TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

NUO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the financial condition and results of operations of Nuo Therapeutics, Inc. ("Nuo Therapeutics," the "Company," "we," "us," or "our") should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”), filed with the U.S. Securities and Exchange Commission, or the Commission. 

 

Special Note Regarding Forward Looking Statements

 

Some of the information in this Quarterly Report (including this section) 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. 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 Quarterly 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 continuing rapid depletion of our cash resources, our need for immediate and substantial additional financing (without which we face liquidation) and our ability to obtain that financing, including in light of our unsuccessful registered offering and refinancing of our Series A preferred stock in 2017 and the low share price and significant volatility with respect to our common stock - if we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock;
●	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;
●	whether the Centers for Medicare & Medicaid Services, or CMS, will meaningfully increase the standard national payment rate for physicians for the use of Aurix so that it will provide an adequate payment to physicians to increase such use sufficiently;
●	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 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;
●	Restorix Health, Inc.’s, or Restorix’, willingness to continue performing consistent with the Collaboration Agreement, the initial term of which expired in March 2018;
●	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 Ambulatory Payment Classification ("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 OTC market (with such price having declined substantially) and the limited trading volume or liquidity of our common stock - as a result of our decrease in net tangible assets below the required threshold for trading on OTCQX, our common stock moved to the OTCQB market effective June 7, 2018, which could further restrict liquidity and our ability to raise capital through equity issuances;
●	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 “Risk Factors” in our 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.

 

Finally, we can offer no assurances that we have correctly estimated the resources necessary to execute under our existing customer agreements and seek partners, co-developers or acquirers for our regenerative therapies post-reorganization. If a larger workforce or one with a different skillset is ultimately required to implement our post-reorganization strategy successfully, or if we inaccurately estimated the cash and cash equivalents necessary to finance our operations, or if we are unable to identify additional sources of capital if necessary to continue our operations, our business, results of operations, financial condition and cash flows may be materially and adversely affected.

 

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.

 

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.

 

A potential 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 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 and 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 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. However, the Company and Restorix have been unsuccessful in meaningfully expanding patient enrollment in the three clinical study protocols approved under the CED program. 

 

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 129 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 103 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 53 patients have enrolled to date.

 

●

To increase the opportunity for greater enrollment in our CED program, we were 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 economic payment to the physician for utilizing Aurix. While physician reimbursement rates per treatment of approximately $200 in a private practice setting and approximately $130 in a hospital setting have been established as of July 2, 2018, we believe these rates may need to be increased in order to provide an adequate payment for physicians. There are no assurances that such increase will actually occur, that it will occur on a timely basis so as to provide a meaningful opportunity to the Company in light of its liquidity constraints, or that any such increase would in fact have a sufficiently positive impact on patient enrollment in the CED studies.

 

 

●

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, assuming the Company procures appropriate financing to continue operations, 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 as described below and an additional future cash payment if and when a pricing event is met as described below. Pursuant to our amended license agreement with Millennia Holdings, Inc. (“Millennia”), we are obligated to pay Millennia 50% of any milestone payments received from Rohto. 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.

 

On May 28, 2018, the Company entered into a pair of agreements with Rohto. Pursuant to a securities purchase agreement, the Company agreed to issue to Rohto, and Rohto agreed to purchase from the Company, 1,000,000 shares of the Company’s common stock at a price of $0.50 per share. This transaction closed in June 2018. Pursuant to an amendment, dated as of May 28, 2018 (the “Amendment”), to the Company’s exclusive licensing and distribution agreement with Rohto (the “Original Agreement”), the parties amended the Original Agreement, reflecting the following material revisions:

 

●

The milestone payment that Rohto was obligated to make upon achievement of the pricing event was reduced from $1,000,000 to $300,000, and the definition of the pricing event was expanded to include a second trigger. As a result of the Amendment, the pricing event occurs on the earlier of (a) achievement of the National Health Insurance system (“NHI”) reimbursement price for the licensed product in Japan and (b) achievement of NHI reimbursement for the treatment by treating clinicians of patients using the licensed product in Japan in the field of use.

 

●

The royalty payment structure was amended. Previously, the royalty was 9% of net sales. This was amended to provide that the royalty would be 9% of net sales so long as Rohto uses any Nuo patent, and 5% of net sales if Rohto does not use any Nuo patent and in certain other circumstances described in the Amendment. The royalty payment obligation expires at the later of December 31, 2029 or the expiration of the relevant Nuo patent. The two relevant patents have expiration dates in 2019 and 2032.

 

 

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.)

 

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 then existing equity interests of the Company, including shares of the Company's 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.

 

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 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 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. 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 Commitment. During 2017, the Company exercised its rights under the Backstop Commitment in full and issued 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3 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 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 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 suspended sales under the registration statement pending the filing and effectiveness of a post-effective amendment containing updated financial information.

 

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.  As of the date of filing of this Quarterly Report, trading in our common stock continues to be 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.  In addition, we have received notice from OTCMarkets that we do not meet the penny stock exemption criteria as a result of our decrease in net tangible assets below the required threshold.  As such, our common stock moved to the OTCQB market effective June 7, 2018, which could further restrict liquidity and our ability to raise capital through equity issuances.

 

Results of Operations

  

Comparison of Three Months Ended June 30, 2018 and 2017

 

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:

 

		Quarter ended June 30, 2018				Quarter ended June 30, 2017
Product sales		$	80,000			$	147,000
Royalties			58,000				41,000
Total revenues			138,000				188,000
Product cost of sales			38,000				277,000
Total cost of sales			38,000				277,000
Gross profit		$	100,000			$	(89,000	)
Gross margin %			72	%			(47	)%

 

Revenues decreased by $50,000 to $138,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The decrease was primarily attributable to a $67,000 decrease in Aurix product sales partially offset by higher Aldeflour related royalties.  Aurix revenues declined primarily due to lower enrollment in the CED study protocols (and resulting fewer treatments) as the Company's limited resources impacted viability perceptions.  Management believes quarterly Aurix revenues will remain modest and insufficient to cover operating expenses until such time as CED enrollment can be substantially increased and/or alternative non-CED Aurix revenues can be established

 

Overall gross profit increased $189,000 to $100,000 while overall gross margin increased to 72% from (47)%, comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The increase in gross profit primarily reflects the effect of non-cash amortization expense of (i) approximately $183,000 of intangible technology assets and (ii) approximately $30,000 for a prepaid royalty, both of which were recorded in the three month period ended June 30, 2017. As all intangible assets were considered impaired as of December 31, 2017, no amortization expense was recognized in the three months ended June 30, 2018.

 

 

Operating Expenses

 

Total operating expenses decreased $3,139,000 to $683,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The decrease was primarily due to (i) the $2.1 million goodwill impairment charge recognized in the three months ended June 30, 2017 and (ii) decreases across substantially all expense components from reduced headcount and cost saving initiatives. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased $140,000 (87%) to $21,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The decrease was primarily due to elimination of the remaining direct sales personnel early in the first quarter 2018.

 

Research and Development

 

Research and development expenses decreased $169,000 (55%) to $140,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The decrease was primarily due to (i) reduced headcount in the clinical affairs area and corresponding lower compensation expenses, (ii) no depreciation expense in the three months ended June 30, 2018 as software costs are now fully depreciated, and (iii) decreased clinical site training fees.

 

General and Administrative

 

General and administrative expenses decreased $751,000 (59%) to $522,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017. The decrease was primarily due to (i) lower compensation expense due to reduced headcount, and (ii) lower professional fees including legal and audit services.

 

Impairment of Goodwill

  

As a result of events and circumstances in the three months 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.

 

Other Income (Expense)

 

Other expense, net increased modestly by approximately $6,000 comparing the three months ended June 30, 2018 to the three months ended June 30, 2017.

 

Comparison of Six Months Ended June 30, 2018 and 2017

 

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:

 

		Six Months ended June 30, 2018				Six Months ended June 30, 2017
Product sales		$	205,000			$	261,000
Royalties			93,000				100,000
Total revenues			298,000				361,000
Product cost of sales			87,000				547,000
Total cost of sales			87,000				547,000
Gross profit		$	211,000			$	(186,000	)
Gross margin %			71	%			(52	)%

 

 

Revenues decreased by $63,000 to $298,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The decrease was primarily attributable to a $56,000 decrease in Aurix product sales.  Aurix revenues declined primarily due to lower enrollment in the CED study protocols (and resulting fewer treatments) as the Company's limited resources impacted viability perceptions.  Management believes quarterly Aurix revenues will remain modest and insufficient to cover operating expenses until such time as CED enrollment can be substantially increased and/or alternative non-CED Aurix revenues can be established

 

Overall gross profit increased $397,000 to $211,000 while overall gross margin increased to 71% from (52)%, comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The increase in gross profit primarily reflects the effect of non-cash amortization expense of (i) approximately $365,000 of intangible technology assets and (ii) approximately $60,000 for a prepaid royalty, both of which were recorded in the six month period ended June 30, 2017. As all intangible assets were considered impaired as of December 31, 2017, no amortization expense was recognized in the six months ended June 30, 2018.

 

Operating Expenses

 

Total operating expenses decreased $3,948,000 to $1,461,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The decrease was due to (i) the $2.1 million goodwill impairment charge recognized in the six months ended June 30, 2017 and (ii) decreases across substantially all expense components from reduced headcount and cost saving initiatives. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased $292,000 (78%) to $82,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The decrease was primarily due to the elimination of the remaining direct sales personnel early in the first quarter 2018.

 

Research and Development

 

Research and development expenses decreased $311,000 (44%) to $398,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The decrease was primarily due to (i) reduced headcount in the Clinical Affairs area and corresponding lower compensation expenses, (ii) no depreciation expense in the six months ended June 30, 2018 as software costs are now fully depreciated, and (iii) decreased clinical site training fees.

 

General and Administrative

 

General and administrative expenses decreased $1,266,000 (56%) to $981,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017. The decrease was primarily due to (i) lower compensation expense due to reduced headcount, and (ii) lower professional fees including legal and audit services.

 

Impairment of Goodwill 

  

As a result of events and circumstances in the three months 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.

 

Other Income (Expense)

 

Other expense, net increased a modest $1,000 comparing the six months ended June 30, 2018 to the six months ended June 30, 2017.

 

Liquidity and Capital Resources

 

We are rapidly depleting our cash resources and our ability to continue to operate is in immediate jeopardy. For the six months ended June 30, 2018, we incurred net losses from operations of approximately $1.3 million. At June 30, 2018, we had cash and cash equivalents of approximately $0.4 million, total current assets of approximately $0.7 million and total current liabilities of approximately $1.1 million. As of August 9, 2018, we had cash and cash equivalents of approximately $0.3 million.

 

We have a history of losses and are not currently profitable. 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 June 30, 2018, our accumulated deficit was approximately $21.9 million and our stockholders' deficit was approximately $0.3 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, 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. In June 2018, we issued an additional 1,000,000 shares of common stock for gross proceeds of $0.5 million pursuant to a securities purchase agreement with Rohto. 

 

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.  If we are unable within the next 30 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.

 

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 further 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 certain risks and uncertainties including those described in "Item 1.A Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Cash Flows

 

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

 

		Six Months ended June 30, 2018				Six Months ended June 30, 2017
Cash flows used in operating activities		$	(0.8	)		$	(2.3	)
Cash flows used in investing activities		$	-			$	-
Cash flow provided by financing activities		$	0.5			$	-

 

Operating Activities

 

Cash used in operating activities for the six months ended June 30, 2018 of approximately $0.8 million primarily reflects our net loss of approximately $1.3 million adjusted by (i) approximately $0.2 million bad debt recovery and (ii) an approximately $0.6 million increase for changes in operating assets and liabilities.

 

Cash used in operating activities for the six months ended June 30, 2017 of approximately $2.3 million primarily reflects our net loss of approximately $5.6 million adjusted by (i) approximately $2.1 million for the impairment of goodwill, (ii) approximately $0.6 million of depreciation and amortization expense and (ii) an approximately $0.6 million change in operating assets and liabilities.

 

 

Investing Activities

 

We did not have any material investing activities for the six months ended June 30, 2018 and 2017. 

 

Financing Activities

 

Cash provided by financing activities for the six months ended June 30, 2018 of $0.5 million represents the sale of 1,000,000 shares of common stock to Rohto in June 2018.

 

We did not have any financing activities for the six months ended June 30, 2017. 

 

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

 

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 to the successor company.

 

Use of Estimates

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 condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, 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.

 

Revenue Recognition

Prior to January 1, 2018, revenues were recognized when the four basic criteria for recognition were 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. The Company adopted new accounting guidance for revenue recognition effective January 1, 2018 which did not have a material impact on the Company’s financial statements. Beginning January 1, 2018, the Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

 

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 condensed consolidated statements of operations. Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.

 

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 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management has carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of June 30, 2018. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Our recent reduction in staff may affect our ability to conduct our operations and other functions effectively, which may materially affect our internal control over financial reporting in future periods.

 

 

 

PART II
 
OTHER INFORMATION

Item 1. Legal Proceedings.

 

Not Applicable. 

 

Item 1A. Risk Factors.

 

Not Applicable.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

 

None. 

 

Item 3.     Defaults Upon Senior Securities.

 

None.

  

Item 4.     Mine Safety Disclosures.

 

Not applicable. 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits listed in the accompanying Exhibit Index are furnished as part of this Report.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         

 

	NUO THERAPEUTICS, INC.
Date: August 13, 2018
By:	/s/ David E. Jorden
	David E. Jorden Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
10.1		Securities Purchase Agreement, dated May 28, 2018, between the Company and Rohto Pharmaceutical Co., Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 30, 2018.
10.2		Amendment No. 1 to Exclusive License and Distribution Agreement, dated May 28, 2018, between the Company and Rohto Pharmaceutical Co., Ltd., incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 30, 2018.
31		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Nuo Therapeutics, Inc. Form 10-Q for the quarter ended June 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2018 and December 31, 2017, (ii) Consolidated Statements of Operations for the three and six month periods ended June 30, 2018 and 2017, (iii) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2018 and 2017 and (iv)  Notes to the Unaudited Consolidated Financial Statements.

 

 

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