ALD-401 development program following results that demonstrated that observed improvements in the primary endpoint of the trial were not clinically or statistically significant. Even if we believe the data collected from clinical trials of our product candidates is promising, this data may not be sufficient to support approval by the U.S. or foreign regulatory agencies. Pre-clinical and clinical data can be interpreted in different ways. Accordingly, the regulatory officials could reach different conclusions in assessing such data, which could delay, limit or prevent regulatory approval. In addition, the U.S. regulatory authorities, or we, may suspend or terminate clinical trials at any time. Any failure or delay in completing clinical trials for product candidates, or in receiving regulatory approval for the sale of any product candidates, has the potential to materially harm our business, and may prevent it from raising necessary, additional financing that may be needed in the future.

 

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.

 

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including the following:

 

 

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

 

clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs that we expect to be promising;

 

 

the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

 

our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner or at all;

 

 

we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;

 

 

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

 

the cost of clinical trials of our product candidates may be greater than we anticipate;

  

 

we may be subject to a more complex regulatory process, since stem cell-based therapies are relatively new and regulatory agencies have less experience with them than with traditional pharmaceutical products;

 

 

the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

 

 

our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to halt or terminate the trials.

 

 

A Disruption in Healthcare Provider Networks Could Have an Adverse Effect on Operations and Profitability

 

Our operations and future profitability are dependent, in large part, upon the ability to contract with healthcare providers on favorable terms. In any particular service area, healthcare providers could refuse to contract with us or take other actions that could result in higher healthcare costs, or create difficulties in meeting our regulatory requirements. In some service areas, certain healthcare providers may have a significant market presence. If healthcare providers refuse to contract with us, use their market position to negotiate unfavorable contracts or place us at a competitive disadvantage, our ability to market services or to be profitable in those service areas could be adversely affected. Provider networks could also be disrupted by the financial insolvency of a large healthcare provider group. Any disruption in provider networks could adversely impact our business, results of operations and financial condition.

 

Liquidity Problems or Bankruptcy of our Key Customers or Collaborators Could Have a Significant Adverse Effect on our Business, Financial Condition and Results of Operations

 

Our sales to customers are typically made on credit without collateral. There is a risk that key customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers, weak sales or other factors beyond our control, which could increase our exposure to losses from bad debts. In addition, if our key customers were to cease doing business as a result of bankruptcy or significantly reduce their orders from us, it could have a significant adverse effect on our business, financial condition, and results of operations. In addition, if our collaborators face liquidity problems or file for bankruptcy, they may choose to divert resources away from their continued cooperation and engagement with us or otherwise choose or be forced to reduce operations, which could also have a significant adverse effect on our business, financial condition, and results of operation.

 

We May Be Unable to Attract a Strategic Partner for the Further Development of Product Candidates

 

Even if positive clinical data is eventually achieved in any future clinical trials, we may not be able to enter into strategic partnerships, out-licensing, or other similar arrangements that we may consider necessary or appropriate to commercialize product candidates successfully, or even have the resources necessary to seek such arrangements. Furthermore, even if such a strategic relationship regarding any of our products or product candidates is reached, development milestones, clinical data, or other such benchmarks may not be achieved. Therefore, our products and product candidates may never proceed toward commercialization or drive cash infusions for us, and we may ultimately not be able to monetize the patents, existing clinical data, and other intellectual property.

 

Our Efforts to Secure Commercial Partners May Not Be Successful

 

From time to time, we engage in discussions with larger companies regarding potential strategic partnerships involving the broad commercialization of Aurix. The resources and expertise of such a partner would greatly facilitate the capture of market share within the wound care market, but would require that the economic benefits of such a broad penetration would be shared with said partner. We may not be successful in securing such a partner. Furthermore, even if a partner is secured, the partnership may not attain the market penetration contemplated, and the profits ultimately realized by us, if any, may not be sufficient to allow us to execute our business strategy.

 

We May Use Third-Party Collaborators and Service Providers to Help Us Support, Develop or Commercialize Our Product Candidates, and Our Ability to Commercialize Such Candidates May Be Impaired or Delayed if such Collaborations or Engagements Are Unsuccessful

 

We do presently and may in the future selectively pursue strategic collaborations or engagements for, among other purposes, development, data collection, analysis, and/or commercialization of our product candidates, domestically or otherwise, such as our arrangements with Restorix, Rohto and Boyalife. There can be no assurance as to our ability to utilize the data from such engagements to their potential. Nor can there be any assurance, in general, that we will be able to identify future suitable collaborators or negotiate collaboration agreements on terms that are acceptable to us or at all. In any current or future third-party collaborations, we are and would be dependent upon the success of the collaborators in performing their responsibilities and their continued cooperation and engagement. For a variety of reasons outside of our control, our collaborators or third-party providers may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities under our agreements with them. Our collaborators may choose to pursue alternative technologies in preference to those being developed in collaboration with us. The development and commercialization of our product candidates will be delayed if collaborators fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their collaboration agreements with us. Disputes with our collaborators could also result in product development delays, decreased revenues and litigation expenses.

 

 

Legislative and Administrative Action May Have an Adverse Effect on Our Company

 

Political, economic and regulatory influences are subjecting the health care industry in the U.S. to fundamental change. We cannot predict what other legislation relating to our business or to the health care industry may be enacted, including legislation relating to third-party reimbursement, or what effect such legislation may have on our business, prospects, operating results and financial condition. We expect federal and state legislators to continue to review and assess alternative health care delivery and payment systems, and possibly adopt legislation affecting further changes in the health care delivery system. Such laws may contain provisions that may change the operating environment for hospitals and managed care organizations. Health care industry participants may react to such legislation by curtailing or deferring expenditures and initiatives, including those relating to our products. Future legislation could result in modifications to the existing public and private health care insurance systems that would have a material adverse effect on the reimbursement policies discussed above. With growing pressures on government budgets due to the current economic downturn, government efforts to contain or reduce health care spending in some way or another are likely to continue. While members of the current administration and of the Republican majority in Congress have expressed a strong desire to repeal and/or replace the Patient Protection and Affordable Care Act, colloquially called Obamacare, the scope and timing of any such repeal and/or replacement is highly uncertain. If enacted and implemented, any measures to restrict health care spending could result in decreased revenue from our products and decrease potential returns from our research and development initiatives. Furthermore, we may not be able to successfully neutralize any lobbying efforts against any initiatives we may have with governmental agencies. In addition to legislative initiatives, we may be subject to changes in current regulations and policies affecting coverage and reimbursement for our products. Administrative agencies such as the Centers for Medicare and Medicaid Services have broad discretion to adopt or modify polices through rulemaking, and adoption of rules that curtail access to our products or limit reimbursement could have a material adverse effect on the adoption of our products by health care providers, which would have a material adverse effect on our business.

 

We Could Be Affected by Malpractice or Product Liability Claims

 

Providing medical care entails an inherent risk of professional malpractice and other claims. We do not control or direct the practice of medicine by physicians or health care providers who use our products and do not assume responsibility for compliance with regulatory and other requirements directly applicable to physicians. There is no assurance that claims, suits or complaints relating to the use of our products, and treatment administered by physicians, will not be asserted against us in the future. The production, marketing and sale, and use of our products entails risks that product liability claims will be asserted against us. These risks cannot be eliminated, and we could be held liable for any damages that result from adverse reactions or infectious disease transmission. Such liability could materially and adversely affect our business, prospects, operating results and financial condition. We currently maintain professional and product liability insurance coverage, but the coverage limits of this insurance may not be adequate to protect against all potential claims. We may not be able to obtain or maintain professional and product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities.

 

Our Products Have Existing Competition in the Marketplace and We May Not Be Able to Compete Effectively.

 

In the market for biotechnology products, we face competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors. The chronic wound market has many therapies that compete with Aurix that have established habitual use patterns and provider contracts to encourage standardized use.  Furthermore, other companies have developed or are developing products that could be in direct future competition with our current product line. Biotechnology development projects are characterized by intense competition. Thus, we may not be the first to the market with any newly developed products and we may not successfully be able to market these products. If we are not able to participate and compete in the regenerative biological therapy market, our financial condition will be materially and adversely affected. We may not be able to compete effectively against such companies in the future. Many of these companies have substantially greater capital resources, larger marketing staffs and more experience in commercializing products than we do. Recently developed technologies, or technologies that may be developed in the future, may be the basis for developments that will compete with our products.

 

We Have Only Limited Experience Manufacturing Product Candidates. We May Not Be Able to Manufacture Product Candidates in Compliance With Evolving Regulatory Standards or in Quantities Sufficient for Commercial Sale.

 

Components of therapeutic products approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP as required by the FDA. Manufacturers of cell-based product candidates also must comply with the FDA’s current good tissue practices, or cGTP. In addition, we may be required to modify our manufacturing process from time-to-time for our product candidates in response to FDA requests if we, in fact, reinitiate cell processing and manufacturing activities in the future. Manufacture of live cellular-based products is complex and subjects us to significant regulatory burdens that may change over time. Regulatory agencies such as the FDA regularly inspect our manufacturing facilities as well as those of our third-party suppliers, and may issue FDA Forms 483 “Inspectional Observations” in connection with those inspections from time to time.  If the FDA’s inspections uncover significant violations of the Food, Drug, and Cosmetic Act and/or related acts, and the violations are not appropriately remedied within the time periods requested by the FDA, the FDA may take regulatory action against us, including the imposition of civil or criminal monetary sanctions or penalties, product recalls or seizure, injunctions, total or partial suspension of production and/or distribution, and suspension or withdrawal of regulatory approvals.

 

 

We may encounter difficulties in the production of our product candidates due to our limited manufacturing capabilities. We have only limited manufacturing experience with previous product candidates, and we currently do not have sufficient manufacturing capacity to support commercialization. These difficulties could reduce sales of our products, if they are approved for marketing, increase our costs or cause production delays, any of which could damage our reputation and hurt our profitability.

 

If we successfully obtain marketing approval for any product candidates, we may not be able to efficiently produce sufficient quantities of these products to meet potential commercial demand. We expect that we would need to significantly expand our manufacturing capabilities to meet potential demand for these products. Such expansion would require additional regulatory approvals. We may also encounter difficulties in the commercial-scale manufacture of our product candidates. Improving the speed and efficiency of our manufacturing process and the cell sorters and other instruments we use will be key to our success. However, we may not be able to develop process enhancements on a timely basis, on commercially reasonable terms, or at all. If we fail to develop these improvements, we could face significantly higher capital expenditures than we anticipate, increased facility and personnel costs and other increased operating expenses. We may need to demonstrate that our product candidates manufactured using any new processes or instruments are comparable to our product candidates used in clinical trials. Depending on the type and degree of differences, we may be required to conduct additional studies or clinical trials to demonstrate comparability.

 

In addition, some changes in our manufacturing processes or procedures, including a change in the location where a product candidate is manufactured, generally require prior FDA or foreign regulatory authority review and approval for determining our compliance with cGMP and cGTP. We may need to conduct additional preclinical studies and clinical trials to support approval of any such changes. Furthermore, this review process could be costly and time-consuming and could delay or prevent the commercialization of our product candidates.

 

If Our Patent Position Does Not Adequately Protect Our Product Candidates or Any Future Products, Others Could Compete Against Us More Directly, Which Would Harm Our Business

 

Our success depends, in large part, on our ability to obtain and maintain patent protection for our product candidates. Issued patents may be challenged by third parties, resulting in patents being deemed invalid, unenforceable or narrowed in scope, or a third party may circumvent any such issued patents. The patent position of biotechnology companies is generally highly uncertain, involves complex legal and factual questions and has been the subject of much litigation and recent court decisions introducing uncertainty in the strength of patents owned by biotechnology companies. The legal systems of some foreign countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. Therefore, any patents that we own or license may not provide sufficient protection against competitors.

 

The claims of the issued patents that are licensed to us, and the claims of any patents which may issue in the future and be owned by or licensed to us, may not confer on us significant commercial protection against competing products. Also, our pending patent applications may not issue, and we may not receive any additional patents. Our patents might not contain claims that are sufficiently broad to prevent others from utilizing our technologies. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property. To the extent a competitor can develop similar products using a different chemistry, our patents may not prevent others from directly competing with us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, a patent having claims that encompass one or more product candidates may expire or remain in force for only a short period following commercialization of the product candidates, thereby reducing any advantages of the patent. For instance, three of our U.S. patents relating to our technology will expire in 2019. To the extent our product candidates based on that technology are not commercialized significantly ahead of this date, or to the extent we have no other patent protection on such product candidates, those product candidates would not be protected by patents beyond 2019 and we would then rely solely on other forms of exclusivity, such as regulatory exclusivity provided by the Federal Food, Drug and Cosmetic Act, which may provide less protection of our competitive position. Similar considerations apply in any other country where we are prosecuting patents, have been issued patents, or have licensed patents or patent applications relating to our technology.

 

If We Are Unable to Protect the Confidentiality of Our Proprietary Information and Know-how, Our Competitive Position Would be Impaired

 

A significant amount of our technology, especially regarding manufacturing processes, is unpatented and is maintained by us as trade secrets. The background technologies used in the development of our product candidates are known in the scientific community, and it is possible to duplicate the methods we use to create our product candidates. In an effort to protect these trade secrets, we require our employees, consultants and contractors to execute confidentiality agreements with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. The disclosure of our trade secrets would impair our competitive position.

 

 

If We Infringe, or Are Alleged to Infringe, Intellectual Property Rights of Third Parties, Our Business Could be Harmed

 

Our research, development and commercialization activities, including any product candidates resulting from these activities, may infringe, or be claimed to infringe, patents or other proprietary rights owned by third parties, and to which we do not hold licenses or other rights. There may be patent applications owned by third parties that have been filed but not published that, when issued, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages.

 

Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. We have not conducted an exhaustive search or analysis of third-party patent rights to determine whether our research, development or commercialization activities, including any product candidates resulting from these activities, may infringe or be alleged to infringe any third-party patent rights. As a result of intellectual property infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the licensee would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property.

 

Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. All of the issues described above could also affect our potential collaborators to the extent we have any collaborations then in place, which would also affect the success of the collaboration and therefore us. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including inter partes review and/or interference proceedings declared by the U. S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our product candidates and technology.

 

Our Business May Be Adversely Impacted by Cyber-Security Attacks

 

Disruption in our computer systems could adversely affect our business. We rely on computer systems to process transactions, communicate with customers, manage our business, and process and maintain information. We have measures in places to monitor and protect our computer systems, but these measures might not be sufficient protection from unpredicted events. Cyber-security attacks are evolving and disruptions can be caused by a variety of events, such as viruses, malicious malware, unauthorized access attempts to data, or other types of cyber-security attacks. Such events could produce disruptions that result in an unexpected delay in operations, loss of confidential or otherwise protected information, corruption of data, and expenses related to the repair or replacement of our computer systems. Compromising and/or loss of information could result in loss of sales or legal or regulatory claims which could adversely affect our revenues and profits or damage our reputation.

 

Any Product for Which We Obtain Marketing Approval Will Be Subject to Extensive Ongoing Regulatory Requirements, and We May Be Subject to Penalties if We Fail to Comply with Regulatory Requirements or if We Experience Unanticipated Problems with Our Products, When and if Any of Them Are Approved

 

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising, and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP and cGTP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements relating to product labeling, advertising and promotion, and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to additional limitations on the indicated uses for which the product may be marketed or to other conditions of approval. In addition, approval may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

 

restrictions on such products’ manufacturing processes;

 

restrictions on the marketing of a product;

 

restrictions on product distribution;

 

requirements to conduct post-marketing clinical trials;

 

 

warning letters;

 

withdrawal of the products from the market;

 

refusal to approve pending applications or supplements to approved applications that we submit;

 

recall of products;

 

fines, restitution or disgorgement of profits or revenue;

 

suspension or withdrawal of regulatory approvals;

 

refusal to permit the import or export of our products;

 

product seizure;

 

injunctions; or

 

imposition of civil or criminal penalties.

 

Failure to Obtain Regulatory Approval in International Jurisdictions Would Prevent Us from Marketing Products Abroad

 

We may in the future seek to market some of our product candidates outside the U.S. In order to market our product candidates in the European Union and many other jurisdictions, we must submit clinical data concerning our product candidates and obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval from foreign regulators may be longer than the time required to obtain FDA approval. The regulatory approval process outside the U.S. may include all of the risks associated with obtaining FDA approval. In addition, in many countries outside the U.S., it is required that the product candidate be approved for reimbursement before it can be approved for sale in that country. In some cases this may include approval of the price we intend to charge for our product, if approved. We may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, or at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the U.S. does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA, but a failure or delay in obtaining regulatory approval in one country may negatively affect the regulatory process in other countries. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize any products in any market and therefore may not be able to generate sufficient revenues to support our business.

 

Risks Related to the Common Stock

 

Our Common Stock is Currently Quoted on an Over-the-Counter Market, Which Affects the Liquidity of Our Common Stock.

 

Quotation of the common stock commenced on OTCQB on January 20, 2017 under the trading symbol “AURX” and was moved to OTCQX as of March 16, 2017. On March 6, 2017, the shares of common stock became eligible for Deposit/Withdrawal At Custodian, or DWAC, distribution through The Depository Trust Company, or DTC. DWAC transfer allows brokers and custodial banks to make electronic book-entry deposits and withdrawals of shares of common stock into and out of their DTC book-entry accounts using a “Fast Automated Securities Transfer”, or FAST, service.   Trading in our common stock has been very limited and we cannot make any assurances that the trading volume will increase, or, if and when it increases, that it will be sustained at any level.  Over-the-counter markets are generally considered to be less efficient than, and not as broad as, a stock exchange.   

 

Our share price could decrease as a result of this limited liquidity or otherwise, and our share price is likely to be highly volatile.  Specifically, stockholders may have difficulties reselling significant numbers of shares of common stock at any particular time, and may not be able to resell their shares of common stock at or above the price paid for such shares.  As a result, stockholders may be required to hold shares of common stock for an indefinite period of time.  In addition, sales of substantial amounts of common stock could lower the prevailing market price of our common stock.

 

Furthermore, our ability to raise additional capital may be impaired because of the less liquid nature of the over-the-counter markets. We may not be able to complete an equity financing on acceptable terms, or at all. In that context, investors should consider that not having the common stock listed on a national securities exchange makes us ineligible to use shorter and less costly filings, such as Form S-3, to register our securities for sale. While we may use Form S-1 to register a sale of our stock to raise capital or complete acquisitions, doing so would cause us to incur higher transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.  In addition, if we are able to complete equity financings, the dilution from any equity financing while our shares are quoted on an over-the-counter market could be greater than if we were to complete a financing while our common stock were listed on a national securities exchange.  

 

 

In recent years the stock market in general, and the market for life sciences companies in particular, have experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and it may adversely affect the price of our common stock. These broad market fluctuations may reduce the demand for our stock and therefore adversely affect the price of our securities, regardless of operating performance. See also “- U.S. Broker-Dealers May Be Discouraged from Effecting Transactions in Shares of our common stock.”

 

Finally, if we cease to qualify for quotation on OTCQB or OTCQX, our common stock may be forced to trade on the “pink sheets,” and the market for resale of our common stock would be extremely limited. In that case, holders of our common stock may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock may decline as a result.

  

The Rights of the Holders of our Common Stock and the Value of our Common Stock are Severely Limited by the Liquidation Preference and Other Terms of our Series A Preferred Stock

 

On the Effective Date, the Company filed a Certificate of Designation with the Delaware Secretary of State, designating 29,038 shares of the Company’s undesignated preferred stock, par value $0.0001 per share, as Series A Preferred Stock. On the Effective Date, the Company issued 29,038 shares of Series A Preferred Stock to Deerfield in accordance with the Plan of Reorganization.

 

The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of common stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction.

 

In addition, the rights of our holders of common stock with respect to their common stock are limited by and subject to the terms of the Series A Preferred Stock with respect to dividends, voting rights, election of directors, and the right to approve certain material transactions, among other things.

 

For so long as Series A Preferred Stock is outstanding, holders of two-thirds of the shares of Series A Preferred Stock must approve a change in the number of our directors (currently five) and the holders of Series A Preferred Stock have the right to nominate and elect one member of our Board of Directors. Lawrence S. Atinsky serves as the director designee of the holders of Series A Preferred Stock, which are all currently affiliates of Deerfield Management Company, L.P., of which Mr. Atinsky is a Partner.

 

With respect to all other matters on which holders of common stock may vote, the Series A Preferred Stock also have voting rights, voting with the common stock as a single class, with each share of Series A Preferred Stock having the right to five votes, currently representing approximately one percent (1%) of the voting rights of the capital stock of the Company.

 

Furthermore, holders of two-thirds of our outstanding shares of Series A Preferred Stock have the right to approve certain transactions, including transactions to:

 

amend, modify, or repeal any provision of the Certificate of Designation for our Series A Preferred Stock or the Bylaws in a manner that adversely affect the preferences, rights or powers of, or any restrictions provided for the benefit of, the Series A Preferred Stock,

 

issue securities that are senior to or pari passu with the Series A Preferred Stock,

 

incur debt (other than for working capital purposes not in excess of $3.0 million),

 

issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences,

 

pay dividends on or purchase shares of its capital stock (with certain exceptions),

 

change the authorized number of members of its Board of Directors to a number other than five, or

 

consummate or consent to any liquidation in which the holders of Series A Preferred Stock do not receive in cash at the closing of any such event or occurrence the Series A liquidation preference for each outstanding share of Series A Preferred Stock.

 

If It Is Determined That We Were Required to File a Consent Solicitation Statement on Schedule 14A In Connection With the Approval of our 2016 Omnibus Incentive Compensation Plan, We Could Be Subject to Penalties, Fines or Damages.

 

On November 23, 2016, we filed an Information Statement on Schedule 14C with the SEC to inform the Company’s stockholders that a written consent had been executed by stockholders holding a majority of the shares of voting stock of the Company, which approved the Company’s 2016 Omnibus Incentive Compensation Plan, as amended. The stockholders that signed the written consent were officers and directors of the Company and a small number of stockholders that participated in the private placement effected in connection with our Plan of Reorganization. Although we provided the Information Statement to the limited number of stockholders from whom we solicited consents at the time of such solicitation, we did not file a Consent Solicitation Statement on Schedule 14A. If it is determined that such filing was required under Regulation 14A, we could be subject to penalties, fines or damages.

 

 

As Long As We Are Not Listed on an Exchange or Nasdaq, U.S. Broker-Dealers May Be Discouraged from Effecting Transactions in Shares of our Common Stock

 

The SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving our shares of common stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share, subject to certain exclusions. As long as we are not listed on a securities exchange or Nasdaq, our shares of common stock constitute “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers in connection with effecting transactions in “penny stocks” may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.

 

A U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth, excluding the value of the primary residence, in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared in accordance with SEC standards relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Furthermore, transfers of our common stock may require broker-dealers to submit notice filings and pay fees in certain states, which may discourage broker-dealers from effecting transactions in our common stock.

 

You should also be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses.

 

Our Officers, Directors and Principal Stockholders Can Exert Significant Influence Over Us and May Make Decisions That Are Not in the Best Interests of All Stockholders

  

As of April 12, 2018, our officers and directors beneficially owned approximately 20.8% of our shares of common stock, while principal stockholders Charles E. Sheedy and Boyalife Investment Fund I, Inc. together beneficially owned an additional approximately 65.2% of our shares of common stock. For these purposes, beneficial ownership was calculated to include all shares of common stock issuable upon the exercise of options or warrants exercisable as of the date above, or exercisable within 60 days after such date. In addition, the holders of Series A Preferred Stock have the right to nominate and elect one member of our Board of Directors. The Series A Preferred Stock have voting rights, voting with the common stock as a single class, with each share of Series A Preferred Stock having the right to five votes, currently representing approximately one percent (1%) of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock have the right to approve certain transactions and incurrences of debt.

  

 

As a result, our officers, directors, principal holders of common stock and holders of Series A Preferred Stock are able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. This concentration of ownership of our common stock and our Series A Preferred Stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock, if and when it commences trading. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.

 

Transactions Engaged in by Our Largest Stockholders, Our Directors or Officers Involving Our Common Stock May Have an Adverse Effect on the Price of Our Common Stock

 

Sales of our common stock by our officers, directors and principal stockholders could have the effect of lowering our stock price. In connection with the Recapitalization Transaction, we agreed to file a registration statement covering the resale of securities issued in that transaction. The perceived risk associated with the possible sale of a large number of shares of common stock by those stockholders could cause some of our stockholders to sell their stock, thus causing the price of our common stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of common stock by our largest stockholders, directors or officers could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline.

 

From time to time our largest stockholders, directors and executive officers may sell shares of our common stock on the open market. These sales will be publicly disclosed in filings made with the SEC. In the future, our largest stockholders, directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business. Our stockholders may perceive these sales as a reflection on management’s view of the business, which may result in some stockholders selling their shares of our common stock. These sales could cause the price of our stock to drop.

 

Volatility of Our Stock Price Could Adversely Affect Current and Future Stockholders

 

The market price of our common stock is likely to fluctuate widely in response to various factors which are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors that could cause the market price to fluctuate substantially include, among others:

 

our ability or inability to execute our business plan;

 

the dilutive effect or perceived dilutive effect of additional equity financings;

 

investor perception of our company and of the industry;

 

the success of competitive products or technologies;

 

regulatory developments in the U.S. or overseas;

 

developments or disputes concerning patents or other proprietary rights;

 

the recruitment or departure of key personnel; or

 

general economic, political and market conditions.

 

The stock market in general has recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility could be worse if the trading volume of our common stock is low.

 

The Exercise of Warrants or Options Will Likely Cause Substantial Dilution to Our Existing Stockholders

 

In the Recapitalization Transaction, we issued warrants, or 2016 Warrants, to purchase 6,180,000 shares of common stock to certain of the selling stockholders. The 2016 Warrants terminate on May 5, 2021 and are exercisable at prices ranging from $0.50 per share to $0.75 per share. The exercise of these warrants may cause substantial dilution to our existing stockholders and affect the market price of the common stock.

 

 

In addition, our Board of Directors has granted options to purchase shares of common stock to certain of our employees and directors under our 2016 Omnibus Incentive Compensation Plan, as amended and restated, or the Omnibus Plan, of which 861,250 remained outstanding as of December 31, 2017. The exercise of these options may also cause dilution to our existing stockholders and affect the market price of the common stock.

  

We May Likely Issue Additional Equity or Debt Securities Which Will Likely Dilute and May Materially and Adversely Affect the Price of Our Common Stock

 

Additional issuances of our common stock or other equity or convertible debt securities will likely dilute the ownership interests of our stockholders. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur, could negatively affect the market price of our common stock. We have used, and will likely continue to use, our common stock or securities convertible into or exchangeable for common stock to fund working capital needs or to acquire technology, product rights or businesses, or for other purposes. If additional equity and/or equity-linked securities are issued, particularly during times when our common stock is trading at relatively low price levels, the price of our common stock may be materially and adversely affected.

 

We are Subject to Anti-Takeover Provisions and Laws

 

Provisions in our restated certificate of incorporation and restated bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect the price of our common stock.

 

ITEM 1B. Unresolved Staff Comments

 

Not applicable.

 

ITEM 2. Properties

 

Our principal executive offices are located at 207A Perry Parkway, Suite 1, Gaithersburg, MD 20877 and our warehouse facility is located at 209 Perry Parkway, Suite 7, Gaithersburg, MD 20877. These facilities are comprised of approximately 12,000 square feet. These facilities fall under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $14,400 and $4,600 per month with the leases expiring September 2019. In addition, we also subleased a 2,076 square foot facility in Nashville, Tennessee, which was being utilized as a commercial operations office. The lease was approximately $4,200 per month excluding our shares of annual operating expenses and was due to expire April 30, 2018. Effective January 28, 2018, we executed a sublease termination agreement which terminated our obligations remaining on the sublease in exchange for our forfeiture of the approximately $4,000 security deposit on the sublease. We also lease a 16,300 square foot facility in Durham, North Carolina, which we initially used to conduct research and development primarily focused on the Bright Cell technology. The lease is approximately $22,000 per month, including our share of certain annual operating costs and taxes, and expires December 31, 2018. Following the discontinuation of direct funding for our bright cells clinical development activities in May 2014, we subleased the facility. The sublease rent is approximately $14,000 per month and also expires December 31, 2018. Due to non-payment on the lease subsequent to December 31, 2017, we have been declared in default on the lease. The Company does not own any real property and does not intend to invest in any real property in the foreseeable future.

 

ITEM 3. Legal Proceedings

 

The Company filed its Chapter 11 Case on January 26, 2016 and emerged from bankruptcy on May 5, 2016. Please see the description of the Company’s Chapter 11 Case contained in “Item 1. Business – Bankruptcy and Emergence from Bankruptcy”, which is incorporated herein by reference.  Other than the Chapter 11 Case, the Company has not been party to, and its property has not been the subject of, any material legal proceedings required to be disclosed herein.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

During the fiscal year ended December 31, 2015, shares of Old Common Stock were quoted for trading on the OTC Markets Group’s OTCQX marketplace (the “OTCQX”) under the symbol “NUOT.”  After we filed our petition for bankruptcy in January 2016, our Old Common Stock was traded on OTC Pink under the symbol “NUOTQ.” Pursuant to the Plan of Reorganization, all outstanding shares of Old Common Stock were cancelled as of May 5, 2016.

 

Quotation of our shares of New Common Stock on the OTCQB commenced on January 20, 2017 under the symbol “AURX,” however, trading was nominal until March 6, 2017, when our shares obtained eligibility for Deposit/Withdrawal At Custodian, or DWAC, distribution through The Depository Trust Company, or DTC. DWAC transfer allows brokers and custodial banks to make electronic book-entry deposits and withdrawals of shares of New Common Stock into and out of their DTC book-entry accounts using a “Fast Automated Securities Transfer” service.  On March 16, 2017, quotation of our shares of New Common Stock was moved to OTCQX.

 

The following table sets forth, for the periods indicated, the high and low closing prices for our Old Common Stock as determined from quotations on the OTC Markets. The quotations reflect inter-dealer prices, without retail markup, markdown, or commissions, and may not represent actual transactions.

 

Quarter Ended

 

High

   

Low

 

December 31, 2017

  $ 0.30     $ 0.05  

September 30, 2017

  $ 0.80     $ 0.30  

June 30, 2017

  $ 2.00     $ 0.56  

March 31, 2017

  $ 2.00     $ 1.25  

December 31, 2016

  $ -     $ -  

September 30, 2016

  $ -     $ -  

June 30, 2016

  $ -     $ -  

March 31, 2016 (through March 28, 2016)

  $ 0.06     $ 0.01  

 

On March 28, 2016, the record date under our Plan of Reorganization, the closing sales price of our Old Common Stock as reported on OTC Pink was $0.025 per share. On May 5, 2016, the Company issued shares of New Common Stock to certain accredited investors in the Recapitalization Financing for a purchase price of $1.00 per share.  Shares of New Common Stock did not trade publicly for the remainder of 2016.

 

Holders

 

There were approximately 790 holders of record of our New Common Stock as of April 12, 2018.

 

Dividends

 

We have not paid or declared cash distributions or dividends on our Old Common Stock in 2016 or on our New Common Stock in 2016 or 2017, and we do not intend to pay cash dividends on our New Common Stock in the foreseeable future. We currently intend to retain all earnings, if and when generated, for reinvestment in our business.

 

The Certificate of Designations for our Series A Preferred Stock limits the Company’s ability to pay dividends on or purchase shares of its capital stock without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock. 

 

 

Penny Stock

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Our stock is currently a “penny stock.” Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the SEC, which: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities’ laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form as the SEC shall require by rule or regulation. The broker-dealer also must provide to the customer, prior to effecting any transaction in a penny stock, (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock.

 

Issuer Purchases of Equity Securities

 

Issuer Purchases of Equity Securities
   

(a)

   

(b)

 

(c)

 

(d)

Period (Q4 2017)

 

Total number

of shares

(or units)

purchased

   

Average price

paid per share

(or unit)

 

Total number of

shares (or units)

purchased as part

of publicly

announced plans

or programs

 

Maximum number (or

approximate dollar

value) of shares (or

units) that may yet be

purchased under the

plans or programs

October 1-31

    4,712 (1)   $ 0.10  

NA

 

NA

November 1-30

    -       -  

NA

 

NA

December 1-31

    -       -  

NA

 

NA

Total

               

NA

 

NA

 

(1)

Made in a privately negotiated transaction with a third party unaffiliated with the Company, its directors, officers or significant shareholders.

 

Recent Sales of Unregistered Securities

 

Except as previously reported in the Company’s Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and elsewhere in this filing, there have been no unregistered sales of securities in 2017.

 

ITEM 6. Selected Financial Data

 

Not Applicable.

 

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. The discussion in this section regarding the Company’s business and operations includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report. The following should be read in conjunction with the audited financial statements and the notes thereto included elsewhere herein. Certain numbers in this section have been rounded for ease of analysis.

 

Important Note About Our Bankruptcy, Emergence from Bankruptcy and Fresh Start Accounting

 

Please refer to the disclosure in “Business – Bankruptcy and Emergence from Bankruptcy” for a description of our bankruptcy and material post-bankruptcy events. That disclosure is incorporated into this section by reference.

 

This Annual Report contains the Company’s audited consolidated financial statements as of December 31, 2017 and 2016, and for the year ended December 31, 2017, and the periods between January 1, 2016 and May 4, 2016, and between May 5, 2016 and December 31, 2016, and the accompanying footnotes, or the Financial Statements, as well as a discussion comparing the Company’s results of operations for the periods ended December 31, 2017 and 2016 and related financial condition in the section titled “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We refer to this discussion as the Period-to-Period Comparison. 

 

The historical financial and share-based information contained in the Financial Statements and the Period-to-Period Comparison as of and relating to periods ending on dates prior to the Effective Date reflects the Company’s financial condition and results of operations prior to its emergence from bankruptcy, and therefore is not indicative of the Company’s current financial condition or results of operations from and after May 5, 2016.

 

More specifically, following the consummation of the Plan of Reorganization, the Company’s financial condition and results of operations from and after May 5, 2016 are not comparable to the financial condition or results of operations reflected in the Company’s prior financial statements (including those for period ending on May 4, 2016 included in this Annual Report) due to the Company’s application of fresh start accounting to time periods beginning on and after May 5, 2016. Fresh start accounting requires the Company to adjust its assets and liabilities contained in its financial statements immediately before its emergence from bankruptcy protection to their estimated fair values using the acquisition method of accounting.  Those adjustments are material and affect the Company’s financial condition and results of operations from and after May 5, 2016. For that reason, it is difficult to assess our performance in periods beginning on or after May 5, 2016 in relation to prior periods.

 

In the following discussion and analysis of the Company’s financial condition and results of operations, references to “Predecessor” or “Predecessor Company” are to the Company for periods ending on or before May 4, 2016, and references to “Successor” or “Successor Company” are to the Company for periods ending on or after May 5, 2016.

 

Overview

 

Nuo Therapeutics is a regenerative therapies company developing and marketing products primarily within the U.S. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long term recovery in complex chronic conditions with significant unmet medical needs.

 

Our current commercial offering consists of a point of care technology for the safe and efficient separation of autologous blood to produce a platelet based therapy for the chronic wound care market (the "Aurix System"). Prior to May 5, 2016, we had two distinct Platelet Rich Plasma, or PRP, devices, the Aurix System for chronic wound care, and the Angel concentrated PRP, or cPRP, system for usage generally within the orthopedics market. Approximately 74% of our total revenue during the year ended December 31, 2017 has been generated in the United States. 

 

As described above under “Item 1. Business - Bankruptcy and Emergence from Bankruptcy,” on May 5, 2016 the Company entered into an Assignment and Assumption Agreement with the Assignee, as the designee of the Deerfield Lenders, to assign to the Assignee the Company’s rights, title and interest in and to its existing license agreement with Arthrex, and to transfer and assign to the Assignee associated intellectual property owned by the Company and licensed under such agreement, as well as rights to collect royalty payments thereunder. On May 5, 2016, the Company and the Assignee also entered into a Transition Services Agreement in which the Company agreed to continue to service its existing license agreement with Arthrex for a transition period. As a result of the assignment and transfer, the Aurix System currently represents our only commercial product offering.

 

 

Growth opportunities for the Aurix System in the United States in the near to intermediate term include the treatment of chronic wounds with Aurix in (i) the Medicare population under a National Coverage Determination, or NCD, when registry data is collected under the Coverage with Evidence Development, or CED, program of the Centers for Medicare & Medicaid Services, or CMS and (ii) the Veterans Affairs, or VA, healthcare system and other federal accounts settings.

 

Comparison of the Years Ended December 31, 2017 and 2016

 

The amounts presented in this comparison section are rounded to the nearest thousand.

 

Revenue and Gross Profit

 

The following table presents the profitability of sales for the periods presented:

 

 

   

Successor

   

Successor

   

Predecessor

   

Combined

 
   

Year Ended

December 31,

2017

   

Period from May 5,

2016 through

December 31,

2016

   

Period from January

1, 2016 through May

4, 2016

   

Year Ended

December 31,

2016

 
                                 

Product sales

  $ 531,000     $ 366,000     $ 923,000     $ 1,289,000  

License Fees

    -       -       140,000       140,000  

Royalties

    190,000       106,000       670,000       776,000  

Total revenues

    721,000       472,000       1,733,000       2,205,000  
                                 

Product cost of sales

    1,091,000       729,000       829,000       1,558,000  

License fees cost of sales

    -       -       -       -  

Royalties cost of sales

    -       -       55,000       55,000  

Total cost of sales

    1,091,000       729,000       884,000       1,613,000  
                                 

Gross profit (loss)

  $ (370,000

)

  $ (257,000

)

  $ 849,000     $ 592,000  

Gross margin %

    (51

)%

    (54

)%

    49

%

    27

%

 

Revenues decreased $1,484,000 (67%) to $721,000, comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016. This was primarily due to (1) the absence of any sales of Angel devices and disposables to Arthrex or Angel royalties from Arthrex for the year ended December 31, 2017 as compared to approximately $0.6 million each of Angel product sales and royalties in the period January 1, 2016 through May 4, 2016 (the date of the assignment of the Angel asset to Deerfield), (2) an approximately $157,000 decline in Aurix revenues comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016, and (3) approximately $140,000 of license fees recognized as deferred revenue in the period from January 1, 2016 through May 4, 2016. The decline in Aurix revenues was primarily the result of the loss of a long term acute care customer totaling approximately $126,000 of Aurix product sales for the year ended December 31, 2016. As a result of the assignment of the Angel asset to Deerfield, Aurix remains the Company's sole remaining revenue-generating product. As described below under “Liquidity and Capital Resources – Overview,” we need to raise substantial additional funds immediately in order to continue to conduct our business. In the event the Company is successful in raising such funds on a timely basis, it expects Aurix revenues to increase gradually in the quarters ahead as it deepens its collaboration with Restorix and experiences increased enrollment in the CED protocols, although there can be no assurances that this expectation will materialize.

 

Overall gross profit decreased $962,000 to a gross loss of $370,000 while overall gross margin decreased to (51)% from 27%, comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016. The decline in gross profit was primarily attributable to (1) approximately $550,000 of gross profit on Angel royalties described above recognized in the period January 1, 2016 through May 4, 2016, (2) $140,000 of license fee gross profit also recognized in such period, and (3) an increase of approximately $250,000 in intangible asset amortization costs in the full year 2017 compared to the prior year partial period of May 5, 2016 through December 31, 2016. For the year ended December 31, 2017, the Aurix product line incurred $731,000 of non-cash amortization charges recorded as cost of sales due to the amortization of the intangible assets resulting from the application of fresh start accounting as of the Effective Date.  Due to the impairment of the intangible assets as of December 31, 2017, there will be no such non-cash amortization charges recorded in future periods. 

 

 

Operating Expenses

 

Total operating expenses increased $6,267,000 (70%) to $15,164,000 comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016. The increase was primarily due to the approximately $9.3 million of goodwill and intangible asset impairment charges. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased $1,014,000 (59%) to $713,000 comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016. The decrease was due primarily to significantly reduced sales related headcount as the Company’s prior sales force efforts around CED were largely transitioned to a clinical affairs effort with attendant reductions in compensation and benefit costs ($0.7 million) and various other sales and marketing related expenditures.

 

Research and Development

 

Research and development expenses decreased $242,000 (15%) to $1,328,000 comparing the year ended December 31, 2017 to the combined twelve months ended December 31, 2016. The decrease was due primarily to lower intellectual property/patent maintenance and database management costs, and lower depreciation expense due to assets becoming fully amortized and lower clinical research costs, which were partially offset by higher site training fees with the expansion of the clinical affairs team in 2017 and higher costs of contract testing services.

 

General and Administrative

 

General and administrative expenses decreased $1,775,000 (32%) to $3,824,000 comparing the year ended December 31, 2017 to the combined twelve month period ended December 31, 2106. The decrease was primarily due to approximately $1.0 million of lower compensation costs, including approximately $0.5 million of severance related costs; a decrease in bad debt expense of approximately $0.5 million as a result of a bad debt recovery of approximately $0.1 million during 2017 compared to a bad debt expense of approximately $0.4 million in 2016; lower costs associated with professional services of approximately $0.3 million; a refund on franchise taxes of approximately $0.1 million; lower depreciation expenses and the absence of a one-time charge in 2016 for manufacturing transfer costs under our agreement with Arthrex, which were partially offset by costs associated with our unsuccessful registered offering and refinancing of our Series A preferred stock in early summer 2017.

 

Goodwill and Intangible Asset Impairment

 

As a result of events and circumstances in the quarter ended June 30, 2017, including a sustained reduction in our stock price, we determined that it was more likely than not that our fair value was reduced below the carrying value of our net equity, requiring an impairment test as of June 30, 2017. We compared our carrying value to our fair value as reflected by our June 30, 2017 market capitalization and concluded that our carrying value exceeded our fair value by approximately $2.8 million. Consequently, we recognized a non-cash goodwill impairment charge of approximately $2.1 million to write-down goodwill to its estimated fair value of zero as of June 30, 2017.

 

As of December 31, 2017, the Company concluded that the remaining intangible assets of approximately $7.2 million including approximately $0.2 million related to the 2013 prepayment of a patent related royalty and which were classified in other short and long term assets were impaired due to the substantial uncertainty concerning the Company as a going concern and the assessment that it was more likely than not that the carrying value of the intangible assets would not be recovered from future cash flows.  As a result, the Company concluded that the fair value of the intangibles assets was zero as of December 31, 2017 and recognized an impairment loss in the fourth quarter of 2017 of approximately $7.2 million.

 

Other Income (Expense)

 

Other income, net decreased $30,228,000 to $555,000 comparing the year ended December 31, 2017 to the combined twelve month period ended December 31, 2016. The change was primarily attributable to the approximately $30.8 million gain on reorganization in 2016 which was partially offset by a decrease of approximately $0.2 million in interest expense, net and approximately $0.5 million in other income from the recovery of Angel device refurbishment costs no longer expected to be realized.

 

Liquidity and Capital Resources

 

Overview

 

We are rapidly depleting our cash resources and our ability to continue to operate is in immediate jeopardy. At December 31, 2017, we had cash and cash equivalents of approximately $0.7 million, total current assets of approximately $1.2 million and total current liabilities of approximately $0.9 million. At April 12, 2018, we had cash and cash equivalents of approximately $0.3 million.

 

 

We have a history of losses and are not currently profitable. Our revenues have continued to decline significantly comparing 2017 with 2016, and 2016 with 2015. For the year ended December 31, 2017, we incurred a net loss from operations of approximately $15.5 million. As a result of the application of fresh-start accounting on the Effective Date, our retained earnings (deficit) was zero and our total stockholders’ equity was approximately $17.9 million on such date. As of December 31, 2017, our accumulated deficit was approximately $20.7 million and our stockholders' equity was approximately $0.5 million. 

 

During the quarter ended September 30, 2017, we withdrew our attempted registered offering and related refinancing of our Series A Preferred Stock, and exercised our rights under the Backstop Commitment in full.  As a result of that exercise, we issued an aggregate of 12,800,000 shares of common stock for gross proceeds of approximately $3.0 million, which more than doubled the number of our outstanding shares of common stock. 

 

Our continuing losses and depleted cash raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds immediately in order to continue to conduct our business.   Our cost reduction measures to date have included the reduction of our full-time employees from 15 at December 31, 2017 to 8 as of April 12, 2018. If we are unable within the next 30-60 days to raise substantial additional funds or otherwise restructure our business, we will likely be forced to cease operations and liquidate our assets. If we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock as a result of the liquidation preference of the holder of our Series A Preferred Stock. See below under “Series A Preferred Stock”.

 

Even assuming we succeed in raising substantial additional funds immediately to avoid liquidation, we expect to incur losses and negative operating cash flows in the foreseeable future. We may never generate sufficient revenues to achieve and maintain profitability. Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, licensing, royalty, and product revenues. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we need to finance future cash needs.  It is substantially uncertain whether we will be able to obtain such financing on satisfactory terms or at all.

 

Any equity financings may cause further substantial dilution to our stockholders and could involve the issuance of securities with rights senior to the common stock. Any allowed debt financings (which are restricted under the terms of the Certificate of Designations for our Series A Preferred Stock) may require us to comply with onerous financial covenants and restrict our business operations. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed equity or debt offering, state of the credit markets at the time of any proposed loan financing, market reception of the Company and perceived likelihood of success of our business model, and on the relevant transaction terms, among other things. We may not be able to obtain additional capital as required to finance our efforts, through asset sales, equity or debt financings, or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.   

 

Even assuming we succeed in raising substantial additional funds immediately to avoid liquidation, if we are unable to secure sufficient capital to fund our operating activities beyond the immediate future or we are unable to increase revenues significantly over that time period, we may be forced to delay the completion of, or significantly reduce the scope of, our current business plan, including our plan to penetrate the market serving Medicare beneficiaries and fulfill the related data gathering requirements as stipulated by the Medicare CED coverage determination, delay the pursuit of commercial insurance reimbursement for our wound treatment technologies, and postpone the hiring of new personnel.   If we are unable to secure sufficient capital to fund our operating activities and are unable to increase revenues significantly, we will likely be required to cease operations.

 

Our business is subject to risks and uncertainties including those described in “Item 1A. Risk Factors” in this Annual Report. 

 

Series A Preferred Stock

 

Under our 2016 Plan of Reorganization, the Company issued 29,038 shares of Series A Preferred Stock to the Deerfield lenders. The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of common stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction. For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect one member of the Board of Directors. Lawrence S. Atinsky serves on our Board as the designee of the holders of Series A Preferred Stock, which are all currently affiliates of Deerfield Management Company, L.P., of which Mr. Atinsky is a Partner. The Series A Preferred Stock have voting rights, voting with the common stock as a single class, representing approximately one percent (1%) of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock have the right to approve certain transactions. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limits the Company’s ability to (i) issue securities that are senior or pari passu with the Series A Preferred Stock, (ii) incur debt other than for working capital purposes not in excess of $3.0 million, (iii) issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, (iv) pay dividends on or purchase shares of its capital stock, and (v) change the authorized number of members of its Board of Directors to a number other than five, in each case without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock.

 

 

Cash Flows

 

Net cash provided by (used in) operating, investing, and financing activities for the periods presented were as follows (in millions):

 

   

Successor

   

Successor

   

Predecessor

   

Combined

 
   

Year Ended

December

31,

2017

   

Period from

May 5,

2016

through

December

31,

2016

   

Period from January 1,

2016

through

May 4, 2016

   

Year ended

December

31,

2016

 

Cash flows used in operating activities

  $ (4.9

)

  $ (7.8

)

  $ (3.1

)

  $ (10.9

)

Cash flows provided by (used in) investing activities

  $ 0.1     $ 0.1     $ (0.0 )   $ 0.1  

Cash flow provided by financing activities

  $ 2.9     $ -     $ 12.5     $ 12.5  

 

Operating Activities

 

Cash used in operating activities for the year ended December 31, 2017 of $4.9 million primarily reflects our net loss of $15.0 million adjusted by (i) approximately $9.3 million for the impairment of intangible assets and goodwill, (ii) approximately $1.1 million of depreciation and amortization expense (iii) an approximate $0.3 million change in operating assets and liabilities and (iv) an approximate $0.1 million bad debt recovery.

 

Cash used in operating activities by the Predecessor Company for the combined twelve month period ended December 31, 2016 of $10.9 million primarily reflects our net income of $22.5 million adjusted by the approximately $34.9 million non-cash gain on reorganization and a net change in operating assets and liabilities of approximately $0.5 million, partially offset by (i) approximately $1.1 million of depreciation and amortization expense, (ii) approximately $0.4 million for the increase in the allowance for uncollectible accounts and (iii) approximately $0.3 million of non-cash DIP Financing debt issuance costs.

 

Investing Activities

 

We had no material investing activities in the year ended December 31, 2017 and we received $0.1 million in cash primarily for the sale of Angel machines for the combined twelve month period ended December 31, 2016. 

 

Financing Activities

 

Cash provided by financing activities for the year ended December 31, 2017 consisted of $2.9 million of net proceeds from the funding of the Backstop Commitments.

 

Cash provided by financing activities for the Predecessor Company in the period prior to May 5, 2016 of approximately $12.5 million consisted of approximately $5.5 million, net of issuance costs, of DIP Financing provided by Deerfield and net cash of approximately $7.1 million from the Recapitalization Financing. The total amount outstanding under the DIP Credit Agreement as of May 4, 2016 was $5.75 million, excluding approximately $0.3 million of debt issuance costs. The DIP Credit Agreement and Deerfield Facility Agreement were terminated and cancelled, respectively, as the Effective Date of May 5, 2016.

 

Inflation

 

The Company believes that the rates of inflation in recent years have not had a significant impact on its operations. 

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

Critical Accounting Policies

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us 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 the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the application of fresh start accounting, stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, valuation of derivative liabilities and contingent consideration, contingent liabilities, fair value and depreciable lives of long-lived assets (including property and equipment, intangible assets and goodwill), deferred taxes and associated valuation allowance and the classification of our long-term debt. Actual results could differ from those estimates. A summary of our significant accounting policies is included in Note 3 to the accompanying consolidated financial statements.

 

 

A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and that requires management’s most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. We have identified the following accounting policies as critical:

 

Intangible Assets and Goodwill

 

Our definite-lived intangible assets include trademarks, technology (including patents), customer and clinician relationships, and are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, we test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), we would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. We periodically reevaluate the useful lives for these intangible assets to determine whether events and circumstances warrant a revision in their remaining useful lives.

 

Goodwill represents the excess of reorganization value over the fair value of tangible and identifiable intangible assets and the fair value of liabilities as of the Effective Date. Goodwill is not amortized, but is subject to periodic review for impairment. Goodwill is reviewed annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable. We perform our review of goodwill on our one reporting unit.

 

Before employing detailed impairment testing methodologies, we first evaluate the likelihood of impairment by considering qualitative factors relevant to our reporting unit. When performing the qualitative assessment, we evaluate events and circumstances that would affect the significant inputs used to determine the fair value of the goodwill. Events and circumstances evaluated include: macroeconomic conditions that could affect us, industry and market considerations for the medical device industry that could affect us, cost factors that could affect our performance, our financial performance (including share price), and consideration of any company specific events that could negatively affect us, our business, or the fair value of our business. If we determine that it is more likely than not that goodwill is impaired, we will then apply detailed testing methodologies. Otherwise, we will conclude that no impairment has occurred.

 

Detailed impairment testing involves comparing the fair value of our one reporting unit to its carrying value, including goodwill. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of our one reporting unit as if it had been acquired in a business combination. The implied fair value of our one reporting unit's goodwill then is compared to the carrying value of that goodwill. If the carrying value of our one reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. 

 

Revenue Recognition

 

We recognize revenue when the four basic criteria for recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured.

  

We provide for the sale of our products, including disposable processing sets and supplies to customers. Revenue from the sale of products is recognized upon shipment of products to the customers. We do not maintain a reserve for returned products as in the past those returns have not been material and are not expected to be material in the future.

 

Percentage-based fees on licensee sales of covered products are generally recorded as products are sold by licensees and are reflected as royalties in the consolidated statements of operations. Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.

 

Fair Value Measurements

 

Our consolidated balance sheets include certain financial instruments that are carried at fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

 

 

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets;

 

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In May 2014, the FASB issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and contract modifications at transition, with the same effective date. While we are currently evaluating the impact, if any, that this guidance will have on our consolidated financial statements, we believe that the adoption will not have a material impact on our revenue or costs.

 

In February 2016, the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

 

In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. The guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements. 

 

In November 2016, the FASB issued guidance to reduce diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The revised guidance requires that amounts generally described as restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for the fiscal years beginning after December 15, 2017. Early adoption is permitted. The guidance must be adopted on a retrospective basis. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities is not a business, provides a framework to assist entities in evaluating whether both an input and substantive process are present, and narrows the definition of the term output. The guidance is for the Company for fiscal years beginning after December 15, 2018. The guidance must be adopted on a prospective basis. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

 

We have evaluated all other issued and unadopted Accounting Standards Updates and believe the adoption of these standards will not have a material impact on our results of operations, financial position, or cash flows.

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

ITEM 8. Financial Statements and Supplementary Data

 

Our financial statements and supplementary data required to be filed pursuant to this Item 8 appear in a separate section of this report beginning on page F-1.

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

ITEM 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Annual Report, under the supervision and with the participation of management, including the Chief Executive Officer who is also our Chief Financial Officer (the “Certifying Officer”), the Company conducted an evaluation of its disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Certifying Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Certifying Officer has concluded that, as of December 31, 2017, our disclosure controls and procedures were effective. 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on our consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on its evaluation of the Company’s internal control over financial reporting as of December 31, 2017, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013), our management has concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria. 

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Pursuant to Item 308(b) of Regulation S-K, management’s report is not subject to attestation by our independent registered public accounting firm because the Company is neither an “accelerated filer” nor a “large accelerated filer” as those terms are defined by the Securities and Exchange Commission.

 

 

Changes in Internal Control over Financial Reporting 

 

There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Please refer to “Item 1.A Risk Factors - Risks Related to the Company’s Financial Position, Business and Industry - Our Recent Reduction in Staff May Affect our Ability to Conduct our Operations and Other Functions Effectively” for a description of risks pertaining to staff reductions effected after December 31, 2017. Such staff reductions may materially affect our internal control over financial reporting.

 

ITEM 9B. Other Information

 

None.

 

 

PART III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth the names and ages of all current directors and executive officers of the Company. Officers are appointed by, and serve at the pleasure of, the Board of Directors.

 

Name

 

Age

 

Position

 

 

 

 

 

David E. Jorden

 

55

 

Chief Executive and Chief Financial Officer; Director

 

 

 

 

 

C. Eric Winzer

 

61

 

Independent Director

 

 

 

 

 

Scott M. Pittman

 

59

 

Independent Director

 

 

 

 

 

Lawrence S. Atinsky

 

49

 

Independent Director

         
Paul D. Mintz, MD   69   Independent Director

 

 

 

 

 

Peter A. Clausen

 

52

 

Chief Scientific Officer

 

Biographical Information of Directors and Executive Officers

 

Biographical information with respect to the Company’s current executive officers and directors is provided below.

 

David E. Jorden has been Chief Executive Officer and Chief Financial Officer of the Company effective July 1, 2016 after serving as Acting CEO since January 8, 2016 and Acting CFO since May 2015. Mr. Jorden also serves as Acting Secretary of the Company. He served as our Acting CEO and Acting CFO during the Company’s bankruptcy reorganization proceedings, as disclosed under “Item 1. Business – Bankruptcy and Emergence from Bankruptcy,” has served on the Board of Directors since October 2008 and was Executive Chairman from February 2012 to May 2015.  Mr. Jorden is also presently serving since June 2013 as CEO in a part time capacity for Nanospectra Biosciences, Inc., a private company developing nanoparticle directed focal thermal ablation technology of solid tumors.  From 2003 to 2008, he was with Morgan Stanley’s Private Wealth Management group where he was responsible for equity portfolio management for high net worth individuals.  Prior to Morgan Stanley, Mr. Jorden served as CFO for Genometrix, Inc., a private genomics/life sciences company focused on high-throughput microarray applications.  Mr. Jorden was previously a principal with Fayez Sarofim & Co.  Mr. Jorden has a MBA from Northwestern University’s Kellogg School and a B.B.A. from University of Texas at Austin.  He is Chartered Financial Analyst and previously held a Certified Public Accountant designation.  Mr. Jorden previously served on the board of Opexa Therapeutics, Inc. (OPXA) from August 2008 through November 2013.   Mr. Jorden was chosen to serve on the Board in part because of his extensive financial experience, particularly in the life sciences industry. As our current Chief Executive Officer and Chief Financial Officer, he provides the Board with critical insight into the day-to-day operations of the Company. 

 

C. Eric Winzer has served as Director since January 30, 2009. Mr. Winzer has over 30 years of experience in addressing diverse financial issues including raising capital, financial reporting, investor relations, banking, taxation, mergers and acquisitions, financial planning and analysis, and accounting operations. Mr. Winzer has been the Chief Financial Officer at Immunomic Therapeutics, Inc., a privately-held clinical stage biotechnology company, since May 2015. From June 2009 to April 2015 Mr. Winzer served as the Principal Accounting Officer, Senior Vice President of Finance, and Chief Financial Officer for OpGen Inc. (OPGN), a precision medicine company that went public in May 2015. Before his tenure with OpGen Inc., Mr. Winzer held multiple executive positions at Avalon Pharmaceuticals, Inc. (AVRX) including serving as its Chief Financial Officer and Executive Vice President, Principal Accounting Officer, and Secretary. Before joining Avalon Pharmaceuticals, Mr. Winzer held numerous senior financial positions over twenty years at Life Technologies Corporation (LIFE) (now part of Thermo Fisher Scientific (TMO)) and its predecessor companies, Invitrogen (IVGN) and Life Technologies, Inc. (LTEK). From 1980 to 1986, Mr. Winzer held various financial positions at Genex Corporation. Mr. Winzer holds a B.A. in Economics and Business Administration from Western Maryland College (now McDaniel College) and an M.B.A. from Mount Saint Mary's University. Mr. Winzer was chosen to serve as a director of the Company in part because of his executive experience in the life sciences industry and his substantial financial knowledge and expertise.

 

Scott M. Pittman has served as a director since May 5, 2016. Mr. Pittman has over 30 years in Hospital Executive management. He is a Chief Operating & Business Development Officer for Buchanan General Hospital, a Registered Representative with Calton & Associates, and a Principal of Hospital CEO Associates. He has served as CEO of Florida Hospital Zephyrhills, FL, in senior executive positions with Adventist Health Systems, and in various hospital executive positions in southern West Virginia. Mr. Pittman has developed several multimillion dollar hospital and program service expansions, and healthcare entity acquisitions and mergers, and has served on numerous state and regional health planning organizations. He is a magna cum laude graduate of Southwestern Adventist University with B.S. and B.A. Degrees in Business and Religion, and a Masters of Hospital Administration from Medical College of Virginia. Mr. Pittman was chosen to serve as a director of the Company in part because of his extensive experience as a hospital administration executive.

 

 

Lawrence S. Atinsky has served as a director since May 5, 2016. Mr. Atinsky is a Partner at Deerfield Management Company, LP (“Deerfield Management”), a healthcare investment firm focused on advancing healthcare through investment, information and philanthropy.  He primarily focuses on the firm’s structured transactions and private equity investments.  Prior to joining Deerfield Management, Mr. Atinsky was a partner of Ascent Biomedical Ventures, a healthcare focused private equity firm investing in early-stage biomedical and medical device companies. He has over 18 years of experience investing in healthcare companies.  Mr. Atinsky earned a J.D. from New York University School of Law and B.A. degrees in Political Science and Philosophy from the University of Wisconsin-Madison, cum laude. Deerfield Management’s affiliates are currently the sole holders of our Series A Preferred Stock and Mr. Atinsky serves as their designee to our Board of Directors under the Certificate of Designations for our Series A Preferred Stock.

 

Paul D. Mintz, MD has served as a director since April 7, 2017, replacing the vacancy created by the departure of Joseph Del Guercio. Dr. Mintz is the Senior Vice President and Chief Medical Officer of Verax Biomedical, Inc., or Verax Biomedical. Prior to joining Verax Biomedical in early 2016, Dr. Mintz served as Director, Division of Hematology Clinical Review, Office of Blood Research and Review, Center for Biologics Evaluation and Research of the U.S. Food and Drug Administration between 2011 until 2016. Prior to that, for more than 30 years, Dr. Mintz was a member of the faculty of the University of Virginia School of Medicine, where he was a tenured Professor of Pathology and Internal Medicine. He also served as Vice-Chair of Pathology and Chief of the Division of Clinical Pathology, and as Medical Director of the Clinical Laboratories and Transfusion Medicine Services at the University of Virginia Health System. In addition, Dr. Mintz served as Co-Medical Director of Virginia Blood Services.  He served as a director of Immucor, Inc. (BLUD) in 2010 and 2011. Dr. Mintz is a former President of the American Association of Blood Banks, or AABB, served on AABB’s Board of Directors for nine years, and chaired and was a member of numerous AABB committees. He has also served as a member of the Board of Trustees of the National Blood Foundation. A recipient of a Transfusion Medicine Academic Award from the National Heart, Lung and Blood Institute, Dr. Mintz was an inaugural inductee into the National Blood Foundation Hall of Fame. He has served as a member of the Medicare Coverage Advisory Committee of CMS. Dr. Mintz is author or co-author of more than 100 articles and editorials spanning clinical practice, blood safety and the evaluation of new transfusion medicine technologies, and has designed and served as principal investigator for numerous clinical trials. He is the sole editor of all three editions of Transfusion Therapy: Clinical Principles and Practice (AABB Press) and has served on several journal editorial boards. Dr. Mintz earned his BA in Philosophy from the University of Rochester and received his MD with honors from the University of Rochester School of Medicine. Dr. Mintz has served as the medical monitor for the Company’s CED study since November 2017 and is entitled to receive a monthly fee of $2,500 in this role. Dr. Mintz was chosen to serve as a director of the Company based in part on his recognized expertise in clinical practice, blood safety and transfusion medicine.

 

Peter A. Clausen was appointed as the Chief Scientific Officer on March 30, 2014. He joined the Company in September 2008 and has more than 20 years of experience in the biotechnology industry. Prior to joining the Company, Dr. Clausen was a founding member and Vice President of Research and Development at Marligen Bioscience, where he developed and commercialized innovative genomic and protein analysis products for the life sciences market. Dr. Clausen was the Manager of New Purification Technologies at Life Technologies and the Invitrogen Corporation. He also has significant experience within the commercial biotechnology industry developing peptide and small molecule therapeutics for application in the areas of inflammatory mediated disease and stem cell transplantation. He completed his post-doctoral training at the Laboratory of Molecular Oncology at the National Cancer Institute where his research efforts focused in the areas of oncology, hematopoiesis, and gene therapy. Dr. Clausen earned Ph.D. in Biochemistry from Rush University in Chicago and a Bachelor of Science degree in Biochemistry from Beloit College.

 

There are no family relationships between any of the Company’s executive officers or directors and, other than as disclosed above, there are no arrangements or understandings between a director and any other person pursuant to which such person was elected as director.

 

Board of Directors

 

The Board oversees the business affairs of the Company and monitors the performance of management. Presently, there are five Board members. On the Effective Date, pursuant to the Plan of Reorganization, the size of the Board of Directors was fixed at five members and Scott M. Pittman and Lawrence Atinsky were appointed to the Board, the latter by the holders of the Series A Preferred Stock. Joseph Del Guercio, David E. Jorden and C. Eric Winzer remained on the Board of Directors. Paul D. Mintz, MD, was appointed to the Board effective April 7, 2017 replacing Joe Del Guercio who resigned effective April 6, 2017.

 

The procedures by which shareholders may recommend nominees is described in the section titled “- Nominating and Governance Committee” below. These procedures changed materially on May 5, 2016 as the Company adopted Amended and Restated Bylaws under the Plan of Reorganization.

 

 

For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect one member of the Board of Directors. The Certificate of Designations for our Series A Preferred Stock also limits the Company’s ability to change the authorized number of members of its Board of Directors to a number other than five without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock.

 

At each annual meeting, shareholders elect directors for a full term or the remainder thereof, as the case may be, to succeed those whose terms have expired. Each director holds office for the term for which he or she is elected or until his or her successor is duly elected.

 

Director and Board Nominee Independence

 

The Company’s current directors include David Jorden, Eric Winzer, Scott Pittman, Lawrence S. Atinsky, and Paul D. Mintz MD. The Board elects to apply the NASDAQ Stock Market corporate governance requirements and standards in its determination of the independence status of each Board and Board committee member. All of the Company’s current directors meet such independence requirements with the exception of Mr. Jorden, who does not serve on the Audit Committee, Compensation Committee or Nominating and Governance Committee. The members of the Audit Committee are also independent for purposes of Section 10A-3 of the Exchange Act and NASDAQ Stock Market rules and the members of the Compensation Committee are also independent for purposes of Section 10C-1 of the Exchange Act and NASDAQ Stock Market rules. The Board based its independence determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and transaction history, affiliations and family and other relationships and on discussions with the directors. Please see Item 13 below for a description of directors engaged in any transaction, relationship, or arrangement contemplated under section 404(a) of Regulation S-K.

 

Membership, Meetings and Attendance; Committee Charters

 

Our Board has three standing committees: Audit Committee, Compensation Committee, and Nominating and Governance Committee. In 2017, each of our directors attended at least 75% of the aggregate of the total number of meetings of the Board (held during the period for which he was a director) and the total number of meetings held by all committees of the Board on which he served (during the periods that he served). The Board held 9 meetings and the Audit Committee held 4 meetings during 2017. The Board, the Audit Committee, the Compensation Committee and the Nominating and Governance Committee discussed various matters informally on numerous occasions throughout the year 2017.

 

The membership and responsibilities of these committees are summarized below. Additional information regarding the responsibilities of each committee is found in our Amended and Restated Bylaws, each committee’s charter, specific directions of the Board, and certain regulatory requirements. The charters of the Audit, Compensation, and Nominating and Governance Committees are available at the Company’s website at http://www.nuot.com and at no charge by contacting the Company at its headquarters as listed on the cover page of this report. Information appearing on the Company’s website is not part of this Annual Report. 

 

Director Attendance at Annual Meeting

 

The Company has no specific policy requiring directors’ attendance at its Annual Meeting. Our last Annual Meeting held on November 12, 2014 was attended by three of our directors, including our Chairman and Chief Executive Officer at the time.

 

Audit Committee

 

The Board formed an Audit Committee in December 2004. Mr. Winzer currently serves as chairman of the Audit Committee. The other members of the Audit Committee are Scott M. Pittman and Lawrence S. Atinsky. The Board has determined that Mr. Winzer is an audit committee financial expert as defined by Item 407(d) of Regulation S-K under the Securities Act. The Company applies NASDAQ Stock Market “independence” standards in its assessment of director and committee member independence. The Board has determined that each member of the Audit Committee is “independent” as required by the NASDAQ Stock Market rules and regulations and under the federal securities laws.

 

The purpose of the Audit Committee is to assist the Board in its general oversight of our financial reporting, internal controls and audit functions. As described in the Audit Committee Charter, the Audit Committee’s primary responsibilities are to:

 

 

Review whether or not management has maintained the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Company;

 

 

Review whether or not management has established and maintained processes to ensure that an adequate system of internal controls is functioning within the Company;

 

 

 

Review whether or not management has established and maintained processes to ensure compliance by the Company with legal and regulatory requirements that may impact its financial reporting and disclosure obligations;

 

 

Oversee the selection and retention of the Company’s independent public accountants, their qualifications and independence;

 

 

Prepare a report of the Audit Committee for inclusion in the proxy statement for the Company’s annual meeting of shareholders;

 

 

Review the scope and cost of the audit, the performance and procedures of the auditors, the final report of the independent auditors; and

 

 

Perform all other duties as the Board may from time to time designate.

 

Compensation Committee

 

The Compensation Committee was established in December 2004. Scott M. Pittman is the current Chairman of this Committee, with Paul D. Mintz MD and C. Eric Winzer being the other members of the Committee. The duties of the Committee include, among others, establishing any director compensation plan or any executive compensation plan or other employee benefit plan which requires shareholder approval; establishing significant long-term director or executive compensation and director or executive benefits plans which do not require stockholder approval; determination of any other matter, such as severance agreements, change in control agreements, or special or supplemental executive benefits, within the Committee’s authority; determining the overall compensation policy and executive salary plan; and determining the annual base salary, annual bonus, and annual and long-term equity-based or other incentives of each corporate officer, including the CEO.

 

Although a number of aspects of the CEO’s compensation may be fixed by the terms of his employment contract, the Compensation Committee retains discretion to determine other aspects of the CEO’s compensation. The CEO reviews the performance of the executive officers of the Company (other than the CEO) and, based on that review, the CEO makes recommendations to the Compensation Committee about the compensation of executive officers (other than the CEO). The CEO does not participate in any deliberations or approvals by the compensation committee or the Board with respect to his own compensation. The Compensation Committee makes recommendations to the Board about all compensation decisions involving the CEO and the other executive officers of the Company. The Board reviews and votes to approve all compensation decisions involving the CEO and the executive officers of the Company. The Compensation Committee and the Board will use data, showing current and historic elements of compensation, when reviewing executive officer and CEO compensation. The Committee is empowered to review all components of executive officer and director compensation for consistency with the overall policies and philosophies of the Company relating to compensation issues. The Committee may from time to time delegate duties and responsibilities to subcommittees or a Committee member. The Committee may retain and receive advice, in its sole discretion, from compensation consultants. None of the members of our Compensation Committee is one of our officers or employees.

 

None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.

 

Pursuant to its charter, the Compensation Committee is authorized to retain and terminate, without Board or management approval, the services of an independent compensation consultant to provide advice and assistance. The Compensation Committee has the sole authority to approve the consultant’s fees and other retention terms, and reviews the independence of the consultant and any other services that the consultant or the consultant’s firm may provide to the company. The chair of the Compensation Committee reviews, negotiates and executes an engagement letter with the compensation consultant. The compensation consultant directly reports to the Compensation Committee. 

 

Nominating and Governance Committee

 

The Nominating and Governance Committee has the following responsibilities as set forth in its charter:

 

 

to review and recommend to the Board with regard to policies for the composition of the Board;

 

 

to review any director nominee candidates recommended by any director or executive officer of the Company, or by any shareholder if submitted properly;

 

 

to identify, interview and evaluate director nominee candidates and have sole authority to retain and terminate any search firm to be used to assist the Committee in identifying director candidates and approve the search firm’s fees and other retention terms;

 

 

to recommend to the Board the slate of director nominees to be presented by the Board;

 

 

 

to recommend director nominees to fill vacancies on the Board, and the members of each Board committee;

 

 

to lead the annual review of Board performance and effectiveness and make recommendations to the Board as appropriate; and

 

 

to review and recommend corporate governance policies and principles for the Company, including those relating to the structure and operations of the Board and its committees.

 

Lawrence S. Atinsky is the current Chairman of this Committee, with Paul D. Mintz MD and Scott M. Pittman being the other members of the Committee.

 

Shareholders meeting the following requirements who want to recommend a director candidate may do so in accordance with our Bylaws. To make a nomination for director at an Annual Meeting, a written nomination solicitation notice must be received by our Secretary at our principal executive office not later than the close of business on the 90th day nor earlier than the opening of business on the 120th day before the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that if the annual meeting is called for a date that is more than 30 days earlier or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so received no earlier than the opening of business on the 120th day before the meeting and not later than the later of (x) the close of business on the 90th day before the meeting or (y) the close of business on the 10th day following the day on which public announcement of the date of the annual meeting is first made by the Company.

 

The written nomination solicitation notice must contain the following material elements:

 

As to each person whom the stockholder proposes to nominate for election as a director:

 

 

the name, age, business address and residence address of the person;

 

the principal occupation or employment of the person;

 

the class or series and number of shares of stock of the Company that are owned of record or are directly or indirectly owned beneficially by the person;

 

any derivative instrument directly or indirectly owned beneficially by the person;

 

any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 (or any successor thereof) of the Exchange Act and the rules and regulations promulgated thereunder; and

 

a written consent of the person to being named as a nominee and to serve as a director if elected.

 

As to the shareholder giving the notice:

 

 

the name and address of the shareholder as they appear on the Company’s books;

 

the class or series and number of shares of stock of the Company that are owned of record or directly or indirectly owned beneficially by the shareholder and any affiliate of the shareholder;

 

any proxy (other than a revocable proxy given in response to a solicitation made pursuant to Section 14(a) (or any successor thereof) of the Exchange Act by way of a solicitation statement filed on Schedule 14A, contract, arrangement, understanding or relationship pursuant to which the shareholder and any affiliate of the shareholder has a right to vote any shares of the Company;

 

any derivative position held by the shareholder and any affiliate of the shareholder;

 

a description of all agreements, arrangements or understandings (written or oral) between or among the shareholder, any affiliate of the shareholder, any proposed nominee or any other person or persons (including their names) pursuant to which the nomination or nominations are to be made by the shareholder;

 

a representation that the shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice;

 

any other information relating to the shareholder and any affiliate of the shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 (or any successor thereof) of the Exchange Act and the rules and regulations promulgated thereunder;

 

a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the shareholder, any affiliate of the shareholder, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the shareholder, any affiliate of the shareholder, or any person acting in concert therewith, was the “registrant” for purposes of such rule and the nominee was a director or executive officer of such registrant; and

 

a statement of whether the shareholder and any affiliate of the shareholder intends, or is part of a group that intends, to solicit proxies for the election of the proposed nominee.

 

 

In considering director candidates, the Nomination and Governance Committee will consider such factors as it deems appropriate to assist in developing a Board and committees that are diverse in nature and comprised of experienced and seasoned advisors who can bring the benefit of various backgrounds, skills and insights to the Company and its operations. Candidates whose evaluations are favorable are then chosen by the Nominating and Governance Committee to be recommended for selection by the full Board. The full Board selects and recommends candidates for nomination as directors for stockholders to consider and vote upon at the annual meeting. Each director nominee is evaluated in the context of the full Board’s qualifications as a whole, with the objective of establishing a Board that can best perpetuate our success and represent stockholder interests through the exercise of sound judgment. Each director nominee will be evaluated considering the relevance to us of the director nominee’s skills and experience, which must be complimentary to the skills and experience of the other members of the Board. The Nominating and Governance Committee does not have a formal policy with regard to the consideration of diversity in identifying director candidates, but seeks a diverse group of candidates who possess the background, skills and expertise to make a significant contribution to the Board, to the Company and its shareholders. 

 

Code of Conduct and Ethics

 

In April 2005, the Board approved a Code of Conduct and Ethics applicable to all directors, officers and employees which complies with Item 406 of Regulation S-K. A copy of this Code of Conduct and Ethics is available at the Company’s website at www.nuot.com, and is available at no charge by contacting the Company at its headquarters as listed on the cover page of this Annual Report. Information appearing on the Company’s website is not part of this Annual Report.

 

Board Oversight of Risk Management

 

Our Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board as the Board believes it is in the best interests of the Company to make that determination based on the position and direction of the Company and the membership of the Board. Independent directors and management have different perspectives and roles in strategy development. The Company’s independent directors bring experience, oversight and expertise from outside the Company and industry, while the Chief Executive Officer brings Company-specific experience and expertise. Currently, David Jorden serves as Chief Executive Officer of the Company while the office of Chairman of the Board has been vacant since Joseph Del Guercio’s departure. We believe that this arrangement currently serves the best interests of the Company and its shareholders.

 

The Board’s role in the Company’s risk oversight process involves the receipt of regular reports from members of senior management on areas of material risk to the Company, including strategic, operational, reporting, and compliance risks. The full Board (or the appropriate standing committee of the Board in the case of risks that are under the purview of a particular committee) is to receive these reports from the appropriate party within the organization that is responsible for a particular risk or set of risks to enable it to understand our risk identification, management and mitigation strategies. When a committee receives such a report, the Chairman of the committee will discuss the report with the full Board during the next available Board meeting, holding additional meetings, if and when required. The Board believes that this practice enables the Board and its committees to coordinate risk oversight for the Company, particularly in light of the interrelationship among various risks. During the regular course of its activities, our Audit Committee discusses our policies with respect to risk assessment and risk management. The Compensation Committee and the Board each discuss the relationship between our compensation policies and corporate risk to assess whether these policies encourage excessive risk-taking by executives and other employees.

 

Process for Communicating with Board Members

 

We have no formal written policy regarding communication with the Board. Persons wishing to write to the Board or to a specified director or committee of the Board should send correspondence to the Secretary at our principal offices. Electronic submissions of shareholder correspondence will not be accepted. The Secretary will forward to the directors all communications that, in his judgment, are appropriate for consideration by the directors. Examples of communications that would not be appropriate for consideration by the directors include commercial solicitations and matters not relevant to the shareholders, to the functioning of the Board, or to the affairs of the Company. Any correspondence received that is addressed generically to the Board will be forwarded to the Chairman of the Board, if any, or the Chairman of the Audit Committee.

 

Section 16(a) Beneficial Ownership Reporting Compliance 

 

Section 16(a) of the Exchange Act, requires officers, directors and persons who own more than ten percent of a registered class of equity securities to, within specified time periods, file certain reports of ownership and changes in ownership with the SEC.

 

Based solely upon a review of Forms 3 and Forms 4 furnished to the Company pursuant to Rule 16a-3 under this Exchange Act during the Company’s most recently completed fiscal year, and Forms 5 with respect to the most recently completed fiscal year, the Company believes that the following forms required to be filed pursuant to Section 16(a) were not timely filed as necessary by the executive officers, directors and security holders required to file same during the fiscal year ended December 31, 2017: Paul Mintz (one Form 4 reporting one transaction) and Boyalife (one Form 4 reporting one transaction).

 

 

ITEM 11. Executive Compensation 

 

This discussion focuses on the compensation paid to “named executive officers,” which is a defined term generally encompassing all persons that served as principal executive officer at any time during the most recently completed fiscal year, as well as certain other highly paid executive officers during such fiscal year. For the fiscal year ended December 31, 2017, the named executive officers consisted of the following persons:

 

 

David E. Jorden, who served as our Chief Executive Officer and Chief Financial Officer effective July 1, 2016, our Acting Chief Executive Officer from January 8, 2016 through June 30, 2016, and our Acting Chief Financial Officer from May 2015 through June 30, 2016.

 

Peter A. Clausen, who has served as our Chief Scientific Officer.

 

 

Summary Compensation Table

 

Name and

Principal

Position

 

Year

 

Salary

   

Bonus

   

Option

Awards(1)

   

Non-Equity

Incentive Plan

Compensation

   

All Other

Compensation

   

Total

 

David E. Jorden(2)

 

2017

  $ 275,000 (3)     -     $ -     $ -     $ 435 (5)   $ 275,435  
   

2016

  $ 260,417 (3)     -     $ 58,577 (4)      40,000     $ 1,560 (5)   $ 360,554  

Peter A. Clausen(6)

 

2017

  $ 290,000       -     $ -     $ -     $ 11,235 (8)   $ 301,235  
   

2016

  $ 290,000       -       29,603 (7)      115,000     $ 25,212 (8)   $ 459,815  

 

 

(1)

Represents the grant date fair value of the stock option awards granted during the fiscal year indicated, calculated in accordance with FASB ASC Topic 718. The fair value was estimated using the assumptions detailed in Note 3 - Liquidity and Summary of Significant Accounting Principles to the Company’s consolidated financial statements included in this Annual Report.

 

 

(2)

Mr. Jorden served in the positions specified immediately above the Summary Compensation Table during the years presented.

 

 

(3)

Commencing on May 1, 2015, the Company began compensating Mr. Jorden at the rate of $200,000 per year for as long as he served as Acting Chief Financial Officer. On January 8, 2016, the Board also appointed Mr. Jorden as the Company's Acting Chief Executive Officer, effective immediately. In connection therewith, the Board agreed to an increase in Mr. Jorden's annual compensation from $200,000 to $250,000, effective January 16, 2016. On July 1, 2016, the Board appointed Mr. Jorden as the Company’s Chief Executive Officer and Chief Financial Officer and, at the recommendation of the Compensation Committee, increased his annual salary to $275,000.

 

 

(4)

Represents options to purchase 350,000 shares of New Common Stock awarded on July 1, 2016 at an exercise price of $1.00 per share, subject to approval of the 2016 Omnibus Incentive Compensation Plan by the Company’s shareholders, which approval was subsequently obtained. The award consists of options to purchase 162,500 shares (which are fully vested as of December 31, 2017) and options to purchase 187,500 shares vesting according to certain performance milestones related to the extinguishment of the Backstop Commitment and enrollment under our collaboration with Restorix (which options terminated during 2017).

 

(5)

Represents $435 in life insurance premiums paid by the Company for 2017. Represent $1,216 in unused vacation payouts triggered by the Company’s bankruptcy, with the remainder consisting of life insurance premiums paid by the Company for 2016.

 

 

(6)

Dr. Clausen served in the positions specified immediately above the Summary Compensation Table during the years presented.

 

 

(7)

Represents options to purchase 175,000 shares of New Common Stock awarded on July 1, 2016 at an exercise price of $1.00 per share, subject to approval of the 2016 Omnibus Incentive Compensation Plan by the Company’s shareholders, which approval was subsequently obtained. The award consists of options to purchase 80,000 shares vested as of December 31, 2017 and options to purchase 95,000 shares vesting according to certain performance milestones related to enrollment under our collaboration with Restorix (which options terminated as of December 31, 2017).

 

 

(8)

Represents $10,800 in 401(k) contributions made by the Company, with the remainder consisting of life insurance premiums paid by the Company for 2017. Represents $14,237 in unused vacation payouts triggered by the Company’s bankruptcy, $10,600 in 401(k) contributions made by the Company, with the remainder consisting of life insurance premiums paid by the Company for 2016. 

 

 

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

 

Following is a description of the employment or severance agreements the Company has with its named executive officers.

 

David Jorden

 

In April 2015, Mr. Jorden was appointed as Acting Chief Financial Officer of the Company for the remainder of the fiscal year, a role which he officially assumed in May of that year. Commencing on May 1, 2015, the Company began compensating Mr. Jorden at the rate of $200,000 per year for as long as he served as Acting Chief Financial Officer. On January 8, 2016, the Board also appointed Mr. Jorden as the Company's Acting Chief Executive Officer, effective immediately. In connection therewith, the Board agreed to an increase in Mr. Jorden's annual compensation from $200,000 to $250,000, effective January 16, 2016. On July 1, 2016, the Board appointed Mr. Jorden as the Company’s Chief Executive Officer and Chief Financial Officer and, at the recommendation of the Compensation Committee, increased his annual salary to $275,000. On January 12, 2018, the Board of Directors adjusted Mr. Jorden’s salary to $100,000 as part of an effort to preserve the Company’s going concern value.

 

Option awards made to Mr. Jorden in 2016 are set forth in the “Summary Compensation Table” and its footnotes.

 

Peter Clausen

 

On March 30, 2014, the Board appointed Peter Clausen, the Company’s Senior VP of Technology and Business Development, to serve as the Company’s Chief Science Officer (later renamed Chief Scientific Officer) and (i) beginning on April 1, 2014, Dr. Clausen’s annual base salary was set to $290,000, subject to annual review by the Compensation Committee and (ii) he is eligible to earn up to 40% of his annual salary as an annual bonus. On May 23, 2014, the Board approved the terms and provisions of Dr. Clausen’s continued employment with the Company to include, among others: (i) base salary of $290,000 per annum, subject to review by the Board for subsequent increases on an annual basis; (ii) an opportunity to earn an annual bonus in the amount of up to 40% of his annual base salary, subject to the Board’s review and approval, and (iii) provisions relating to termination of his employment with or without cause as well as terminations for change in control of the Company. In addition, the foregoing agreement also contains non-solicitation, non-disparagement, non-competition and other covenants and provisions customary for agreements of this nature. On January 12, 2018, the Board of Directors adjusted Dr. Clausen’s salary to $120,000 as part of an effort to preserve the Company’s going concern value.

 

Option awards made to Dr. Clausen in 2016 are set forth in the “Summary Compensation Table” and its footnotes.

 

Outstanding Equity Awards

 

The following table sets forth the outstanding equity awards held by our named executive officers as of December 31, 2017.

 

Outstanding Equity Awards at December 31, 2017

 

Name

 

Number of
Securities
Underlying
Unexercised
Options
Exercisable

   

Number of
Securities
Underlying
Unexercised
Options
Unexercisable

   

Number of

Securities

Underlying

Unexercised

Unearned

Options

   

Option
Exercise
Price

 

Option
Expiration
Date

                                   

David E. Jorden

    162,500 (1)                $ 1.00  

7/1/2026

                                   
                                   

Peter A. Clausen

    80,000 (2)                $ 1.00  

7/1/2026

 

(1)

Consists of options to purchase 162,500 shares (with such options having fully vested as of December 31, 2017).

   

(2)

Consists of options to purchase 80,000 shares (with such options having fully vested as of December 31, 2017).

 

The Company does not provide any pension plans/benefits or nonqualified deferred compensation.

 

 

Director Compensation in 2017 

 

The following table sets forth, for the fiscal year ended December 31, 2017, the cash and non-cash compensation of our non-executive directors during that year. In the paragraphs following the table and in the footnotes, we describe our standard compensation arrangement for service on the Board of Directors and its committees. 

 

Name

 

Fees Earned or
Paid in Cash
(1)

   

Option
Awards

   

Total

 
                         

Joseph Del Guercio(2)

  $ 27,500     $ -     $ 27,500  
                         

C. Eric Winzer

  $ 48,125     $ -     $ 48,125  
                         

Scott M. Pittman

  $ 43,750     $ -     $ 43,750  
                         

Lawrence S. Atinsky

  $ 31,250     $ -     $ 31,250  
                         

Paul D. Mintz MD(3)

  $ 15,000     $ 3,079     $ 18,079  

 

 

(1)

The amounts reflected in this column represent the cash fees paid to non-executive directors in 2017. Of these amounts, the following amounts were paid in 2017 with respect to 2016 services: Del Guercio: $13,750, Winzer: $13,750, Pittman: $12,500 and Atinsky: $12,500.   Effective with respect to Board fees for the third quarter 2017, the Board approved the payment of 50% of the fees in cash and the indefinite deferral of the balance of the fees until the Board determined that the Company’s liquidity situation allowed for payment in cash.  As of December 31, 2017, Board fees payable, representing the 50% deferral with respect to the third quarter and 100% of the fees with respect to the fourth quarter, totaled $73,125.  In January 2018, the Board approved further cash expenditure reductions, as a result of which all Board fees would be deferred indefinitely.   The Board’s Compensation Committee is undertaking a review to determine an appropriate manner to settle Board compensation obligations.   

     
 

(2)

Mr. Del Guercio resigned from the Board effective April 6, 2017.

 

 

(3)

 

Dr. Mintz was appointed to the Board effective April 7, 2017. The option award dollar amount shown reflects the aggregate grant date fair value of the stock option award to Dr. Mintz on May 10, 2017 computed in accordance with FASB ASC Topic 718 (formerly FAS 123R). Dr. Mintz was owed $5,000 as of December 31, 2017 for services performed in his role as Medical Monitor of the CED studies for the months of November and December 2017 at a monthly fee of $2,500.

 

Based on feedback from the Board of Directors and guidelines provided by Pay Governance, an outside compensation consultant, in May 2014, the Compensation Committee proposed and the Board of Directors approved the following compensation of outside directors, which was effective until June 30, 2016:

 

 

1.

Annual retainer of $40,000 payable in cash, effective October 1, 2014;

 

2.

Annual grant of options to purchase 45,000 shares of Old Common Stock (elimination of annual grant of 10,000 options for Committee chairs);

 

3.

Committee chair fees of $15,000, $10,000 & $10,000 for Audit, Compensation & Governance/Nominating Committee, respectively.

 

4.

No “per meeting” fees paid for Board or Committee meetings but $1,500 per official Board meeting exceeding 10 per year. The additional $1,500 fee for official Board meetings exceeding 10 per year was waived for 2015 by the Board of Directors.

 

On July 1, 2016, the Board of Directors adopted the following director compensation recommended by the Compensation Committee:

 

 

1.

Annual retainer of $40,000 payable in cash to all non-employee directors;

 

2.

Annual fee of $15,000 payable in cash to each of the Board Chair and Audit Committee Chair, and annual fee of $10,000 payable in cash to each of the Compensation Committee Chair and the Governance/Nominating Committee Chair; and

 

3.

$1,500 payable in cash per official Board meeting in excess of 10 per year (with no “per meeting” fees payable for the first 10 such meetings) with the 2016 year to be considered the period May 5, 2016 through December 31, 2016.

 

In addition, as disclosed in footnote (3) to the Director Compensation Table, on May 10, 2017, at the recommendation of the Compensation Committee, the Board awarded Dr. Mintz, its new non-employee member, options to purchase 18,750 shares of New Common Stock, which vested on July 1, 2017.

 

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Securities Authorized for Issuance under Equity Incentive Plans

 

We believe that the making of awards under equity compensation plans promotes the success and enhances our value by providing the awardee with an incentive for outstanding performance. Our equity compensation plan is further intended to provide flexibility to us in our ability to motivate, attract, and retain the services of personnel upon whose judgment, interest, and special effort the successful conduct of our operation is largely dependent.

 

2016 Omnibus Incentive Compensation Plan

 

At the recommendation of the Compensation Committee, on July 1, 2016, the Board of Directors approved the Company’s 2016 Omnibus Incentive Compensation Plan (as amended as described below, the “Omnibus Plan”), subject to adoption by the Company’s stockholders.  The Omnibus Plan permits the following types of awards to grantees:

 

 

stock options (including non-qualified options and incentive stock options);

 

stock appreciation rights;

 

restricted stock;

 

performance units;

 

performance shares;

 

deferred stock;

 

restricted stock units;

 

dividend equivalents;

 

bonus shares;

 

cash incentive awards; and

 

other stock-based awards.

 

Awards may be granted to any employee or potential employee (including any officer or potential officer), consultant or director of the Company or an affiliate of the Company. Incentive stock options may only be granted to an employee (including an officer) of the Company or a subsidiary of the Company.  The maximum number of shares of New Common Stock that can be issued under the Plan is initially 1,500,000 shares.  On August 4, 2016, the Board amended the Omnibus Plan to include an evergreen provision, intended to increase the maximum number of shares issuable under the Omnibus Plan on the first day of each fiscal year (starting on January 1, 2017) by an amount equal to six percent (6%) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases may not exceed 1,000,000 shares.

 

On July 1, 2016, the Board approved the award of options to purchase 350,000 shares of the New Common Stock to Mr. Jorden under the Omnibus Plan, with such award subject to the adoption of the Omnibus Plan by the Company’s stockholders which was subsequently obtained.  The terms of Mr. Jordan’s options are set forth in footnote (4) to the Summary Compensation Table, and are incorporated herein by reference.

 

On July 1, 2016, the Board furthermore approved an award of options to purchase 175,000 shares of New Common Stock to Dr. Clausen under the Omnibus Plan, with such award subject to the adoption of the Omnibus Plan by the Company’s stockholders which was subsequently obtained. The terms of Dr. Clausen’s options are set forth in footnote (7) to the Summary Compensation Table, and are incorporated herein by reference.

 

On July 1, 2016, at the recommendation of the Compensation Committee, the Board furthermore approved the award of options to purchase an aggregate of 160,000 shares of New Common Stock to the Company’s four non-employee directors, in each case subject to adoption of the Omnibus Plan by the Company’s stockholders and subject to vesting conditions. The options granted to the non-employee directors vested immediately with respect to 15,000 shares and vested on January 1, 2017 with respect to the additional 25,000 shares. 

 

On July 1, August 4, and November 10, 2016, the Board approved option awards to purchase an aggregate of 685,000 shares of New Common Stock to non-executive employees of the Company, subject to adoption of the Omnibus Plan by the stockholders.

 

All options granted on July 1, August 4 and November 10, 2016 were granted at an exercise price of $1.00 per share of New Common Stock. The Omnibus Plan was adopted by the Company’s stockholders and became effective on January 9, 2017.

 

During 2017, the Board of Directors granted options to purchase 56,250 share of New Common Stock, 37,500 were granted at an exercise price of $2.00 per share and 18,750 were granted at an exercise price of $1.00 per share. Through December 31, 2017, options to purchase 460,000 shares of New Common Stock have been forfeited.

 

 

The following table sets forth information on our Omnibus Plan as of December 31, 2017.

 

Equity Compensation Plan Information as of December 31, 2017

 

Plan category

 

Number of
securities to be
issued upon
exercise of
outstanding
options, warrants,
and rights

   

Weighted average
exercise price of
outstanding
options, warrants,
and rights

   

Number of
securities

remaining
available for

future
issuance

 

Equity compensation plans approved by security holders

    861,250     $ 1.04       728,750 (1) 

Equity compensation plans not approved by security holders

        $        

Total

    861,250     $ 1.04       728,750 (1) 

 

(1)

Under the Omnibus Plan’s evergreen provision, the maximum number of shares issuable under the Omnibus Plan on the first day of each fiscal year (starting on January 1, 2017) is increased by an amount equal to six percent (6%) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases may not exceed 1,000,000 shares.  

 

As of December 31, 2017, no shares of New Common Stock had been issued upon exercise of options granted pursuant to the Omnibus Plan. 

 

Security Ownership of Certain Beneficial Owners 

 

The following table sets forth information regarding the ownership of our New Common Stock as of April 12, 2018 by all those known by the Company to be beneficial owners of more than five percent of its voting securities. This table is prepared in reliance upon beneficial ownership statements filed by such stockholders with the SEC under Section 13(d) or 13(g) of the Exchange Act and/or the best information available to the Company.

  

Name of
Beneficial Owner

 

Beneficial
Ownership
(1)

   

Percent of
Class
(1)

 

Charles E. Sheedy

    11,189,677 (2)      43.7

%

Boyalife Investment Fund I, Inc.

    6,650,000 (3)      27.2

%

 

(1)

Percentage ownership is based upon 22,722,400 shares of New Common Stock issued and outstanding as of April 12, 2018. For purposes of determining the amount of securities beneficially owned, share amounts include all voting stock owned outright plus all shares of voting stock issuable upon the exercise of options or warrants exercisable as of the date above, or exercisable within 60 days after such date. In addition to the shares of New Common Stock outstanding, 29,038 shares of Series A Preferred Stock are outstanding. Except with respect to the election of directors, holders of the Series A Preferred Stock are generally entitled to vote together with holders of New Common Stock, with each share of Series A Preferred Stock corresponding to five votes. Consolidating the voting power of New Common Stock and Series A Preferred Stock, the beneficial ownership percentages for Mr. Sheedy and Boyalife Investment Fund I, Inc. would be 43.6% and 27.1%, respectively. We believe that, except as otherwise noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed.

 

(2)

Charles E. Sheedy’s beneficial ownership includes 8,286,312 shares of New Common Stock held by Charles E. Sheedy and 3,365 shares of New Common Stock held in five separate trusts for the benefit of Mr. Sheedy’s children. It also includes 2,900,000 shares of New Common Stock issuable upon exercise of warrants, which are exercisable at an exercise price of $0.50 per share. The mailing address for Mr. Sheedy is: Two Houston Center, Suite 2907, 909 Fannin Street, Houston, TX 77010.

 

(3)

Boyalife Investment Fund I, Inc.’s beneficial ownership includes 1,750,000 shares of New Common Stock issuable upon exercise of warrants, which are exercisable at an exercise price of $0.65 per share. As disclosed in its Schedule 13D/A filed on September 21, 2017, Boyalife’s President is Xiaochun Xu, all of the outstanding shares of Boyalife are owned by Boyalife Group, Inc, and the principal business address of Boyalife Group, Inc. is 1133 S. Wabash Ave, Suite C1, Chicago, IL 60605.

 

 

Security Ownership of Management

 

The following table sets forth information regarding the ownership of our New Common Stock as of April 12, 2018 by: (i) each director; (ii) each of the named executive officers; and (iii) all executive officers and directors of the Company as a group. This table is prepared in reliance upon beneficial ownership statements filed by such stockholders with the SEC under Section 13(d) or 13(g) of the Exchange Act and/or the best information available to the Company.

 

Name of Beneficial Owner

 

Beneficial
Ownership
(1)

   

Percent of
Class
(1)

 
                 

Scott M. Pittman

    4,105,800 (2)      17.2

%

                 

David E. Jorden

    719,836 (3)      3.1

%

                 

Peter A. Clausen

    84,675 (4)      *  
                 

C. Eric Winzer

    65,000 (5)      *  
                 

Lawrence S. Atinsky

    40,000 (6)      *  
                 

Paul D. Mintz

    18,750 (7)      *  
                 

Group consisting of executive officers and directors (6 in total)

    5,034,061 (8)      20.8

%

 

 

*

Less than 1%.

 

(1)

Percentage ownership is based upon 22,722,400 shares of New Common Stock issued and outstanding as of April 12, 2018. For purposes of determining the amount of securities beneficially owned, share amounts include all voting stock owned outright plus all shares of voting stock issuable upon the exercise of options or warrants exercisable as of the date above, or exercisable within 60 days after such date. In addition to the shares of New Common Stock outstanding, 29,038 shares of Series A Preferred Stock are outstanding. Except with respect to the election of directors, holders of the Series A Preferred Stock are generally entitled to vote together with holders of New Common Stock, with each share of Series A Preferred Stock corresponding to five votes. Consolidating the voting power of New Common Stock and Series A Preferred Stock, the beneficial ownership percentages for Messrs. Pittman and Jorden would be 17.1% and 3.1%, respectively, and the beneficial ownership percentage for all executive officers and directors as a group would be 20.6%. We believe that, except as otherwise noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed. Unless otherwise indicated, the mailing address of all persons named in this table is: c/o Nuo Therapeutics, Inc., 207A Perry Parkway, Suite 1, Gaithersburg, MD 20877.

 

(2)

Independent director of the Company. Includes shares of New Common Stock held in an IRA for the benefit of Mr. Pittman. Includes 1,130,000 shares of New Common Stock issuable upon exercise of warrants (held directly and in an IRA for the benefit of Mr. Pittman), which are exercisable at exercise prices of $0.75 per share (with respect to 850,000 shares) and $0.50 per share (with respect to 280,000 shares). Also includes 40,000 shares Mr. Pittman may acquire upon the exercise of stock options granted under the Omnibus Plan (all of which are exercisable).

 

(3)

Chief Executive and Chief Financial Officer of the Company. Includes 55,915 shares held in an IRA for the benefit of Mr. Jorden and 190 shares held in the name of Mr. Jorden’s children, over which Mr. Jorden has or shares voting and dispositive power. Includes 162,500 shares Mr. Jorden may acquire upon the exercise of stock options granted under the Omnibus Plan.

 

(4)

Chief Scientific Officer of the Company. Includes 80,000 shares Dr. Clausen may acquire upon the exercise of stock options granted under the Omnibus Plan.

 

(5)

Independent director of the Company. Includes 40,000 shares Mr. Winzer may acquire upon the exercise of stock options granted under the Omnibus Plan (all of which are exercisable).

 

(6)

Independent director of the Company. Represents 40,000 shares Mr. Atinsky may acquire upon the exercise of stock options granted under the Omnibus Plan (all of which are exercisable).  Mr. Atinsky, a Partner at Deerfield Management Company, L.P., has no pecuniary interest in the securities reported herein and disclaims beneficial ownership of such securities.

   

(7)

Independent director of the Company. Represents 18,750 shares Dr. Mintz may acquire upon the exercise of stock options granted under the Omnibus Plan (all of which are exercisable).

 

(8)

Includes options to purchase an aggregate of 381,250 shares of New Common Stock, granted under the Omnibus Plan that are exercisable or will become exercisable within 60 days and representing that portion of options to purchase a total of 381,250 shares which are subject only to time vesting.

 

There are no arrangements, known to the Company, including any pledge by any person of securities of the Company, the operation of, which may, at a subsequent date, result in a change of control of the Company.

 

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

 

Related Transactions

 

Except as set forth below, since January 1, 2015, we were not involved in any related party transactions required to be disclosed under Item 404 of Regulation S-K.

 

 

Transactions with Deerfield Lenders

 

On the Effective Date under our Plan of Reorganization, Lawrence Atinsky was appointed to our Board of Directors by the holders of our Series A Preferred Stock issued on the Effective Date, i.e., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., and Deerfield Special Situations Fund, L.P., and certain of their affiliates (collectively, the “Deerfield Lenders”).

 

In 2014, we entered into the Deerfield Facility Agreement, a $35 million five-year senior secured convertible credit facility with the Deerfield Lenders.   At December 31, 2015 and January 26, 2016, we had total debt outstanding under the Deerfield Facility Agreement of $38.1 million, and $38.3 million, respectively, including accrued interest of $3.1 million and $3.3 million, respectively. Pursuant to the terms of the original Deerfield Facility Agreement, we were required to maintain a compensating cash balance of $5.0 million in deposit accounts subject to control agreements in favor of the lenders and we were required to pay the Deerfield Lenders accrued interest of approximately $2.6 million on October 1, 2015. We were unable to meet these requirements and on both December 4 and 18, 2015, we entered into consent letters with the Deerfield Lenders to modify the Deerfield Facility Agreement and waive the compliance violations for a limited period. Under the terms of the December 18, 2015 consent letter, (i) solely during the period between December 18, 2015 and January 7, 2016, the amount of cash that was required to be maintained in a deposit account subject to control agreements in favor of the Company’s senior lenders was reduced from $5,000,000 to $500,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to January 7, 2016. The continued effectiveness of the consent letter was conditioned upon the Company’s continued engagement of a representative of Winter Harbor LLC as chief restructuring officer and providing Deerfield with all relevant business contracts, agreements, and vendor relationships for the Aurix and Angel product lines by December 28, 2015; the Company’s failure to do either would result in an immediate default under the Deerfield Facility Agreement. The consent letter contained various customary representations and warranties.

 

The Deerfield Facility Agreement was structured as a purchase of senior secured convertible notes (the “Notes”), which bore interest at a rate of 5.75% per annum, payable quarterly in arrears in cash or, at our election, registered shares of Old Common Stock; provided, that during the five quarters ending September 30, 2015, we had the option of having all or any portion of accrued interest added to the outstanding principal balance.  The Deerfield Lenders had the right to convert the principal amount of the Notes into shares of our Old Common Stock (“Conversion Shares”) at a per share price equal to $0.52. In addition, we granted to the Deerfield Lenders the option to require the Company to redeem up to 33.33% of the total amount drawn under the facility, together with any accrued and unpaid interest thereon, on each of the second, third, and fourth anniversaries of the closing with the option right triggered upon the Company’s net revenues failing to be equal to or in excess of certain quarterly milestone amounts. We also granted the Deerfield Lenders the option to require us to apply 35% of the proceeds received by us in equity-raising transaction(s) to redeem outstanding principal and interest of the Notes, provided that the first $10 million so raised by us would be exempt from this put option.

  

Under the terms of the facility, we also issued warrants to purchase up to 97,614,999 shares of our Old Common Stock at an initial exercise price of $0.52 per share (subject to adjustments).

 

We entered into a security agreement which provided, among other things, that our obligations under the Notes would be secured by a first priority security interest, subject to customary permitted liens, on all our assets. We also entered into a registration rights agreement pursuant to which we filed a registration statement to register the resale of securities issued in the Recapitalization Financing.

 

In connection with our Chapter 11 Case, on January 28, 2016, the Bankruptcy Court entered an order approving the Company's interim DIP Financing pursuant to terms set forth in the DIP Credit Agreement, by and among the Company, as borrower, the Deerfield Lenders and the DIP Agent. 

 

On March 9, 2016, the Bankruptcy Court approved on a final basis the Company's motion for approval of the final DIP Credit Agreement and use of cash collateral, and approved a Waiver and First Amendment to the DIP Credit Agreement (the “Waiver and First Amendment”) with the Deerfield Lenders and DIP Agent, pursuant to which the DIP Credit Agreement was approved to include certain amendments, including to set forth the material terms of the proposed restructuring of the prepetition and post-petition secured debt, unsecured debt and equity interests of the Company, the terms of which were eventually effected pursuant to our Plan of Reorganization. The Waiver and First Amendment provided for senior secured loans in the aggregate principal amount of up to $6,000,000 in post-petition financing.

 

The Company was required to pay the DIP lenders a closing fee equal to 1.5% of the aggregate committed loan amount. The outstanding principal amount under the DIP Credit Agreement would bear interest from the date of each loan's disbursement at twelve percent (12%) (calculated on the basis of the actual number of days elapsed). Upon an event of default, all obligations under the DIP Credit Agreement would bear interest at a rate equal to then current interest rate applicable thereto plus ten percent (10%).

 

 

On the Effective Date, the obligations of the Company under the Deerfield Facility Agreement and under the DIP Credit Agreement were cancelled in accordance with the Plan of Reorganization and the Company ceased to have any obligations thereunder.

 

On the Effective Date under our Plan of Reorganization, the Company issued 29,038 shares of Series A Preferred Stock to the Deerfield Lenders in accordance with the Plan of Reorganization. The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of New Common Stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction. For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect one member of the Board of Directors and to have such director serve on a standing committee of the Board of Directors established to exercise powers of the Board of Directors in respect of decisions or actions relating to the Backstop Commitment. Lawrence Atinsky serves as the designee of the holders of Series A Preferred Stock. The Series A Preferred Stock have voting rights, voting with the New Common Stock as a single class, representing approximately one percent (1%) of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock have the right to approve certain transactions. For so long as the Backstop Commitment remained in effect, a majority of the members of the standing backstop committee of the Board of Directors was required to approve a drawdown under the Backstop Commitment. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limits the Company’s ability to (i) issue securities that are senior or pari passu with the Series A Preferred Stock, (ii) incur debt (other than for working capital purposes not in excess of $3.0 million), (iii) issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, (iv) pay dividends on or purchase shares of its capital stock, and (v) change the authorized number of members of its Board of Directors to a number other than five, in each case without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock.

 

Pursuant to the Plan of Reorganization, on the Effective Date, the Company entered into an Assignment and Assumption Agreement with Deerfield SS, LLC (the “Assignee”), the designee of the Deerfield Lenders, to assign to the Assignee the Company’s rights, title and interest in and to the Arthrex Agreement, and to transfer and assign to the Assignee associated intellectual property owned by the Company and licensed under the Arthrex Agreement, as well as rights to collect royalty payments thereunder. The assignment and transfer was effected in exchange for a reduction of $15,000,000 in the amount of the allowed claim of the Deerfield Lenders pursuant to the Plan of Reorganization. Pursuant to the Plan of Reorganization, on the Effective Date, the Company and the Assignee entered into a Transition Services Agreement in which the Company agreed to continue to service the Arthrex Agreement for a transition period in exchange for a fee of $10,000 per month.

 

On October 20, 2016, the Company entered into the Three Party Letter Agreement with Arthrex and the Assignee, which extended the transition period under the Transition Services Agreement through January 15, 2017. Under the terms of the Three Party Letter Agreement, subject to Arthrex making a payment of $201,200 to the Company on October 28, 2016, (a) the Company has sold, conveyed, transferred and assigned to Arthrex its title and interest in the Company’s inventory of Angel products (including spare parts therefor) and production equipment, and (b) the Assignee is obligated to make three equal payments of $33,333 each to the Company as consideration for the extension of the transition period. Under the terms of the Three Party Letter Agreement, the Company has no further obligations under the Transition Services Agreement or the Amended Arthrex Agreement after January 15, 2017. The agreement contains a full and irrevocable release of Arthrex by the Company with respect to any actions, claims or other liabilities for payments of Royalty (as defined in the Amended Arthrex Agreement) owed to the Company based on sales of Angel products occurring on or before June 30, 2016, and a full and irrevocable release of the Company and the Assignee by Arthrex with respect to any actions, claims or other liabilities arising under the Amended Arthrex Agreement as of the date of the Three Party Letter Agreement. Neither Arthrex nor the Assignee assumed any liabilities or obligations of the Company in connection with the Three Party Letter Agreement. 

 

Transactions with Boyalife

 

Effective as of May 5, 2016, the Company and Boyalife Hong Kong Ltd. (“Boyalife”), an entity affiliated with the Company’s significant shareholder, Boyalife Investment Fund I, Inc., entered into an Exclusive License and Distribution Agreement (the “Boyalife Distribution Agreement”) with an initial term of five years, unless the agreement is terminated earlier in accordance with its terms. Under this agreement, Boyalife received a non-transferable, exclusive license, with limited right to sublicense, to use certain of the Company’s intellectual property relating to its Aurix System for the purposes and in the territory specified below. Under the agreement, Boyalife is entitled to import, use for development, promote, market, sell and distribute the Aurix Products in greater China (China, Hong Kong, Taiwan and Macau) for all regenerative medicine applications, including but not limited to wound care and topical dermatology applications in human and veterinary medicine. “Aurix Products” are defined as the combination of devices to produce a wound dressing from the patient’s blood - as of May 5, 2016 consisting of centrifuge, wound dressing kit and reagent kit. Under the Boyalife Distribution Agreement, Boyalife is obligated to pay the Company (a) $500,000 within 90 days of approval of the Aurix Products by the China Food and Drug Administration (“CFDA”), but no earlier than December 31, 2018, and (b) a distribution fee per wound dressing kit and reagent kit of $40, payable quarterly, subject to an agreement by the parties to discuss in good faith the appropriate distribution fee if the pricing of such kits exceeds the current general pricing in greater China. Under the agreement, Boyalife is entitled, with the Company’s approval (not to be unreasonably withheld or delayed) to procure devices from a third party in order to assemble them with devices supplied by the Company to make the Aurix Products. Boyalife also has a right of first refusal with respect to the Aurix Products in specified countries in the Asia Pacific region excluding Japan and India, exercisable in exchange for a payment of no greater than $250,000 in the aggregate. If Boyalife files a new patent application for a new invention relating to wound dressings, the Aurix Products or the Company’s technology, Boyalife will grant the Company a free, non-exclusive license to use such patent application outside greater China during the term of the Boyalife Distribution Agreement.

 

 

Recapitalization

 

In accordance with the Plan of Reorganization, as of the Effective Date, the Company issued 7,500,000 shares (the “Recapitalization Shares”) of new common stock, par value $0.0001 per share (the “New Common Stock”) to certain accredited investors (the “Recapitalization Investors”) for gross cash proceeds of $7,300,000 and net cash to the Company of $7,052,500 (the “Recapitalization Financing”).  200,000 of the 7,500,000 shares of New Common Stock were issued in partial payment of an advisory fee.  The net cash amount excludes the effect of $100,000 in offering expenses paid from the proceeds of the DIP Financing, which was converted into Series A Preferred Stock as of the Effective Date.

 

As part of the Recapitalization Financing, the Company also issued warrants to purchase 6,180,000 shares of New Common Stock to certain of the Recapitalization Investors (the “Warrants”). The Warrants terminate on May 5, 2021 and are exercisable at any time on or after November 5, 2016 at exercise prices ranging from $0.50 per share to $1.00 per share. The number of shares of New Common Stock underlying a Warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations.

 

As of the Effective Date, the Company entered into the Registration Rights Agreement with the Recapitalization Investors. The Registration Rights Agreement provides certain resale registration rights to the investors with respect to the securities obtained in the Recapitalization Financing. Pursuant to the Registration Rights Agreement, the Company has agreed to use its best efforts to keep the registration statement continuously effective under the Securities Act until the earliest of (i) the date when all registrable securities under the registration statement may be sold without registration or restriction pursuant to Rule 144(b) under the Securities Act or any successor provision or (ii) the date when all registrable securities under the registration statement have been sold, subject to the Company’s ability to suspend sales under the registration statement in certain circumstances. 

 

The Recapitalization Investors included, among other investors:

 

 

David E. Jorden, who invested $137,500 in cash in exchange for 137,500 shares of New Common Stock and executed a Backstop Commitment in the amount of $55,000,

 

CNF Investments II, LLC (affiliated with Joseph Del Guercio), which invested $250,000 in cash in exchange for 250,000 shares of New Common Stock,

 

Scott M. Pittman, who invested $825,000 in cash in exchange for 825,000 shares of New Common Stock and 1,130,000 Warrants (850,000 with an exercise price of $0.75 per share and 280,000 with an exercise price of $0.50 per share) and executed a Backstop Commitment in the amount of $610,000,

 

C. Eric Winzer, who invested $25,000 in cash in exchange for 25,000 shares of New Common Stock,

 

Charles E. Sheedy, who invested $2,900,000 in cash in exchange for 2,900,000 shares of New Common Stock and 2,900,000 Warrants with an exercise price of $0.50 per share and executed a Backstop Commitment in the amount of $1,160,000, and

 

Boyalife Investment Fund I, Inc., which invested $1,750,000 in cash in exchange for 1,750,000 shares of New Common Stock and 1,750,000 Warrants with an exercise price of $0.65 per share and executed a Backstop Commitment in the amount of $700,000.

 

Issuance of New Common Stock in Exchange for Administrative Claims

 

As of June 20, 2016, the Company issued 162,500 shares of New Common Stock (the “Administrative Claim Shares”) pursuant to the Order Granting Application of the Ad Hoc Equity Committee Pursuant to 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) for Allowance of Fees and Expenses Incurred in Making a Substantial Contribution, entered by the Bankruptcy Court on June 20, 2016. The Administrative Claim Shares were issued to holders of administrative claims under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. Of the Administrative Claim shares, $10,000 were issued to Mr. Pittman and $10,000 shares were issued to Mr. Sheedy as designees of the Ad Hoc Equity Committee who had granted loans in an aggregate amount of $10,000 each to the Ad Hoc Equity Committee in December 2015 as repayment of such loans.

 

Review and Approval Policies and Procedures for Related Party Transactions

 

Pursuant to written Board policies, our executive officers and directors, and principal stockholders, including their immediate family members and affiliates, are not permitted to enter into a related party transaction without the prior consent of the Board. Any request for such related party transaction with an executive officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to the Audit Committee and the Board for review, consideration and approval. All of our directors, executive officers and employees are required to report to the Board any such related party transaction. In approving or rejecting the proposed agreement, the Board will consider the relevant facts and circumstances available and deemed relevant to the Board which will approve only those agreements that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as the Board determines in the good faith exercise of its discretion. 

 

 

Director Independence

 

For disclosure on the independence of our directors, please refer to “Item 10. Directors, Executive Officers and Corporate Governance – Director and Board Nominee Independence,” which is incorporated herein by reference.

 

ITEM 14. Principal Accounting Fees and Services (we need to figure this out for presentation)

 

The following table presents fees for professional services rendered by GBH CPAs PC and CohnReznick LLP for the fiscal years 2017 and 2016, respectively:  

 

Services Performed

  2017(2)     2016(3)  
                 

Audit fees(1)

  $ 183,229     $ 198,725  
                 

Total Fees

  $ 183,229     $ 198,725  

 

(1)

Audit fees represent fees accrued for annual professional services provided in connection with the audit of the Company’s annual financial statements, reviews of its quarterly financial statements, and audit services provided in connection with statutory and regulatory filings for those years.

 

(2)

Represents services provided by GBP CPAs, PC for the annual audit and the quarterly review for the period ended September 30, 2017.   No other services were provided in connection with the fiscal year ended December 31, 2017 by GBP CPAs, PC.  In addition, the amount includes fees for services provided CohnReznick LLP for their reviews of the quarterly financial statements for the periods ended June 30, 2017 and March 31, 2017 and fees related to non-routine SEC filings .

 

(3)

Represents services provided by CohnReznick LLP.  The audit for the fiscal year ended December 31, 2016 was performed by CohnReznick LLP.  For the fiscal year ended December 31, 2016, this category includes fees related to non-routine SEC filings.

 

Pursuant to its charter, the Audit Committee must pre-approve audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor. In 2017 and 2016, all such services were pre-approved by the Audit Committee.

 

Audit Committee Pre-Approval Policies and Procedures

 

The Audit Committee has the sole authority to pre-approve all audit and non-audit services provided by independent accountants. The Audit Committee has adopted policies and procedures for the pre-approval of services provided by the independent accountants. The Audit Committee, on an annual basis, reviews audit and non-audit services performed by the independent accountants. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the accountants’ independence. All requests for services to be provided by the independent accountants, which must include a description of the services to be rendered and the amount of corresponding fees, are submitted to the Chief Financial Officer. The CFO has the authority to authorize services that fall within the category of services that the Audit Committee has pre-approved. If there is any question as to whether a request for services falls within the category of services that the Audit Committee has pre-approved, the CFO will consult with the chairman of the Audit Committee. The CFO submits requests or applications to provide services that the Audit Committee has not pre-approved, which must include an affirmation by the CFO and the independent accountants, that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its chairman or any of its other members pursuant to delegated authority) for approval. 

 

As permitted under the Sarbanes-Oxley Act of 2002, the Audit Committee may delegate pre-approval authority to one or more of its members. Any service pre-approved by a delegate must be reported to the Audit Committee at the next scheduled quarterly meeting. The Audit Committee considered whether the provision of the auditors’ services, other than for the annual audit and quarterly reviews, is compatible with its independence and concluded that it is compatible.

 

 

PART IV

 

ITEM 15. Exhibits, Financial Statement Schedules

 

(a)

The following financial statements of Nuo Therapeutics, Inc. are included in Item 8 of Part II of this Annual Report on Form 10-K:

 

 

 

 

Page

Report of Independent Registered Public Accounting Firms

 

F-2

Consolidated Balance Sheets

 

F-4

Consolidated Statements of Operations

 

F-5

Consolidated Statements of Redeemable Common Stock and Stockholders’ Equity (Deficit)

 

F-6

Consolidated Statements of Cash Flows

 

F-7

Notes to Consolidated Financial Statements

 

F-8

 

(b)

For a list of exhibits filed or furnished with this Annual Report on Form 10-K, see Exhibit Index.

 

(c)

Not applicable.

 

 

NUO THERAPEUTICS, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Report of Independent Registered Public Accounting Firms

 

F-2

Consolidated Balance Sheets

 

F-4

Consolidated Statements of Operations

 

F-5

Consolidated Statements of Redeemable Common Stock and Stockholders' Equity (Deficit)

 

F-6

Consolidated Statements of Cash Flows

 

F-7

Notes to Consolidated Financial Statements

 

F-8

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Nuo Therapeutics, Inc.

 

We have audited the accompanying consolidated balance sheet of Nuo Therapeutics, Inc. (the “Company”) as of December 31, 2016 (Successor Company balance sheet), and the related consolidated statements of operations, redeemable common stock and stockholders’ equity (deficit), and cash flows for the period May 5, 2016 through December 31, 2016 (Successor Company operations) and the period January 1, 2016 through May 4, 2016 (Predecessor Company operations).  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, on April 25, 2016, the Bankruptcy Court entered an order confirming the Plan of Reorganization which became effective on May 5, 2016. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852, Reorganizations, for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying values not comparable with prior periods as described in Note 2 to the consolidated financial statements.

 

In our opinion, the Successor Company consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nuo Therapeutics, Inc. as of December 31, 2016 and the results of their operations and their cash flows for the period May 5, 2016 through December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the period July 1, 2016 through May 4, 2016, in conformity with accounting principles generally accepted in the United States of America. 

 

 

/s/ CohnReznick LLP

 

 

Tysons, Virginia

March 28, 2017

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the stockholders and the board of directors of
Nuo Therapeutics, Inc.
Gaithersburg, Maryland

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Nuo Therapeutics, Inc. (the "Company") as of December 31, 2017, the related consolidated statements of operations, redeemable common stock and stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes  (collectively referred to as the "financial statements").  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on the Company's financial statements based on our audit.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audit provides a reasonable basis for our opinion.

 

Other matters

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ GBH CPAs, PC

 

We have served as the Company's auditor since 2017.

 

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 16, 2018

 

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

 

   

Successor

   

Successor

 
   

December 31, 2017

   

December 31, 2016

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 693,515     $ 2,620,023  

Restricted cash

    -       53,503  

Accounts and other receivable, net

    114,331       294,298  

Inventory, net

    35,590       69,954  

Prepaid expenses and other current assets

    341,671       334,437  

Total current assets

    1,185,107       3,372,215  
                 

Property and equipment, net

    223,616       486,116  

Deferred costs and other assets

    15,316       278,730  

Intangible assets, net

    -       7,840,408  

Goodwill

    -       2,079,284  

Total assets

  $ 1,424,039     $ 14,056,753  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 380,280     $ 392,615  

Accrued expenses and liabilities

    556,557       1,054,677  

Total current liabilities

    936,837       1,447,292  
                 

Other liabilities

    4,331       123,434  

Total liabilities

    941,168       1,570,726  
                 

Commitments and contingencies (Note 13)

               
                 
Stockholders’ equity                

Preferred stock; $0.0001 par value, 1,000,000 shares authorized, 29,038 shares issued and outstanding; liquidation value $29,038,000

    3       3  

Common stock; $0.0001 par value, 31,500,000 shares authorized, 22,722,400 and 9,927,112 shares issued and outstanding, respectively

    2,272       993  

Additional paid-in capital

    21,155,404       18,180,658  

Accumulated deficit

    (20,674,808

)

    (5,695,627

)

Total stockholders' equity

    482,871       12,486,027  
                 

Total liabilities and stockholders' equity

  $ 1,424,039     $ 14,056,753  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

Year Ended

December 31, 2017

   

Period from

May 5, 2016

through

December 31,

2016

   

Period from

January 1, 2016

through May 4,

2016

 
   

Successor

   

Successor

   

Predecessor

 

Revenue

                       

Product sales

  $ 530,935     $ 366,395     $ 922,608  

License fees

    -       -       139,534  

Royalties

    190,110       106,050       670,079  

Total revenue

    721,045       472,445       1,732,221  
                         

Costs of revenue

                       

Costs of sales

    1,091,042       729,050       829,095  

Costs of license fees

    -       -       -  

Costs of royalties

    -       -       54,543  

Total costs of revenue

    1,091,042       729,050       883,638  
                         

Gross profit (loss)

    (369,997

)

    (256,605 )     848,583  
                         

Operating expenses

                       

Sales and marketing

    712,735       893,138       833,943  

Research and development

    1,328,324       1,015,871       554,586  

General and administrative

    3,823,929       3,292,348       2,307,009  

Impairment of intangible assets and goodwill

    9,299,223       -       -  

Total operating expenses

    15,164,211       5,201,357       3,695,538  
                         

Loss from operations

    (15,534,208

)

    (5,457,962

)

    (2,846,955

)

                         

Other income (expense)

                       

Interest, net

    (10,817

)

    (2,219

)

    (252,956

)

Other

    566,314       89,105       2,495  

Reorganization items, net

    -       (324,551 )     31,271,350  

Total other income (expense)

    555,497       (237,665 )     31,020,889  
                         

Income (loss) before income taxes

    (14,978,711

)

    (5,695,627 )     28,173,934  

Income taxes

    -       -       -  
                         

Net income (loss)

  $ (14,978,711

)

  $ (5,695,627 )