UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended September 30, 2015

 

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)		(IRS 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)

 

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 x  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨

 

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

 

Large Accelerated Filer ¨		Accelerated Filer ¨
Non-accelerated Filer ¨		Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of November 5, 2015, the Company had 125,680,100 shares of common stock, par value $.0001, issued and outstanding.

  

 

 TABLE OF CONTENTS

 

NUO THERAPEUTICS, INC.

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	38
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 1A. Risk Factors	40
Item 3. Defaults Upon Senior Securities	40
Item 4. Mine Safety Disclosures	40
Item 5. Other Information	40
Item 6. Exhibits	40
Signatures	41
Exhibit Index	42

  

 

PART I

 

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NUO THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

		September 30,				December 31,
		2015				2014
ASSETS
Current assets
Cash and cash equivalents		$	4,053,733			$	15,946,425
Short-term investments, restricted			53,427				53,391
Accounts and other receivable, net			2,225,380				1,889,327
Inventory, net			603,807				556,620
Prepaid expenses and other current assets			1,582,824				2,338,990
Deferred costs, current portion			3,819,853				1,091,387
Total current assets			12,339,024				21,876,140
Property and equipment, net			865,059				925,171
Intangible assets, net			5,904,042				28,747,770
Goodwill			—				1,128,517
Deferred costs and other assets			43,803				3,547,007
Total assets		$	19,151,928			$	56,224,605
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	2,509,894			$	1,877,736
Accrued expenses			5,511,736				6,218,224
Deferred revenue, current portion			584,671				402,377
Convertible debt, net of debt discount, current portion			705,364				—
Derivative liabilities, current portion			2,597,930				—
Total current liabilities			11,909,595				8,498,337
Deferred revenue			737,692				1,039,475
Convertible debt, net of debt discount			—				325,553
Derivative liabilities			—				29,846,821
Other liabilities			471,995				546,867
Total liabilities			13,119,282				40,257,053
Commitments and contingencies (See Note 9)
Conditionally redeemable common stock (909,091 issued and outstanding)			500,000				500,000
Stockholders' equity
Common stock; $.0001 par value, authorized 425,000,000 shares;
2015 issued and outstanding - 125,680,100 shares;
2014 issued and outstanding - 125,680,100 shares			12,477				12,477
Common stock issuable			392,950				392,950
Additional paid-in capital			125,831,291				125,173,973
Accumulated deficit			(120,704,072	)			(110,111,848	)
Total stockholders' equity			5,532,646				15,467,552
Total liabilities and stockholders' equity		$	19,151,928			$	56,224,605

 

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

 

 

NUO THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Revenue
Product sales		$	1,633,464			$	1,200,719			$	5,272,073			$	4,474,970
License fees			100,594				100,594				3,301,783				301,783
Royalties			435,146				390,714				1,327,706				1,087,307
Total revenue			2,169,204				1,692,027				9,901,562				5,864,060
Costs of revenue
Costs of sales			1,557,420				1,290,449				5,176,715				4,552,317
Costs of license fees			—				—				1,500,000				—
Costs of royalties			42,653				43,853				130,492				132,543
Total costs of revenue			1,600,073				1,334,302				6,807,207				4,684,860
Gross profit			569,131				357,725				3,094,355				1,179,200
Operating expenses
Sales and marketing			1,582,682				1,236,276				5,187,911				3,913,362
Research and development			515,163				1,007,969				1,847,497				3,755,056
General and administrative			1,989,212				2,610,748				7,384,659				7,796,871
Impairment of intangible assets and goodwill			23,740,963				—				23,740,963				4,683,829
Total operating expenses			27,828,020				4,854,993				38,161,030				20,149,118
Loss from operations			(27,258,889	)			(4,497,268	)			(35,066,675	)			(18,969,918	)
Other income (expense)
Interest, net			(967,013	)			(818,493	)			(2,746,588	)			(2,587,366	)
Change in fair value of derivative liabilities			14,399,884				542,868				27,248,891				(158,631	)
Other			1,952				(8,045	)			(13,164	)			(9,284	)
Total other income (expenses)			13,434,823				(283,670	)			24,489,139				(2,755,281	)
Loss before provision for income taxes			(13,824,066	)			(4,780,938	)			(10,577,536	)			(21,725,199	)
Provision for income taxes			4,921				4,645				14,688				13,935
Net loss			(13,828,987	)			(4,785,583	)			(10,592,224	)			(21,739,134	)
Basic and diluted earnings (loss) per share — Basic and diluted		$	(0.11	)		$	(0.04	)		$	(0.08	)		$	(0.18	)
Weighted average shares outstanding — Basic and diluted			125,951,100				123,968,305				125,951,100				118,990,010

 

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

 

 

NUO THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended
		September 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(10,592,224	)		$	(21,739,134	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense			37,642				57,633
Increase in allowance for inventory obsolescence			13,240				—
Depreciation and amortization			532,714				481,114
Stock-based compensation			657,318				939,478
Change in fair value of derivative liabilities			(27,248,891	)			158,631
Non-cash interest expense			1,198,352				1,355,782
Deferred income tax provision			14,688				13,935
Loss (Gain) on disposal of assets			—				131,575
Loss on abandonment of lease			—				242,466
Impairment of intangible assets and goodwill			23,740,963				4,683,829
Change in operating assets and liabilities:
Accounts and other receivable			(373,695	)			2,083,906
Inventory			(60,427	)			566,766
Prepaid expenses and other current assets			756,130				(958,489	)
Other assets			(43,803	)			—
Accounts payable			632,158				(1,678,442	)
Accrued expenses			(706,488	)			106,096
Deferred revenue			(119,489	)			(640,509	)
Other liabilities			(89,560	)			588,268
Net cash used in operating activities			(11,651,372	)			(13,607,095	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment acquisitions			(270,817	)			(209,462	)
Proceeds from sale of equipment			29,497				133,767
Net cash used in investing activities			(241,320	)			(75,695	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net			—				32,967,060
Proceeds from issuance of common stock, net			—				3,666,260
Repayment of note payable			—				(6,201,143	)
Net cash provided by financing activities			—				30,432,177
Net increase (decrease) in cash			(11,892,692	)			16,749,387
Cash, beginning of period			15,946,425				3,286,713
Cash, end of period		$	4,053,733			$	20,036,100

 

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

 

 

NUO THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Business and Summary of Significant Accounting Principles

 

Description of Business

 

Nuo Therapeutics, Inc. (“Nuo Therapeutics,” the “Company,” “we,” “us,” or “our”) is a biomedical company marketing products within the U.S. and internationally. 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. Growth drivers in the U.S. include the treatment of chronic wounds with Aurix™ in the Veterans Affairs healthcare system and the Medicare population under a National Coverage Determination when registry data is collected under CMS’ Coverage with Evidence Development (CED) program, and a worldwide distribution and licensing agreement that allows our partner to promote the Angel® system for uses other than wound care.

 

Our current commercial offerings consist of point of care technologies for the safe and efficient separation of autologous blood and bone marrow to produce platelet based therapies or cell concentrates. We currently have two distinct platelet rich plasma (“PRP”) devices, the Aurix™ System for wound care and the Angel® concentrated Platelet Rich Plasma (“cPRP”) System for orthopedics markets. During the first nine months of 2015, approximately 84% of our product sales were generated in the United States where we sold our products through direct sales representatives and distributors. Arthrex, Inc. (“Arthrex”) is our exclusive distributor for Angel. (See Note 10 - Subsequent Events for additional details.)

 

Since our inception, we have financed our operations by raising debt, issuing equity and equity-linked instruments, executing licensing arrangements, and to a lesser extent by generating royalties and product revenues. We have incurred, and continue to incur, recurring losses and negative cash flows.

 

At September 30, 2015 we had total debt outstanding of $37.6 million, including accrued interest. Pursuant to the terms of the Deerfield Facility Agreement (“Deerfield Facility Agreement”) with Deerfield Management Company, L.P. (“Deerfield”), we are required to maintain a compensating cash balance of $5,000,000 in deposit accounts subject to control agreements in favor of the lenders. As of September 30, 2015, we were not in compliance with this covenant, resulting in a technical event of default under the Deerfield Facility Agreement. In addition, the terms of the Deerfield Facility Agreement required us to pay Deerfield the accrued interest amount of approximately $2.6 million on October 1, 2015, which we were unable to do. As a result, Deerfield may declare the principal of, and accrued and unpaid interest on, all of the notes or any part of any of them, immediately due and payable by providing written notice of default to the Company. We are currently negotiating with the lender to modify the Deerfield Facility Agreement to eliminate the provisions that could lead to the declaration by Deerfield of a default, but can provide no assurance that we will be successful in this effort. (See Note 5 – Debt and Derivative Liabilities and Note 10 - Subsequent Events for additional details.)

 

We had cash and cash equivalents on hand at September 30, 2015 of approximately $4.1 million. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results. The accompanying unaudited interim condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet our obligations as they become due. We believe that our current resources, expected revenue from current products, royalty revenue and license fees will be inadequate to maintain our operations beyond January 2016. Management believes the going-concern basis is appropriate for the accompanying condensed consolidated financial statements, however our inability to negotiate modifications to the existing Deerfield Facility Agreement that are favorable to us may create substantial doubt regarding our ability to continue as a going concern. (See Note 10 - Subsequent Events for additional details.) If we are unable to increase our revenues as much as expected or if capital infusions are not available to the Company from future strategic partnerships, from the sale of shares under the purchase agreements we entered into with Lincoln Park Capital Fund, LLC (“Lincoln Park”), or through the sale of debt, equity and equity-linked securities, licensing, or royalty arrangements, then we may be required to curtail portions of our strategic plan or to cease operations. Specific programs that may require additional funding include, without limitation, continued investment in the sales, marketing, distribution, and customer service areas, further expansion into the international markets, significant new product development or modifications, and pursuit of other opportunities. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations could be materially negatively impacted. (See Note 5 – Debt and Derivative Liabilities and Note 10 - Subsequent Events for additional details.)

 

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2014, has been derived from audited financial statements of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission, or the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our annual report on Form 10-K for the year ended December 31, 2014. Certain prior period information has been reclassified to conform to the current period presentation.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and controlled subsidiary. All significant inter-company accounts and transactions are eliminated in consolidation.

 

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 unaudited condensed consolidated financial statements, estimates are used for, but not limited to, 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 valuation allowance. Actual results could differ from those estimates.

 

Cash Equivalents

 

We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Approximately $3.5 million and $15.5 million held in financial institutions was in excess of FDIC insurance at September 30, 2015 and December 31, 2014, respectively.

 

Pursuant to the terms of the Deerfield Facility Agreement (See Note 5 - Debt and Derivative Liabilities for additional details.), we are required to maintain a compensating cash balance of $5,000,000 in deposit accounts subject to control agreements in favor of the lenders. As of September 30, 2015, we were not in compliance with this covenant, resulting in a technical event of default under the Deerfield Facility Agreement. (See Note 5 – Debt and Derivative Liabilities and Note 10 - Subsequent Events for additional details.)

 

Customer and Vendor Concentration

 

Our accounts receivables balance at September 30, 2015 was primarily from Arthrex (49%). In addition, Arthrex accounted for 92% of total products sales for the nine months ended September 30, 2015 and 2014. (See Note 10 – Subsequent Events for additional details.) No other single customer accounted for more than 5% of total product sales.

 

We use single suppliers for several components of the Angel and Aurix product lines. We outsource the manufacturing of various products, including component parts for Angel, to contract manufacturers. While we believe these manufacturers demonstrate competency, reliability and stability, there is no assurance that one or more of them will not experience an interruption or inability to provide us with the products needed to satisfy customer demand. Additionally, while most of the components of Aurix are generally readily available on the open market, a reagent, bovine thrombin, is available exclusively through Pfizer, with whom we have an established vendor relationship.

 

Accounts Receivables

 

We generate accounts receivables from the sale of our products and we provide for an allowance against receivables for estimated losses that may result from a customer’s inability or unwillingness to pay. The allowance for doubtful accounts is estimated primarily based upon historical write-off percentages, known problem accounts, and current economic conditions. Accounts are written off against the allowance for doubtful accounts when we determine that amounts are not collectable. Recoveries of previously written-off accounts are recorded when collected. At September 30, 2015 and December 31, 2014, we maintained an allowance for doubtful accounts of approximately $70,000 and $32,000, respectively.

 

Inventory

 

Our inventory is produced by third party manufacturers and consists primarily of finished goods. Inventory cost is determined on a first-in, first-out basis and is stated at the lower of cost or net realizable value. We maintain an inventory of kits, reagents, and other disposables that have shelf-lives that generally range from 18 months to five years. In order to meet the anticipated disposable product requirements of our customers, among other reasons, we purchased a certain inventory item at a price which is significantly higher than the previous purchase price for such item. Management entered into an alternative supply arrangement in July 2015 for this certain inventory item which has significantly reduced the cost of subsequent purchases.

 

 

We provide for an allowance against inventory for estimated losses that may result in excess and obsolete inventory (i.e. from the expiration of products). Our allowance for expired inventory is estimated based upon the inventory’s remaining shelf-life and our anticipated ability to sell such inventory, which is estimated using historical usage and future forecasts, within its remaining shelf life. At September 30, 2015 and December 31, 2014, the Company maintained an allowance for expired and excess and obsolete inventory of approximately $67,000 and $90,000, respectively. The Company records the associated expense for this reserve to costs of products sales in the condensed consolidated statement of operations.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation and is depreciated, using the straight-line method, over its estimated useful life ranging from two to five years for all assets except for furniture, lab and manufacturing equipment which is depreciated over seven and ten years, respectively. Leasehold improvements are stated at cost less accumulated depreciation and is amortized, using the straight-line method, over the lesser of the expected lease term or its estimated useful life ranging from three to six years; amortization of leasehold improvements is included in depreciation expense. Maintenance and repairs are charged to operations as incurred. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income (expense).

 

Centrifuges may be sold, leased, or placed at no charge with customers. Depreciation expense for centrifuges that are available for sale, leased, or placed at no charge with customers are charged to costs of product sales. Depreciation expense for centrifuges used for other purposes are charged to their associated operating expenses.

 

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets. If such assets are considered to be impaired, impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets.

 

Intangible Assets and Goodwill

 

Intangible assets were acquired as part of our acquisitions of the Angel business and Aldagen, and consist of definite-lived and indefinite-lived intangible assets, including goodwill.

 

Definite-lived intangible assets

 

Our definite-lived intangible assets include trademarks, technology (including patents) and customer 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.

 

We determined that of our definite-lived intangible assets were not impaired as of September 30, 2015. During the three month period ended June 30, 2014 we recognized a non-cash impairment charge related to our trademarks of approximately $1.0 million. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

Indefinite-lived intangible assets

 

We evaluate our indefinite-lived intangible asset, consisting solely of in-process research and development (“IPR&D”) acquired in the Aldagen acquisition, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of that excess.

 

We determined that our IPR&D asset was impaired as of September 30, 2015 and recognized a non-cash IPR&D impairment charge of approximately $22.6 million during the three month period ended September 30, 2015. During the three months ended June 30, 2014 we recognized a non-cash impairment charge related to our IPR&D of approximately $3.7 million. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

 

Goodwill

 

Goodwill represents the purchase price of acquisitions in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Goodwill is tax deductible in all relevant jurisdictions. As a result of our acquisition of Aldagen in February 2012, we recorded goodwill of approximately $422,000. Prior to the acquisition of Aldagen, we had goodwill of approximately $707,000 as a result of the acquisition of the Angel business in April 2010. 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 generic pharmaceutical 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.

 

We determined that goodwill was impaired as of September 30, 2015 and recognized a non-cash goodwill impairment charge of approximately $1.1 million to write-down the goodwill to its estimated fair value of zero as of September 30, 2015. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

 Realignment and Exit Activities

 

On August 11, 2015, our Board of Directors approved our realignment plan (the "Realignment Plan") with the goal of preserving and maximizing, for the benefit of our stockholders, the value of our existing assets. The plan eliminated approximately 30% of our workforce and was aimed at the preservation of cash and cash equivalents to finance our future operations and support our revised business objectives. We intend to maintain sufficient resources and personnel so that we can seek partners, co-developers or acquirers for our regenerative therapies and continue to execute under our existing agreements with our customers. In connection, with the Realignment Plan, Martin P. Rosendale, stepped down as Chief Executive officer effective August 14, 2015, and continues to serve us as a consultant on an as needed basis. Effective August 15, 2015, Dean Tozer was appointed as our President and Chief Executive Officer. Immediately prior to such appointment, Mr. Tozer served as our Chief Commercial Officer. We recognized severance costs to executives and non-executives in connection with the Realignment Plan of approximately $0.80 million. All such severance expenses are expected to be paid by the end of the first quarter of 2016.

 

In May 2014, we announced preliminary efficacy and safety results of our RECOVER-Stroke Phase 2 clinical trial in patients with neurological damage arising from ischemic stroke and treated with ALD-401. Observed improvements in the primary endpoint (mean modified Rankin Score or mRS) of the trial were not clinically or statistically significant. In light of this outcome, we discontinued further funding of the ALD-401 development program, decided to close our facilities in Durham, NC, and terminated certain employees, and recognized approximately $400,000 of expenses in the second quarter of 2014 related to one-time termination benefits and severance payments. For the full 2014 fiscal year approximately $695,000 of expense was recognized related to the closure of the NC facility. Approximately $335,000 remains accrued for the loss on abandonment of the NC lease as of September 30, 2015. The remaining accrued loss will be amortized over the life of the lease against future rental payments made and sublet income payments received.

 

Conditionally Redeemable Common Stock

 

The Maryland Venture Fund (“MVF,” part of Maryland Department of Business and Economic Development) has an investment in our common stock, and can require us to repurchase the common stock, at MVF’s option, upon certain events outside of our control. MVF’s common stock is classified as contingently redeemable common shares in the accompanying unaudited condensed consolidated balance sheets.

 

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 rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured.

 

 

Sales of products

 

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.

 

Usage or leasing of blood separation equipment

 

As a result of the acquisition of the Angel business, we acquired various multiple element revenue arrangements that combined the (i) usage or leasing of blood separation processing equipment, (ii) maintenance of processing equipment, and (iii) purchase of disposable processing sets and supplies. We assigned these multiple element revenue arrangements to Arthrex in 2013 and no longer recognize revenue under these arrangements.

 

Percentage-based fees on licensee sales of covered products, including those sold by Arthrex, 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.

 

Deferred revenue at September 30, 2015 consists of prepaid licensing revenue of approximately $1,140,000 from the licensing of Angel centrifuges and $182,000 from product sales billed and not shipped. Prepaid licensing revenue is being recognized on a straight-line basis over the five-year term of the agreement. Deferred revenue related to products billed and not yet shipped will be recognized when the product is shipped to the customer. Revenue of approximately $302,000 related to the prepaid license was recognized during both the nine months ended September 30, 2015 and 2014. In 2013, a medical device excise tax came into effect that required manufacturers to pay tax of 2.3% on the sale of certain medical devices; we report the medical device excise tax on a gross basis, recognizing the tax as both revenue and costs of sales.

 

License Fees

 

The Company’s license agreement with Rohto (See Note 2 – Distribution and License Arrangements for additional details) contains multiple elements that include the delivered license and other ancillary performance obligations, such as maintaining its intellectual property and providing regulatory support and training to Rohto. The Company has determined that the ancillary performance obligations are perfunctory and incidental and are expected to be minimal and infrequent. Accordingly, the Company has combined the ancillary performance obligations with the delivered license and is recognizing revenue as a single unit of accounting following revenue recognition guidance applicable to the license. Because the license is delivered, the Company recognized the entire $3.0 million license fee as revenue in the three months ended March 31, 2015. Other elements contained in the license agreement, such as fees and royalties related to the supply and future sale of the product, are contingent and will be recognized as revenue when earned.

 

Segments and Geographic Information

 

We operate in one business segment. Approximately 13% and 16% of our product sales were generated outside of the United States for the three and nine months ended September 30, 2015, respectively. Approximately 50% and 30% of our product sales were generated outside of the United States for the three and nine months ended September 30, 2014, respectively.

 

Research and Development Expenses

 

Research and development costs are expensed as incurred; advance payments are deferred and expensed as performance occurs. Research and development costs include salaries and wages and related benefits, including stock-based compensation expense, clinical trials, CED costs, related material and supplies, contract services and other outside services.

 

Stock-Based Compensation

 

The Company awards stock options, restricted stock or other equity instruments to employees, directors, consultants, and other service providers under its 2002 Long-Term Incentive Plan or 2013 Equity Incentive Plan (collectively, the “Plans”). The Company also issues stock purchase warrants to service providers outside of the Plans.

 

Stock-based compensation cost for employee and non-employee director stock options is determined at the grant date using an option pricing model and stock-based compensation cost for restricted stock is based on the closing market price of the stock at the grant date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee's requisite service period. Stock-based compensation for awards granted to non-employees is periodically remeasured as the underlying equity awards vest. We recognize an expense for such awards throughout the performance period as the services are provided by the non-employees, based on the fair value of these options and warrants at each reporting period. We recognize the estimated fair value of stock-based awards and classify the expense where the underlying salaries or other related costs are classified.

 

Valuation of stock awards requires management to make assumptions and to apply judgment to determine the fair value of the awards. The fair value of equity-based compensation awards is estimated on the accounting grant date using the Black-Scholes-Merton option-pricing formula. For stock options, expected volatilities are based on historical volatility of the Company’s stock. Company data was used to estimate option exercises and employee terminations within the valuation model for the nine month period ending September 30, 2015 and the year ended December 31, 2014. Expected years until exercise represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated that the dividend rate on its common stock will be zero.

 

 

Income Taxes

 

We account for income taxes using the asset and liability approach, which requires the recognition of future tax benefits or liabilities on the temporary differences between the financial reporting and tax bases of our assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense.

 

Income tax expense was $4,921 and $4,645 during the three months ended September 30, 2015 and 2014 and $14,688 and $13,935 during the nine months ended September 30, 2015 and 2014, respectively. These relate exclusively to the generation of a deferred tax liability associated with the tax amortization of goodwill, which is included as a component of other long-term liabilities on our condensed consolidated balance sheets.

 

Basic and Diluted Earnings (Loss) per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period.

 

For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares outstanding plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and convertible debt using the if-converted method. The total number of anti-dilutive shares, common stock options, warrants exercisable for common stock, and convertible debt, which have been excluded from the computation of diluted earnings (loss) per share, was 201,168,564 and 224,287,304 for the three and nine months ended September 30, 2015 and 2014, respectively.

 

For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive.

 

Recent Accounting Pronouncements

 

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. The FASB approved a one-year deferral in July 2015, 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. We are currently evaluating the impact, if any, that this new accounting pronouncement will have on our financial statements.

 

In August 2014, the FASB issued guidance for the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Previously, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This was issued to provide guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We are currently evaluating the impact, if any, that the adoption will have on our consolidated financial statements.

 

In April 2015, the FASB issued guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment is effective for reporting periods beginning after December 15, 2015 and may be applied on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of this new accounting pronouncement to have a material impact on our financial statements.

 

 

In April 2015, the FASB issued guidance to simplify the balance sheet disclosure for debt issuance costs. Under the guidance, debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, in the same manner as debt discounts, rather than as an asset. The standard is effective for reporting periods beginning after December 15, 2015 and early adoption is permitted. We intend to adopt this requirement in 2016, and currently anticipate that the impact of adoption will solely be a reclassification of our deferred financing costs from asset classification to contra-liability classification.

 

In July 2015, the FASB issued guidance for the accounting for inventory. The main provisions are that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value, except when inventory is measured using LIFO or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. In addition, the Board has amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. The amendments in this update for public business entities are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact, if any, that the adoption will have on our financial statements.

 

In September 2015, the FASB issued accounting guidance to simplify the accounting for measurement period adjustments resulting from business combinations. Under the guidance, an acquirer will be required to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined. The guidance requires an entity to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. The standard is effective for reporting periods beginning after December 15, 2015. The amendments in this pronouncement should be applied prospectively, with earlier application permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its 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.

 

Note 2 – Distribution and Licensing Arrangements

 

Distribution and License Agreement with Arthrex

 

In 2013, we entered into a Distributor and License Agreement (the “Original Arthrex Agreement”) with Arthrex. The term of the Original Arthrex Agreement was originally for five years, automatically renewable for an additional three-year period unless Arthrex gives the Company a termination notice at least one year in advance of the end of the initial five-year period. Under the terms of the Original Arthrex Agreement, Arthrex obtained the exclusive rights to sell, distribute, and service the Company’s Angel concentrated Platelet System and activAT (“Products”), throughout the world, for all uses other than chronic wound care. In connection with execution of the Original Arthrex Agreement, Arthrex paid the Company a nonrefundable upfront payment of $5.0 million. In addition, under the terms of the Original Arthrex Agreement, Arthrex paid royalties to the Company based upon volume of the Products sold. Arthrex’s rights to sell, distribute and service the Products were not exclusive in the non-surgical dermal and non-surgical aesthetics markets. On October 16, 2015, the Company entered into an Amended and Restated License Agreement (the "Amended Arthrex Agreement") with Arthrex, which amended and restated the Original Arthrex Agreement Under the terms of the Amended Arthrex Agreement, among others, the Company licensed certain exclusive and non-exclusive rights to Arthrex, for which it will receive certain royalties through 2021, and on a date to be determined by Arthrex, but not later than March 31, 2016, Arthrex will assume all rights related to the manufacture and supply of the Angel product line. As part of the transaction, the Company transferred to Arthrex all of its rights and title to product registration rights and intellectual property (other than patents) related to Angel. In connection with the Agreement, senior lien holders Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P. irrevocably released their liens on the product registration rights and intellectual property (other than patents) assets transferred by the Company to Arthrex (See Note 10 – Subsequent Events for additional details.)

 

During 2015 and 2014, we devoted substantial resources to improving our Angel product to satisfy new regulatory requirements. In 2014, we recognized a charge to earnings of $0.6 million for estimated refurbishment and design improvement costs for Angel products already in circulation. Although we believe that we have completed all the necessary design modifications to the Angel products, we cannot be sure that we will not continue to experience additional costs in the future. As of September 30, 2015, approximately $0.5 million remains in accrued expenses related to the Angel product improvement costs.

 

Distribution and License Agreement with Rohto

 

In September 2009, we entered into a license and distribution agreement with Millennia Holdings, Inc. (“Millennia”) for the Company’s Aurix System in Japan. Since then, Millennia has been collecting and publishing clinical data for regulatory purposes and expanding the utilization of Aurix throughout their network. The diabetic population in Japan is estimated to be approximately seven million adults. Millennia has assisted the Company in securing a partner to address widespread distribution in Japan.

 

 

In January 2015 we granted to Rohto Pharmaceutical Co., Ltd. (“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 future cash payment in the event specific milestones are met. In connection with and effective as of entering into the Rohto Agreement, we amended the Licensing and Distribution Agreement with Millennia to terminate it and allow us to transfer the 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 we may be required to pay certain future royalty payments to Millennia based upon net sales in Japan. Rohto has assumed all responsibility for securing the marketing authorization in Japan, while we will provide relevant product information, as well as clinical and other data, to support Rohto’s efforts.

  

Note 3 — Receivables

 

Accounts and other receivables, net consisted of the following:

 

		September 30,				December 31,
		2015				2014
Trade receivables		$	807,890			$	609,179
Other receivables			1,487,601				1,312,617
			2,295,491				1,921,796
Less allowance for doubtful accounts			(70,111	)			(32,469	)
		$	2,225,380			$	1,889,327

 

Other receivables consist primarily of royalties due from Arthrex and the cost of raw materials needed to manufacture the Angel products that are sourced by the Company and immediately resold, at cost, to the contract manufacturer.

 

Note 4 – Goodwill and Other Intangible Assets

 

Prior to the September 30, 2015 impairment charge our goodwill was the result of our 2012 acquisition of Aldagen of approximately $422,000 and goodwill arising from our 2010 acquisition of the Angel Business of approximately $707,000. Our other intangible assets consist of trademarks, technology (including patents), customer relationships, and IPR&D. Our definite-lived intangible assets include trademarks, technology (including patents) and customer relationships, and are amortized over their useful lives ranging from eight to twenty years. Our indefinite-lived intangible asset, consisting solely of IPR&D acquired in the Aldagen acquisition, will not be amortized until it is placed into service. Because of recent events, including a substantial reduction in our stock price, our current technical event of default under the Deerfield Facility Agreement, and our liquidity situation, we determined that it was “more likely than not” that one or more of our intangible assets were impaired. As such, we performed an impairment analysis as of September 30, 2015 for our goodwill, definite-lived intangible assets and our indefinite-live intangible asset. 

 

In assessing any impairment of our goodwill, we compared the carrying value (net equity) of our single reporting unit to its fair value; we determined that the fair value of our single reporting unit was our market capitalization as of September 30, 2015. Because the carrying value of our single reporting unit exceeded its fair value, we determined that our goodwill was impaired. In determining the amount that our goodwill was impaired, we assessed how our net tangible assets, goodwill and other intangible assets would be valued in a hypothetical sale of the Company. After allocating the total fair value of our reporting unit to the estimated fair value of our net tangible assets, we concluded that our intangible assets were impaired. We allocated remaining fair value first to our definite-lived intangible assets and second to our indefinite-lived intangible asset, with any remaining fair value allocated to goodwill. As a result of this fair value allocation process, during the three month period ended September 30, 2015, we recognized a non-cash impairment charge for IPR&D of $22.6 million and a non-cash impairment charge for goodwill of $1.1 million.

 

 

The carrying value of our intangible assets net of impairment charges, and the associated amortization, were as follows:

 

		September 30,				December 31,
		2015				2014
Trademarks		$	1,047,000			$	1,047,000
Technology			2,355,000				2,355,000
Customer relationships			708,000				708,000
In-process research and development			3,313,554				25,926,000
Total		$	7,423,554			$	30,036,000
Less accumulated amortization			(1,519,512	)			(1,288,230	)
		$	5,904,042			$	28,747,770

 

Amortization expense associated with our definite-lived intangible assets of approximately $118,000 was recorded to costs of royalties and approximately $113,000 was recorded to general and administrative expenses for the nine months ended September 30, 2015. Amortization expense for the remainder of 2015 is expected to be approximately $80,000. Amortization expense associated with our definite-lived intangible assets of approximately $118,000 was recorded to costs of royalties and approximately $143,000 was recorded to general and administrative expenses for the nine months ended September 30, 2014.

 

We continue to conduct (i) a Phase 1/2 clinical trial in critical limb ischemia (PACE) that is being funded by the National Institutes of Health, and (ii) a Phase 1 clinical trial in grade IV malignant glioma following surgery that is funded by Duke University, both using the intellectual property and know-how encompassed by the IPR&D and trademarks. We have no current plans to change our approach with respect to these programs.

 

Note 5 – Debt and Derivative Liabilities

 

Outstanding Debt as of September 30, 2015

 

In 2014, we entered into the Deerfield Facility Agreement, a $35 million five-year senior secured convertible credit facility with Deerfield.

 

At September 30, 2015 and November 12, 2015, we had total debt outstanding under the Deerfield Facility Agreement of $37.6 million, and $38.3 million, respectively, including accrued interest of $2,593,374 and $3,290,910, respectively. Pursuant to the terms of the Deerfield Facility Agreement, we are required to maintain a compensating cash balance of $5.0 million in deposit accounts subject to control agreements in favor of the lenders. As of September 30, 2015, we had approximately $4.1 million in cash and cash equivalents, and therefore were not in compliance with that covenant, resulting in a technical event of default under the Deerfield Facility Agreement. In addition, the terms of the Deerfield Facility Agreement required us to pay Deerfield the accrued interest amount of approximately $2.6 million on October 1, 2015, which we were unable to do. As a result, Deerfield may declare the principal, including accrued and unpaid interest, on, all of the notes or any part of any of them, immediately due and payable by providing written notice to the Company. In addition, because our revenue for the three month period ended September 30, 2015 was less than the net sales threshold contemplated for this period under the Deerfield Facility Agreement, Deerfield has the option of requiring the Company to prepay, on March 31, 2016, one-third of the aggregate amount of the credit facility together with accrued and unpaid interest thereon. We are currently engaged in substantive negotiations with the lender to modify the Deerfield Facility Agreement and to modify the Deerfield Facility Agreement to eliminate the provisions that could lead to the declaration by Deerfield of a default, but can provide no assurance that we will be successful in this effort. Because of the occurrence of events of default as of September 30, 2015 and November 12, 2015, we have classified outstanding borrowings, net of unamortized discount, and associated derivative liabilities and deferred financing costs, as current in our unaudited condensed consolidated balance sheets as of September 30, 2015.

 

The Deerfield Facility Agreement is structured as a purchase of senior secured convertible notes (the “Notes”), which bear interest at a rate of 5.75% per annum, payable quarterly in arrears in cash or, at our election, registered shares of common stock; provided, that during the five quarters ending September 30, 2015, we have the option of having all or any portion of accrued interest added to the outstanding principal balance. We elected to have all portions of accrued interest added to the principal balance until September 30, 2015, beginning with interest due for the third quarter of 2014. (See Note 10 - Subsequent Events for additional details.) Outstanding amounts under the facility are due in full on March 31, 2019.

 

Deerfield has the right to convert the principal amount of the Notes into shares of our common stock (“Conversion Shares”) at a per share price equal to $0.52. In addition, we granted to Deerfield 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. Revenue for the three month period ended September 30, 2015 was less than the amounts required under the Deerfield Facility Agreement. We will require substantially higher sales to satisfy these quarterly milestones. We also granted Deerfield 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 will be exempt from this put option.

 

 

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

 

We entered into a security agreement which provides, among other things, that our obligations under the Notes will 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 the Conversion Shares and the shares underlying the stock purchase warrants.

 

As a result of certain non-standard anti-dilution provisions and cash settlement features, we classify the detachable stock purchase warrants and the conversion option embedded in the Notes as derivative liabilities. The derivative liabilities were recorded initially at their estimated fair value and as a result, we recognized a total debt discount on the convertible notes of $34.8 million. We are amortizing the debt discount over the term of the Notes using the effective interest method. In addition, we re-measure the warrants and the conversion option to fair value at each balance sheet date. Certain debt issuance costs, in the form of warrants and fees, were recorded as deferred debt issuance costs and are being amortized to interest expense on a straight-line basis through the maturity date (we determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method). The issuance costs include a yield enhancement fee, for which we issued 2,709,677 shares of the Company’s commons stock, with a fixed value of approximately $1.1 million.

 

Debt Repaid, Retired or otherwise Extinguished in 2014

 

JP Nevada Trust 12% Note

 

In April 2011, we borrowed $2.1 million pursuant to a secured promissory note with an original maturity date of May 20, 2016. The note accrued interest at a rate of 12% per annum, and required interest-only payments each quarter commencing September 30, 2011, with the then outstanding principal due on the maturity date. The note was secured by our Angel assets. In connection with the issuance of the secured promissory note, we issued the lender a warrant to purchase up to 1,000,000 shares at an exercise price of $0.50 per share, with variable vesting provisions. Our payment obligations with respect to $1.4 million under the note were guaranteed by certain insiders, affiliates, and shareholders. In connection with this guarantee, we issued the guarantors warrants to purchase an aggregate of up to 1,500,000 shares, on a pro rata basis based on the amount of the guarantee, at an exercise price of $0.50 per share with variable vesting provisions. The warrants issued to the lender and the guarantors were valued at approximately $546,000, were recorded as deferred debt issuance costs, and were being amortized to interest expense on a straight-line basis over the guarantee period (we determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method).

 

On March 31, 2014 in connection with the Deerfield Notes, JP Nevada Trust agreed to subordinate its security interest in the note. In consideration, we issued to the holder a five-year warrant to purchase 750,000 shares of our common stock at an exercise price of $0.52 per share. The warrants were valued at approximately $14,000 and were classified as derivative liabilities. The $2.1 million note with JP Nevada Trust was repaid in full in June 2014 and the warrants expired pursuant to their terms upon repayment of the debt. The corresponding deferred debt issuance costs of $298,000 were charged to interest expense in the second quarter of 2014.

 

JMJ 4% Convertible Notes

 

In July 2011, we issued $1.3 million of our 4% Convertible Notes (the “July 4% Convertible Notes”) to JMJ Financial. The July 4% Convertible Notes were scheduled to mature on May 23, 2016 and included a one-time interest charge of 4% due on maturity. The July 4% Convertible Notes (plus accrued interest) converted at the option of the holder, in whole or in part and from time to time, into shares of our common stock at a conversion rate equal to (i) the lesser of $0.80 per share or (ii) 80% of the average of the three lowest closing prices of our common stock for the previous 20 trading days prior to conversion (subject to a “floor” price of $0.25 per share). In April 2014, the remaining balance of the face amount of the July 4% Convertible Notes and accrued interest were converted into approximately 347,000 shares of common stock at a conversion price of $0.41 per share.

 

Mid-Cap Financial Term Loan

 

In February 2013, we entered into a Credit and Security Agreement (the “Credit Agreement”) with Mid-Cap Financial (“MidCap”) that provided for aggregate term loan commitments of $7.5 million, subsequently modified to $4.5 million. On March 31, 2014, we repaid the term loan in its entirety along with approximately $330,000 in early payment penalties and fees. The balance of the unamortized debt discount of approximately $381,000 and deferred fees of approximately $142,000 were charged to interest expense in the first quarter of 2014.

 

In connection with term loan, we issued the lender a seven-year warrant to purchase 1,079,137 shares of the Company’s Common stock at the warrant exercise price of $0.70 per share. The exercise price and the number of shares issuable upon exercise of the warrant is subject to standard anti-dilution adjustments and contains a cashless exercise provision. The warrants issued to the lender were valued at approximately $568,000, were recorded as a debt discount, and were being amortized to interest expense over the term of the loan (we determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method). The warrants are classified in equity.

 

 

December 2013 Convertible Bridge Note

 

In November 2013, we executed agreements with certain investors for the subsequent issuance of 10% subordinated convertible notes (“10% Subordinated Convertible Notes”) and stock purchase warrants, for gross proceeds of up to $3 million. We received $2.25 million of the expected gross proceeds in December 2013 and we received $0.75 million of the gross proceeds in February 2014.

 

On March 31, 2014 the holders of the December 2013 convertible bridge notes (except for one holder), agreed to convert their outstanding notes pursuant to its terms, converting into 5,981,859 shares of common stock. The Company repaid, in its entirety, the portion of the debt excluded from the conversion (including interest and prepayment penalties) pursuant to its terms, for a total cash payment of approximately $339,000. The unamortized balance of the related debt discount, deferred fees, and derivative liability for the embedded conversion feature, were reclassified to additional paid-in capital.

 

The conversion option embedded in the 10% Subordinated Convertible Notes and related warrants issued to the investors was accounted for as a derivative liability and was recorded at its fair value of $2.25 million, resulting in a debt discount of $2.25 million. The debt discount was amortized as additional interest expense using the interest rate method through the maturity date. The embedded conversion option and the warrants were recorded at fair value and marked to market at each period, with the resulting change in fair value reflected as “change in fair value of derivative liabilities” in the accompanying condensed consolidated statements of operations.

 

In connection with the issuance of the Notes, we also agreed to issue to the investors in the offering five-year warrants to purchase shares of our common stock in the amount equal to 75% of the number of shares into which the Notes may be converted at an exercise price equal to 125% of the Market Price (as defined in the agreement). The warrants also contain non-standard anti-dilution adjustments and contain certain net settlement features. Warrants issued to the placement agent were value at approximately $69,000, were recorded as deferred debt issuance costs, and are being amortized to interest expense on a straight-line basis through the maturity date (we determined that the straight-line method of amortization did not yield a materially different amortization schedule from the effective interest method). As a result of the scheduled expiration of non-standard anti-dilution clauses contained within the investors and placement agent warrants, the warrants were reclassified to equity at their fair value on June 9, 2014.

 

Note 6 – Equity and Stock-Based Compensation

 

Common Stock

 

Our common stock has a par value of $.0001 per share. On June 9, 2014, the Company’s shareholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of all classes of capital stock from 215,000,000 shares to 440,000,000 shares, and the authorized number of common stock from 200,000,000 shares to 425,000,000 shares. Common stock is subordinate to Series A, B, C, and D Convertible Preferred stock. Each share of common stock represents the right to one vote, and common stockholders are entitled to receive dividends as may be declared by the Board of Directors. No dividends were declared or paid on our common stock in 2015 and 2014.

 

2014 Private Placement

 

In March 2014 we raised $2.0 million from the private placement of 3,846,154 shares of common stock (at a price of $0.52 per share) and five-year stock purchase warrants to purchase 2,884,615 shares of common stock at $0.52 per share. As a result of certain non-standard anti-dilution provisions and cash settlement features contained in the warrants, we classified the detachable stock purchase warrants as derivative liabilities, initially at their estimated relative fair value of approximately $1.1 million. We re-measure the warrants to fair value at each balance sheet date. Issuance costs, in the form of warrants and fees, were valued at approximately $136,000 and were recorded to additional paid-in-capital.

 

2014 Issuance to Deerfield

 

In June 2014, we issued 2,709,677 shares of our common stock (with a value of $1.1 million) to Deerfield in satisfaction of certain transaction fees.

 

2014 Issuance to former Aldagen Shareholders

 

In November 2014, we amended and settled our contingent consideration obligations from our 2012 acquisition of Aldagen by issuing 1,270,000 shares of our common stock.

 

 

2014 and 2013 Issuances to Lincoln Park

 

In February 2013, we entered into a purchase agreement and a registration rights agreement with Lincoln Park. Under the terms and subject to the conditions of the agreements, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $15 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 30-month period commencing on the date that a registration statement is declared effective by the SEC. The Company may direct Lincoln Park every other business day, at its sole discretion and subject to certain conditions, to purchase up to 150,000 shares of common stock in regular purchases, increasing to amounts of up to 200,000 shares depending upon the closing sale price of the common stock. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock is not below $1.00 per share. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to 12 business days leading up to such time), but in no event will shares be sold under this arrangement on a day the common stock closing price is less than the floor price of $0.45 per share, subject to adjustment. The Company’s sales of shares of common stock under the agreements are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then outstanding shares of the common stock.

 

No shares were issued to Lincoln Park during the nine month period ended September 30, 2015. We raised approximately $1.8 million during the nine months ended September 30, 2014 from the sale of shares under this agreement. To date, we have issued 5,250,000 shares to Lincoln Park (raising approximately $2.4 million in gross proceeds) with up to 4,750,000 shares or $12.6 million in shares still available for issuance under this arrangement. In addition to those shares, the Company issued to Lincoln Park 375,000 shares of common stock, and is required to issue up to 375,000 additional shares of common stock, in satisfaction of certain transaction fees. To date we have issued 59,126 shares of common stock in satisfaction of those certain transaction fees. This arrangement expires January 17, 2016.

 

Maryland Venture Fund Shares

 

In connection with a 2013 offering, the Company and the MVF executed an agreement which requires the Company to repurchase MVF’s investment, at MVF’s option, upon certain events outside of the Company’s control. The common stock issued to MVF in this offering is classified as “contingently redeemable common shares” in the accompanying condensed consolidated balance sheets.

 

Stock Purchase Warrants

 

The Company had the following stock purchase warrants outstanding at September 30, 2015:

 

Warrants Outstanding at September 30, 2015				Exercise Price				Expiration Date		Classification
	100,000			$	0.37			October-15		Equity
	1,488,839			$	0.60			April-16		Equity
	916,665			$	0.50			April-16		Equity
	20,000			$	0.40			June-16		Equity
	136,364			$	0.66			February-18		Equity
	6,363,638			$	0.75			February-18		Equity
	5,047,461			$	0.65			December-18		Equity
	232,964			$	0.65			December-18		Equity
	2,884,615			$	0.52			March-19		Liability
	1,474,615			$	0.52			March-19		Liability
	3,525,000			$	0.52			June-19		Liability
	1,079,137			$	0.70			February-20		Equity
	250,000			$	0.70			February-20		Equity
	25,115,384			$	0.52			March-21		Liability
	67,500,000			$	0.52			June-21		Liability
	116,134,682

 

Certain of the above warrants were issued to consultants in exchange for services provided (see “stock-based compensation” below).

 

 

Stock -Based Compensation

 

The Company’s 2002 Long Term Incentive Plan (“LTIP”) and 2013 Equity Incentive Plan (“EIP” and, together with the LTIP, the “Plans”) permit the awards of stock options, stock appreciation rights, restricted stock, phantom stock, performance units, dividend equivalents and other stock-based awards to employees, directors and consultants. We are authorized to issue up to 10,500,000 shares of common stock under the LTIP and up to 18,000,000 shares under the EIP (as approved by our shareholders on June 9, 2014). At September 30, 2015, 15,229,267 shares were available to be issued under the Plans.

 

To date, the Company has only issued stock options under the Plans. Stock option terms are determined by the Board of Directors for each option grant, and generally vest immediately upon grant or over a period of time ranging up to four years, are exercisable in whole or installments, and expire no longer than ten years from the date of grant.

 

 

A summary of stock option activity under the Plans as of September 30, 2015, and changes during 2015, is presented below:

 

Stock Options		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2015			14,205,625			$	0.80				7.2			$	2,000
Granted			930,132			$	0.22
Exercised			-				-
Forfeited or expired			(2,396,826	)		$	0.65
Outstanding at September 30, 2015			12,738,931			$	0.78				6.5			$	0
Exercisable at September 30, 2015			9,167,792			$	0.92				5.5			$	0

 

The weighted-average grant-date fair value of stock options granted under the Plans during 2015 was $0.22. We granted 930,132 stock options during 2015 with an estimated fair value of approximately $170,000. No stock options were exercised during 2015. As of September 30, 2015, there was approximately $1.2 million of total unrecognized compensation cost related to non-vested stock options, and that cost is expected to be recognized over a weighted-average period of 2.4 years.

 

Additionally, the Company has issued certain stock purchase warrants in exchange for the performance of services, not covered by the Plans. A summary of service provider warrant activity as of September 30, 2015 and changes during 2015, is presented below:

 

Warrants to Service Providers		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2015			1,481,364			$	1.20				1.3			$	0
Granted			0				—
Exercised			0				—
Forfeited or expired			(975,000	)		$	1.50
Outstanding at September 30, 2015			506,364			$	0.61				2.9			$	0
Exercisable at September 30, 2015			506,364			$	0.61				2.9			$	0

 

There were no such warrants granted or exercised in 2015.

 

The Company recorded stock-based compensation expense for the three and nine months ended September 30, 2015 and 2014 as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
Stock-Based Expense		2015				2014				2015				2014
Included in Statements of Operations caption as follows:
Sales and marketing		$	(36,046	)		$	62,755			$	83,583			$	101,890
Research and development			21,072				32,353				64,542				41,166
General and administrative			149,577				295,781				509,193				796,422
		$	134,603			$	390,889			$	657,318			$	939,478

 

 

Note 7 – Fair Value Measurements and Disclosures

 

Financial Instruments Carried at Cost

 

Short-term financial instruments in our condensed consolidated balance, including accounts receivables, accounts payable and accrued expenses, are carried at cost which approximates fair value, due to their short-term nature. The fair value of our long-term convertible debt was approximately $30 million at September 30, 2015.

 

Fair Value Measurements

 

Our condensed consolidated balance sheets include various 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 I 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.

 

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

We have segregated our financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The inputs used in measuring the fair value of cash and short-term investments are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of our funds.

 

We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using level 3 inputs. We determine the fair value of these derivative liabilities using the Black-Scholes option pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices.

 

When determining the fair value of our financial liabilities using the Black-Scholes option pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. When determining the fair value of our financial liabilities using binomial lattice models or other accepted valuation practices, we also are required to use various estimates and unobservable inputs, including in addition to those listed above, the probability of certain events.

 

 

The following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:

 

		As of September 30, 2015
Description		Level 1				Level 2				Level 3				Total
Assets
Investment in money market funds		$	3,412,080			$	-			$	-			$	3,412,080
Total investment in money market funds		$	3,412,080			$	-			$	-			$	3,412,080
Liabilities
Embedded conversion options		$	-			$	-			$	396,235			$	396,235
Stock purchase warrants			-				-				2,201,695				2,201,695
Total derivative liabilities		$	-			$	-			$	2,597,930			$	2,597,930

 

		As of December 31, 2014
Description		Level 1				Level 2				Level 3				Total
Assets
Investment in money market funds		$	15,736,350			$	-			$	-			$	15,736,350
Total investment in money market funds		$	15,736,350			$	-			$	-			$	15,736,350
Liabilities
Embedded conversion options		$	-			$	-			$	4,362,225			$	4,362,225
Stock purchase warrants			-				-				25,484,596				25,484,596
Total derivative liabilities		$	-			$	-			$	29,846,821			$	29,846,821

  

The Level 1 assets measured at fair value in the above table are classified as cash and cash equivalents and the Level 3 liabilities measured at fair value in the above table are classified as derivative liabilities in the accompanying condensed consolidated balance sheets. All gains and losses arising from changes in the fair value of derivative instruments are classified as the changes in the fair value of derivative liabilities in the accompanying condensed consolidated statements of operations.

 

 

During the quarters ended September 30, 2015 and 2014 we did not have any transfers between Level 1, Level 2, or Level 3 assets or liabilities. The following tables set forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2015 and 2014:

 

Description		Balance at December 31, 2014				Established in 2015				Effect of Conversion to Common Stock				Reclassed to Additional Paid-In Capital				Change in Fair Value				Balance at September 30, 2015
Derivative liabilities:
Embedded conversion options		$	4,362,225			$	-			$	-			$	-			$	(3,965,990	)		$	396,235
Stock purchase warrants			25,484,596				-				-				-				(23,282,901	)			2,201,695
TOTALS		$	29,846,821			$	—			$	-			$	-			$	(27,248,891	)		$	2,597,930

 

Description		Balance at December 31, 2013				Established in 2014				Effect of Conversion to Common Stock				Reclassed to Additional Paid-In Capital (1)				Change in Fair Value				Balance at September 30, 2014
Derivative liabilities:
Embedded conversion options		$	1,515,540			$	8,825,935			$	(1,932,693	)			-			$	(883,931	)		$	7,524,851
Stock purchase warrants			1,733,055				29,137,683				-				(1,331,776	)			1,042,562				30,581,524
TOTALS		$	3,248,595			$	37,963,618			$	(1,932,693	)		$	(1,331,776	)		$	158,631			$	38,106,375

  

(1) Various warrants were reclassified to additional paid-in capital as a result of the expiration of non-standard anti-dilution clauses contained within the warrants.

 

We have no financial assets and liabilities measured at fair value on a non-recurring basis.

 

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

Property and equipment, intangible assets and goodwill are measured at fair value on a non-recurring basis (upon impairment).

 

As discussed in Note 4, as of September 30, 2015 we determined that the estimated fair value of our IPR&D asset was less than its carrying value, and recognized an impairment charge of $22.6 million. Additionally, we determined that the estimated fair value of our goodwill was less than its carrying value, and recognized a non-cash impairment charge of $1.1 million.

 

In determining the fair value of our intangibles assets, we assessed how our net tangible assets, goodwill and other intangible assets would be valued in a hypothetical sale of the Company, with the sales price being equal to our market capitalization as of September 30, 2015. After allocating the total fair value of our reporting unit to the estimated fair value of our net tangible assets, we then allocated remaining fair value first to our definite-lived intangible assets and second to our indefinite-lived intangible asset. We determined the fair value of the goodwill as the excess of the total fair value of the reporting unit over the fair value of all other assets and liabilities. As discussed in Note 4, as of September 30, 2015 we determined that the estimated fair value of our IPR&D asset was less than its carrying value, and recognized an impairment charge of $22.6 million. Additionally, we determined that the estimated fair value of our goodwill was less than its carrying value, and recognized an impairment charge of $1.1 million.

 

As a result of our decision to discontinue further funding of the ALD-401 development program during the three months ended June 30, 2014, we recognized a non-cash impairment charge of approximately $3.7 million to our in-process research and development asset and approximately $1.0 million to our trademarks.

 

For the June 2014 assessment we determined the fair value for our IPR&D asset by using the royalty savings method of the income approach, limited to the estimate fair value of the reporting unit less the net fair value of tangible assets, definite-lived intangible assets and liabilities. In applying this method, we used the existing royalty income that was being generated by the Company and expected future royalty revenues to get to the expected net cash flows. We then applied an asset-specific discount rate to the forecasted net cash flows to arrive at a net present value amount. Significant estimates and assumptions used in this approach were the (i) amount and timing of the projected revenues; (ii) royalty rate based on comparable IPR&D; (iii) discount rate, which reflects the various risks involved in future cash flows; and (iv) tax rate.

 

For the June 2014 assessment we determined the fair value for the Trademark by using the royalty savings method of the income approach. In applying this method, we used the expected future royalty revenues, generated by the Trademark, to get to the expected net cash flows. We then applied an asset-specific discount rate to the forecasted net cash flows to arrive at a net present value amount. Significant estimates and assumptions used in this approach were the (i) amount and timing of the projected revenues; (ii) royalty rate based on comparable trademarks; (iii) estimated useful life; and (iv) discount rate, which reflects the various risks involved in future cash flows; and (v) tax rate.

 

 

We have no non-financial assets and liabilities measured at fair value on a recurring basis.

 

Note 8 – Supplemental Cash Flow Disclosures

 

Non-cash investing and financing activity for nine months ended September 30, 2015 and 2014 include:

 

		2015				2014
Conversion of convertible debt to common stock		$	-			$	3,067,423
Reclassification of the unamortized balance of debt discount and derivative liability, related to the extinguishment and conversion of the subordinated convertible debt, to additional paid-in capital			-				2,860,627
Derivative liability created from conversion option embedded in Deerfield convertible credit facility			-				8,825,935
Warrants issued in connection with convertible debt and equity facility			-				29,137,683
Reclassification of warrant derivative liability to additional paid-in capital as a result of the expiration of non-standard anti-dilution clause contained in warrants			-				1,331,776
Issuance of common stock in connection with convertible debt facility			-				1,050,000
Accrued property and equipment			-				114,494
Common stock issued for settlement of contingency			-				39,150

 

We did not pay any cash for interest in the nine months ended September 30, 2015. Cash paid for interest was approximately $730,000 in the nine months ended September 30, 2014. There were no income taxes paid in 2015 and 2014.

 

Note 9 – Commitments and Contingencies

 

Under the Company’s plan of reorganization upon emergence from bankruptcy in July 2002, the Series A Preferred stock and the dividends accrued thereon that existed prior to emergence from bankruptcy were to be exchanged into one share of new common stock for every five shares of Series A Preferred stock held as of the date of emergence from bankruptcy. This exchange was contingent on the Company’s attaining aggregate gross revenues for four consecutive quarters of at least $10,000,000 and if met would result in the issuance of 325,000 shares of the Company’s common stock. The Company reached such aggregate revenue levels as of the end of the quarter ended June 30, 2012. As of September 30, 2015, 271,000 shares of common stock remain issuable pursuant to the plan of reorganization.

 

In connection with the Deerfield Facility Agreement, we entered into a Registration Rights Agreement (the “RRA”) with Deerfield and agreed to register, among other things, shares of our common stock issuable upon conversion and exercise of convertible notes and related common stock warrants. In accordance with the RRA, we are obligated to file and maintain an effective registration statement until (i) the date when all shares underlying the convertible notes and related warrants (and any other securities issued or issuable with respect to in exchange for such shares) have been sold or (ii) at any time following the six month anniversary of the date of issuance, all warrant shares issuable upon exercise of the warrants should be eligible for immediate resale pursuant to Rule 144 under the Securities Act.

 

Our primary office and warehouse facilities are located in Gaithersburg, Maryland, and comprise approximately 12,000 square feet. The facilities fall under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $13,000 and $4,000 per month, respectively, with each lease expiring in September 2019. In addition, we lease approximately 2,100 square foot facility in Nashville, Tennessee, which is being utilized as a commercial operations. The lease is approximately $4,000 per month excluding our shares of annual operating expenses and expires April 30, 2018. We also lease a 16,300 square foot facility located in Durham, North Carolina. This facility falls under one lease with monthly rent, including our share of certain annual operating costs and taxes, at approximately $20,000 per month with the lease expiring December 31, 2018. As a result of our discontinuance of the ALD-401 clinical trial, the Company ceased use of the facility in Durham, North Carolina on July 31, 2014 and sublet the facility beginning August 1, 2014. The sublease rent is approximately $13,000 per month and expires December 31, 2018.

 

In July 2009, in satisfaction of a Maryland law pertaining to Wholesale Distributor Permits, we established a Letter of Credit, in the amount of $50,000, naming the Maryland Board of Pharmacy as the beneficiary. This Letter of Credit serves as security for the performance by us of our obligations under applicable Maryland law and is collateralized by a Certificate of Deposit maintained at a commercial bank.

 

 

The Company and the MVF agreed to execute a certain Stock Repurchase Agreement which requires us to repurchase the MVF’s investment, at MVF’s option, upon certain events outside of our control; provided, however, that in the event that, at the time of either such event our securities are listed on a national securities exchange, the foregoing repurchase will not be triggered.

 

Purchase obligations consist of a commitment to purchase 600 Aurix centrifuges. Receipt of the centrifuges is expected to commence during the fourth quarter of 2015, with the remaining 200 units expected to be delivered during the first quarter of 2016. In addition, we have committed to rebranding and enhancing 270 additional Aurix centrifuges with this same supplier. The September 30, 2015 remaining balance to be paid under this commitment was approximately $170,000. Under the terms of our purchase agreement for Angel machines, we provide an upfront deposit for the purchase of the units and pay the remaining balance upon shipment of the units from our manufacturer. We were obligated to purchase 53 Angel machines based on our deposit balance held at our supplier at September 30, 2015. The remaining balance to be paid for these 53 Angel machines as of September 30, 2015 was approximately $280,000. In addition, as of September 30, 2015, we were obligated to purchase a combination of Angel cPRP processing sets and activAT kits from our supplier which were valued at approximately $1,050,000.

 

Note 10 - Subsequent Events

 

Deerfield Facility Agreement – Events of Default

 

On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) between November 11, 2015 and December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015. We believe the modification agreement will allow us to continue our substantive discussions with the lenders to reduce our risk of default, thereby permitting us to continue our operations, but we can provide no assurance that we will be successful in this effort. We cannot provide any assurance that the lenders will agree to modify the Deerfield Facility Agreement, whether any proposed modifications to the agreement would be on terms favorable, or acceptable, to us, or whether the lenders will declare an event of default under the agreement and foreclose on our assets by enforcing their rights under our agreements with them. If we cannot agree on additional modifications to the Deerfield Facility Agreement, we may be required to curtail or cease operations or, alternatively, seek court supervised protection from creditor claims. Even if we can reach an agreement to further modify the Deerfield Facility Agreement in a manner that is acceptable to us, management believes that we will be required to identify additional sources of capital in the near term to continue our operations beyond January 2016. Any additional agreement that we reach with the lenders under the Deerfield Facility Agreement is expected to involve substantial dilution to the ownership interests of holders of our common stock, and could involve other conditions causing the value of our common stock to decline.

 

As of November 12, 2015, the Company has failed to make an interest payment of approximately $2.6 million which was due, October 1, 2015, under the terms of the Deerfield Facility Agreement. Although the modification of the Deerfield Facility Agreement deferred the time for us to make such interest payment, the failure to make such payment when due has caused the interest rate due under the agreement to increase from 5.75% per annum to 15.75% per annum for so long as such payment remains outstanding, and such interest will be payable upon Deerfield’s demand. Consequently, as of November 12, 2015, the total debt outstanding under the Deerfield Facility is $38.3 million, including accrued interest of $3,290,910. In addition, prior to the November 11, 2015 modification of the Deerfield Facility Agreement, we were not in compliance with the requirement to maintain a compensating cash balance of $5.0 million in deposit accounts subject to control agreements in favor of the lenders. Because of the occurrence of events of default under the Deerfield Facility Agreement, the Deerfield lenders may declare the principal of, and accrued and unpaid interest on, all of the notes or any part of any of them, immediately due and payable by providing written notice to the Company. (See Note 5 – Debt and Derivative Liabilities for additional details.)

 

Entry into a Material Definitive Agreement.

 

On October 16, 2015, the Company entered into the Amended Arthrex Agreement with Arthrex, which amends and restates the Original Arthrex Agreement entered into by the Company and Arthrex on August 7, 2013. Under the terms of the Amended Arthrex Agreement the Company has granted to Arthrex (A) an exclusive, irrevocable, worldwide, sub-licensable, transferable license to the patents used in the technology 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 product line (including, without limitation, the activAT disposables and associated components) and certain new enhanced products within the "Exclusive Field of Use" and (B) a non-exclusive, irrevocable, worldwide, sub-licensable, transferable license to the patents used in the technology 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 (a) nonsurgical aesthetics markets in the United Kingdom and Ireland subject to certain license rights granted to Biotherapy Services Ltd. and (b) any wound care applications (i) worldwide, outside the United States, its territories and possessions and (ii) in the United Kingdom and Ireland subject to certain license rights granted to Biotherapy Services Ltd. (the "Non-Exclusive Field of Use"). The "Exclusive Field of Use" consists of uses in human and veterinary applications except those described in the Non-Exclusive Field of Use. In consideration of the licenses granted, Arthrex will continue to pay the Company a percentage of gross sales revenue, including royalties paid by sublicensees to Arthrex and its affiliates, from the sales of Angel ("Gross Sales Revenue") as a royalty (a "Royalty") according to percentages agreed upon by the parties. As part of the transaction, the Company transferred to Arthrex all of its rights and title to product registration rights and intellectual property (other than patents) related to Angel. In connection with the Agreement, senior lien holders Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P. irrevocably released their liens on the product registration rights and intellectual property (other than patents) assets transferred by the Company to Arthrex.

 

The Company and Arthrex agreed that, on a date to be determined by Arthrex, but not later than March 31, 2016, Arthrex will assume all rights related to the manufacture and supply of the Angel product line. Notwithstanding the actual Gross Sales Revenue, Arthrex will pay the Company a minimum annual royalty for years 2018 to 2021. Arthrex paid $775,000 to the Company on October 19, 2015 as a prepayment of assumed Royalties for the third and fourth quarters of calendar year 2015, subject to an adjustment to be made in February 2016 based on actual royalties due and payable.

 

 

The term of the Amended Arthrex Agreement will continue until the expiration of the last to expire of the licensed patents licensed thereunder (generally August 2024), or until such time when the last of the royalty obligations expire, whichever is longer, unless terminated earlier at the mutual agreement of the parties or by the Company for failure of Arthrex to pay certain amounts due or if Arthrex challenges the validity or enforceability of certain Company patents. The Amended Arthrex Agreement contains various customary representations and warranties, as well as customary provisions relating to confidentiality and other matters.

 

2016 Aurix System Reimbursement Rate

 

The Aurix™ System reimbursement rate under the Hospital Outpatient Prospective Payment System (HOPPS) for the calendar year 2016 has been published by the Centers for Medicare and Medicaid Services (CMS). Aurix was placed in Ambulatory Payment Classification (APC) 5054 (Level 4 Skin Procedures) and will be reimbursed at a national average rate of $1,411 per application effective January 1, 2016. In the text of the ruling, CMS commented they believe the geometric mean cost of the services underlying Aurix is comparable to the geometric mean cost of APC 5054. This represents an increase of from the effective HOPPS proposed average payment in prior periods, as the national average rate was $430 per treatment in 2015.

 

  

ITEM 2. 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 quarterly report for the period ended September 30, 2015 on Form 10-Q, and our Annual Report for the year ended December 31, 2014 on Form 10-K, 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 for the quarterly period ended September 30, 2015 on Form 10-Q (including the section regarding 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. 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 be,” “will continue,” “will likely result” 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. The risks and uncertainties are detailed from time to time in reports filed by us with the Securities and Exchange Commission, including Forms 8-K, 10-Q, and 10-K, and include, among others, the following: our limited sources of working capital; our need for substantial additional financing; our history of losses and future expectations; our short history and limited operating experience; our ability to comply with requirements imposed upon us by certain financing agreements, including from Deerfield Management Company, L.P., or Deerfield; our ability to implement our Realignment Plan; our receipt of a gross royalty stream pursuant to the amended and restated license agreement; that our receipt of a gross royalty stream pursuant to the amended and restated license agreement with Arthrex will offer us a more predictable and valuable royalty stream over the life of that agreement; that Deerfield, or anyone else, will provide ongoing capital support; that Deerfield will agree to restructure our existing credit facility; whether the lenders under the Deerfield Facility Agreement may declare an event of default under the agreement and foreclose on our assets; the risk of substantial dilution to the ownership interests of holders of our common stock that may result from a further modification of the Deerfield Facility Agreement; the risk that our common stock becomes devalued as a result of a dilutive event related to the Deerfield Facility Agreement; our ability to successfully implement the amended and restated license agreement with Arthrex; whether CMS will continue to consider its treatment of the geometric mean cost of the services underlying 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 and continue to be reimbursed at a profitable national average rate per application in the future; the liquidity of our common stock resulting from its trading on the OTC Markets Group OTCQX marketplace; our reliance on several single source suppliers; our ability to secure additional debt or equity financing; our ability to protect our intellectual property; our compliance with governmental regulations; the success of our clinical trials; our ability to contract with healthcare providers; our ability to successfully sell and market the Aurix System; our ability to secure Medicare reimbursements at adequate levels; the acceptance of our products by the medical community; our ability to source raw materials at affordable costs; our ability to attract and retain key personnel; our ability to successfully pursue strategic collaborations to help develop, support or commercialize our products; and the volatility of our stock price. 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 the 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 under the Realignment Plan. If a larger workforce or one with a different skillset is ultimately required to implement the Realignment Plan successfully, or if we inaccurately estimated the cash and cash equivalents necessary to finance our operations into January 2016, or if we are unable to identify additional sources of capital in the near term to continue our operations beyond January 2016, 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.

 

Corporate Overview

 

Nuo Therapeutics is a regenerative therapies company developing and marketing products within the U.S. and internationally. 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 offerings consist of point of care technologies for the safe and efficient separation of autologous blood and bone marrow to produce platelet based therapies or cell concentrates. Today, we have two distinct PRP devices, the Aurix System for wound care and the Angel cPRP system for orthopedics markets. Our product sales are predominantly (approximately 84%) in the U.S., where we sell our products through direct sales representatives and our Arthrex Distributor and License Agreement. Growth drivers in the U.S. include the treatment of chronic wounds with Aurix in the Veterans Affairs healthcare system and the Medicare population under a National Coverage Determination when registry data is collected under CMS’ Coverage with Evidence Development (CED) program, and a worldwide distribution and licensing agreement that allows our partner to promote the Angel system for uses other than wound care.

 

The Aurix ^TM System

 

In October 2014, we relaunched our AutoloGel chronic wound care system under the Aurix brand, as a part of our marketing plan for the commercialization of Aurix in the U.S. chronic wound care market.

 

The Aurix System is a point of care device for the production of a platelet based bioactive wound treatment derived from a small sample of the patient’s own blood. Aurix is cleared by the FDA for use on exuding wounds and is currently marketed in the chronic wound market. Chronic wounds account for an estimated $6 billion to $15 billion annually in U.S. health care costs. The most significant growth driver for Aurix is the 2012 NCD from the CMS which reversed a twenty year old non-coverage decision for autologous blood products used in wound care. Using the patient’s own platelets as a therapeutic agent, Aurix harnesses the body’s natural healing processes to deliver growth factors, chemokines and cytokines known to promote angiogenesis and to regulate cell growth and the formation of new tissue. Once applied to the prepared wound bed, the biologically active platelet gel can restore the balance in the wound environment to transform a non-healing wound to a wound that heals naturally. There have been nine peer-reviewed scientific and clinical publications demonstrating the effectiveness of Aurix in the management of chronic wounds since the device and gel was cleared by the FDA in 2007.

 

CMS previously advised us that payment levels for reimbursement claims with respect to Aurix would be reviewed annually and subject to change. Revisions to decrease payment rates for reimbursement claims are likely to negatively impact the Company's economic value proposition of Aurix in the market for advanced wound care therapies. On July 1, 2015, CMS released the proposed Hospital Outpatient Prospective Payment System (HOPPS) rule for calendar year 2016. CMS had proposed an average national payment of $305.10. This represented a decrease from the effective HOPPS proposed average payment in prior periods, as the national average rate was $411 per treatment during the 2014 calendar year, and $430 per treatment in 2015. The Company worked with CMS and experts in the field, to establish a reasonable payment in the final rule for 2016. The Aurix™ System reimbursement rate under the Hospital Outpatient Prospective Payment System (HOPPS) for the calendar year 2016 has been published by the Centers for Medicare and Medicaid Services (CMS). Aurix was placed in Ambulatory Payment Classification (APC) 5054 (Level 4 Skin Procedures) and will be reimbursed at a national average rate of $1,411 per application effective January 1, 2016. In the text of the ruling, CMS commented they believe the geometric mean cost of the services underlying Aurix is comparable to the geometric mean cost of APC 5054.

 

The Company’s Aurix revenues in VA facilities are unaffected by CMS determined reimbursement rates, as the Company establishes a price on the Federal Supply Schedule.

 

In September 2009, we entered into a license and distribution agreement with Millennia Holdings, Inc. (“Millennia”) for the Company’s Aurix System in Japan. Since then, Millennia has been collecting and publishing clinical data for regulatory purposes and expanding the utilization of Aurix throughout their network. The diabetic population in Japan is estimated to be approximately seven million adults. Millennia has assisted the Company in securing a partner to address widespread distribution in Japan.

 

In January 2015, we granted to 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 future cash payment in the event specific milestones are met.

 

In connection with and effective as of the entering into the Rohto Agreement, we executed Amendment No. 5 to the Licensing and Distribution Agreement with Millennia dated September 10, 2009, as subsequently amended to terminate the Millennia Agreement and to allow us to transfer the 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 may be required to pay certain future royalty payments 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. Further, Rohto has assumed all responsibility for securing the MA from Japan’s MHLW, while we will provide relevant product information, as well as clinical and other data to support Rohto’s MA application.

 

Angel Product Line

 

The Angel cPRP 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 PRP and PPP from 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 used in a range of orthopedic and cardiovascular indications. The Angel System is a point of care device for the production of a concentrated, aseptic platelet-based bioactive therapy derived from a small sample of the patient’s own blood.

 

 

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 our Angel Concentrated Platelet 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. Arthrex purchases these products from us to distribute and service. Arthrex pays us a certain royalty rate based upon volume of the products sold. The exclusive nature of Arthrex’s rights to sell, distribute and service the products is subject to certain existing supply and distribution agreements such that Arthrex may instruct us to terminate or not renew any of such agreements. In addition, Arthrex’s rights to sell, distribute and service the products is not exclusive in the non-surgical dermal and non-surgical aesthetics markets. On October 16, 2015, the Company entered into an Amended and Restated License Agreement (the "Amended Arthrex Agreement") with Arthrex, which amended and restated the Original Arthrex Agreement Under the terms of the Amended Arthrex Agreement, among others, the Company licensed certain exclusive and non-exclusive rights to Arthrex, for which it will receive certain royalties through 2021, and on a date to be determined by Arthrex, but not later than March 31, 2016, Arthrex will assume all rights related to the manufacture and supply of the Angel product line. As part of the transaction, the Company transferred to Arthrex all of its rights and title to product registration rights and intellectual property (other than patents) related to Angel. In connection with the Agreement, senior lien holders Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P. irrevocably released their liens on the product registration rights and intellectual property (other than patents) assets transferred by the Company to Arthrex (See Note 10 – Subsequent Events for additional details.)

 

ALDHbr, or Bright Cell, Technology and Development Pipeline

 

We acquired the ALDHbr “Bright Cell” technology as part of our acquisition of Aldagen in February 2012. The Bright Cell technology is a novel approach to cell-based regenerative medicine with potential clinical indications in large markets with significant unmet medical needs, such as peripheral arterial disease and ischemic stroke. The Bright Cell technology is unique in that it utilizes an intracellular enzyme marker to facilitate fractionation of essential regenerative cells from a patient’s bone marrow. This core technology was originally licensed by Aldagen from Duke University and Johns Hopkins University. The proprietary bone-marrow fractionation process identifies and isolates active stem and progenitor cells expressing high levels of the enzyme aldehyde dehydrogenase, or ALDH, which is a key enzyme involved in the regulation of gene activities associated with cell proliferation and differentiation. These autologous, selected biologically instructive cells have the potential to promote the repair and regeneration of multiple types of cells and tissues, including the growth of new blood vessels, or angiogenesis, which is critical to the generation of healthy tissue.

 

 Reorganization of Research and Development Operations related to ALD-401

 

In September 2013, we announced our decision to begin a strategic reorganization of our research and development operations that involved discontinuing clinical trials of ALD-401, which focused on the RECOVER-Stroke trial and one component of the technology present in the ALDH Bright Cell platform. This discontinuation was limited to the above mentioned clinical trial of RECOVER-Stroke, and does not represent our discontinuation of efforts to develop and commercialize Bright Cell technology. Following the January 2014 completion of the trial enrollment in the RECOVER-Stroke trial, in May 2014 we announced preliminary efficacy and safety results of our RECOVER-Stroke Phase 2 clinical trial in patients with neurological damage arising from ischemic stroke and treated with ALD-401. Observed improvements in the primary endpoint (mean modified Rankin Score or mRS) of the trial were not clinically or statistically significant. In light of this outcome, we discontinued further funding of the ALD-401 development program, and in connection therewith, closed our R&D facility in Durham, NC, which supported the development of ALD-401. This 2014 decision to close down the facility was in line with the overall realignment of our commercial operations to focus on the wound care market.

 

Continued Development of Bright Cell Technology

 

Notwithstanding the discontinuation of further funding of the RECOVER-Stroke clinical trials, we will continue to develop the Bright Cell technology platform for other uses, and will conduct a Phase 1/2 clinical trial in critical limb ischemia (PACE), that is being funded by the National Institutes of Health, and a Phase 1 clinical trial in grade IV malignant glioma following surgery, that is funded by Duke University.

 

Recent Events

 

At September 30, 2015 we had total debt outstanding under the Deerfield Facility Agreement of $37.6 million, including accrued interest. Pursuant to the terms of the Deerfield Facility Agreement, we are required to maintain a compensating cash balance of $5.0 million in deposit accounts subject to control agreements in favor of the lenders. As of September 30, 2015, we had approximately $4.1 million in cash and cash equivalents and we were not in compliance with that covenant. The terms of the Deerfield Facility Agreement also required us to pay Deerfield the accrued interest amount of approximately $2.6 million on October 1, 2015, which we were unable to do. In addition, because our revenue for the three month period ended September 30, 2015 was less than the net sales threshold contemplated in the Deerfield Facility Agreement, Deerfield has the option of requiring us to prepay on March 31, 2016, an amount equal to one-third of the aggregate amount of the credit facility together with accrued and unpaid interest thereon. On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) between November 11, 2015 and December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015. We believe the modification agreement will allow us to continue our substantive discussions with the lenders to reduce our risk of default, thereby permitting us to continue our operations, but we can provide no assurance that we will be successful in this effort. We cannot provide any assurance that the lenders will agree to modify the Deerfield Facility Agreement, whether any proposed modifications to the agreement would be on terms favorable, or acceptable, to us, or whether the lenders will declare an event of default under the agreement and foreclose on our assets by enforcing their rights under our agreements with them. If we cannot agree on additional modifications to the Deerfield Facility Agreement, we may be required to curtail or cease operations or, alternatively, seek court supervised protection from creditor claims. Even if we can reach an agreement to further modify the Deerfield Facility Agreement in a manner that is acceptable to us, management believes that we will be required to identify additional sources of capital in the near term to continue our operations beyond January 2016. Any additional agreement that we reach with the lenders under the Deerfield Facility Agreement is expected to involve substantial dilution to the ownership interests of holders of our common stock, and could involve other conditions causing the value of our common stock to decline.

 

 

Because of recent events, including a substantial reduction in our stock price and our situation under the Deerfield Facility Agreement and liquidity situation, we determined that it was more likely than not that the fair value of our single reporting unit was reduced below the carrying value of its net equity, requiring an impairment test as of September 30, 2015. We compared the carrying value of our single reporting unit to its fair value and concluded the carrying value of the unit exceeded its fair value. We then performed the second step of the goodwill impairment test and determined that our goodwill was impaired. As a result, we recognized a non-cash goodwill impairment charge of approximately $1.1 million to write-down the goodwill to its estimated fair value as of September 30, 2015.

 

Additionally, there were triggering events identified during the three months ended September 30, 2015 indicating that our IPR&D asset may be impaired and, as a result, we performed an impairment test as of September 30, 2015. In connection with determining the fair value of our goodwill associated with our reporting unit, we determined the fair value of our one reporting unit based on our market capitalization as of September 30, 2015 (see “Goodwill”).  Based on that fair value, we determined that our IPR&D asset was impaired as of September 30, 2015 and recognized a non-cash IPR&D impairment charge of approximately $22.6 million during the three month period ended September 30, 2015.

 

We had cash and cash equivalents on hand at September 30, 2015 of approximately $4.1 million. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results. The accompanying unaudited interim condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet our obligations as they become due. We believe that our current resources, expected revenue from current products, royalty revenue and license fees will be inadequate to maintain our operations beyond January 2016. Management believes the going-concern basis is appropriate for the accompanying condensed consolidated financial statements, however our inability to negotiate modifications to the existing Deerfield Facility Agreement that are favorable to us may create substantial doubt regarding our ability to continue as a going concern.

 

Results of Operations

 

Our revenues will be insufficient to cover our operating expenses in the near term. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, clinical trial costs, and other general business expenses such as insurance, travel related expenses, and sales and marketing related items. We expect our operating expenses, excluding impairment charges, to decrease as a result of our realignment plan. We have realigned our operational and commercial activities to reduce costs and refocus our efforts on the commercial wound care market. However, we expect losses to continue for the foreseeable future.

 

Comparison of Operating Results for the Three-Month Period Ended September 30, 2015 and 2014

 

Revenue and Gross Profit

 

Revenues increased $477,000 (28%) to $2,169,000 comparing the three months ended September 30, 2015 to the previous year. This was due to an increase in product sales related to Angel of $338,000 and Aurix $94,000 and Angel royalties of $59,000.

 

Overall gross profit increased $211,000 (59%) to $569,000 and overall gross margin increased to 26% from 21%, comparing the three months ended September 30, 2015 to the previous year. The increase in gross profit resulted from the increase in Aurix product sales and an increase in Angel related royalties and reduced charges for Angel machine refurbishment costs.

 

 

The following table discloses the profitability of sales, license fees and royalties:

 

		Three Months Ended September 30,
		Aurix								Angel								Bright Cell								Total
		2015				2014				2015				2014				2015				2014				2015				2014
Product sales		$	188,000			$	94,000			$	1,445,000			$	1,107,000			$	-			$	-			$	1,633,000			$	1,201,000
License Fees			-				-				101,000				100,000				-				-				101,000				100,000
Royalties			-				-				392,000				333,000				43,000				58,000				435,000				391,000
Total revenue			188,000				94,000				1,938,000				1,540,000				43,000				58,000				2,169,000				1,692,000
Product cost of sales			122,000				92,000				1,435,000				1,198,000				-				-				1,557,000				1,290,000
Royalty cost of sales			-				-				40,000				39,000				3,000				5,000				43,000				44,000
Total cost of revenue			122,000				92,000				1,475,000				1,237,000				3,000				5,000				1,600,000				1,334,000
Gross profit/(loss)			66,000				2,000				463,000				303,000				40,000				53,000				569,000				358,000
Gross margin			35	%			2	%			24	%			20	%			93	%			91	%			26	%			21	%

 

Aurix Revenue and Gross Profit

 

Aurix product sales increased $94,000 while gross profit increased $64,000 comparing the three months ended September 30, 2015 to the previous year. The increase in gross profit and gross margin was due to increased product sales.

 

Angel Revenue and Gross Profit

 

Overall Angel revenue increased $398,000 while gross profit increased $160,000 comparing the three months ended September 30, 2015 to the previous year. Product sales increased by $338,000 due to higher sales of both centrifuges and disposables. The increase in gross profit and gross margin was primarily due to lower centrifuge warranty repair expenses and higher royalty revenue.

 

Under the terms of the Amended Arthrex Agreement, Arthrex will assume manufacturing and supply responsibilities for the Angel product line at a date to be determined by Arthrex, but not later than March 31, 2016. Once fully transitioned, the Company will no longer reflect revenue related to Angel product sales and product cost of sales, only the related Angel royalties, will be reflected in the condensed consolidated statements of operations.

 

 Operating Expenses

 

Operating expenses increased $22,973,000 (473%) to $27,828,000 comparing the three months ended September 30, 2015 to the same period last year. A discussion of the various components of operating expenses follows.

 

Sales and Marketing

 

Sales and marketing increased $346,000 (28%) to $1,583,000 comparing the three months ended September 30, 2015 to the previous year. The increase was primarily due to the planned expansion of our commercial and marketing organization that began in the second quarter of 2014 and costs associated with the reorganization of the company.

 

Research and Development

 

Research and development expenses decreased $493,000 (49%) to $515,000 comparing the three months ended September 30, 2015 to the previous year. The decrease was primarily due to lower CED costs related to the development of Aurix CED protocols.

 

General and Administrative

 

General and administrative expenses decreased $622,000 (24%) to $1,989,000 comparing the three months ended September 30, 2015 to the previous year. The decrease was primarily due to lower compensation expense related to the recent realignment of the Company, and lower expense related to the closure of our Durham, North Carolina facility in 2014. This was partially offset by increased severance costs related to the recent realignment of the company.

 

Impairment of Intangible Assets

 

Because of recent events, including a substantial reduction in our stock price through the period ending September 30, 2015 and our situation under the Deerfield Facility Agreement and liquidity situation, we determined that it was more likely than not that the fair value of our single reporting unit was reduced below the carrying value of its net equity, requiring an impairment test as of September 30, 2015. We compared the carrying value of our single reporting unit to its fair value and concluded the carrying value of the unit exceeded its fair value. We then performed the second step of the goodwill impairment test and determined that our goodwill was impaired. As a result, we recognized a non-cash goodwill impairment charge of approximately $1.1 million to write-down the goodwill to its estimated fair value as of September 30, 2015.

 

 

Additionally, there were triggering events identified during the three months ended September 30, 2015 indicating that our IPR&D asset may be impaired and, as a result, we performed an impairment test as of September 30, 2015. In connection with determining the fair value of our goodwill associated with our reporting unit, we determined the fair value of our one reporting unit based on our market capitalization as of September 30, 2015 (see “Goodwill” above).  Based on that fair value, we determined that our IPR&D asset was impaired as of September 30, 2015 and recognized a non-cash IPR&D impairment charge of approximately $22.6 million during the three month period ended September 30, 2015. We will continue to develop the IPR&D Bright Cell technology platform for other uses, and will conduct a Phase 1/2 clinical trial in critical limb ischemia (PACE), that is being funded by the National Institutes of Health, and a Phase 1 clinical trial in grade IV malignant glioma following surgery, that is funded by Duke University.

 

Other Income and Expense

 

Other expense, net decreased $13,718,000 (4836%) to other income, net of $13,435,000 comparing the three months ended September 30, 2015 to the same period last year. The difference was primarily due to the $13,857,000 change in the fair value of derivative liabilities from an unrealized gain of $543,000 to an unrealized gain of $14,400,000 for the three months ended September 30, 2014 and 2015, respectively partially offset by an increase in interest expense under the Deerfield Facility Agreement executed on March 31, 2014.

 

Comparison of Operating Results for the Nine-Month Period Ended September 30, 2015 and 2014

 

Revenue and Gross Profit

 

Revenues increased $4,038,000 (69%) to $9,902,000, comparing the nine months ended September 30, 2015 to the previous year. This was primarily due to an increase in license fee revenue of $3,000,000, related to the Rohto agreement, and Angel product sales and royalties of $757,000 and $267,000, respectively.

 

Overall gross profit increased $1,915,000 (162%) to $3,094,000 while overall gross margin increased to 31% from 20%, comparing the nine months ended September 30, 2015 to the previous year. The increase in gross margin resulted primarily from the Rohto license fees of $3,000,000 and costs of license fees paid to Millennia of $1,500,000, as well as increased royalties. 

 

The following table discloses the profitability of sales, license fees and royalties:

 

		Nine Months Ended September 30,
		Aurix								Angel								Bright Cell								Total
		2015				2014				2015				2014				2015				2014				2015				2014
Product sales		$	419,000			$	379,000			$	4,853,000			$	4,096,000			$	-			$	-			$	5,272,000			$	4,475,000
License Fees			3,000,000				-				302,000				302,000				-				-				3,302,000				302,000
Royalties			-				-				1,169,000				902,000				159,000				185,000				1,328,000				1,087,000
Total revenue			3,419,000				379,000				6,324,000				5,300,000				159,000				185,000				9,902,000				5,864,000
Product cost of sales			341,000				271,000				4,836,000				4,281,000				-				-				5,177,000				4,552,000
License fees cost of sales			1,500,000				-				-				-				-				-				1,500,000				-
Royalty cost of sales			-				-				117,000				118,000				13,000				15,000				130,000				133,000
Total cost of revenue			1,841,000				271,000				4,953,000				4,399,000				13,000				15,000				6,807,000				4,685,000
Gross profit/(Loss)			1,578,000				108,000				1,371,000				901,000				146,000				170,000				3,095,000				1,179,000
Gross margin			46	%			28	%			22	%			17	%			92	%			92	%			31	%			20	%

 

Aurix Revenue and Gross Profit

 

Overall, Aurix revenue increased $3,040,000 while gross profit increased $1,470,000 comparing the nine months ended September 30, 2015 to the previous year. Increased sales and gross profit was primarily due to the $3,000,000 license fee related to the Rohto agreement and related costs of license fees paid to Millennia of $1,500,000. Aurix product sales increased by $40,000 while gross profit from these sales decreased $30,000. The decrease in gross profit and gross margin from product sales was primarily due to an increase in costs of sales related to royalty expense for the underlying patents, increase in inventory obsolescence charges, and a temporary increase in the cost of raw materials used in the Aurix kit.

 

Angel Revenue and Gross Profit

 

Overall Angel revenue increased $1,024,000 while gross profit increased $470,000 comparing the nine months ended September 30, 2015 to the previous year. Product sales increased $757,000 as a result of higher centrifuge sales partially offset by lower disposable sales. The increase in gross profit and gross margin was primarily due to an increase in royalties along with lower centrifuge warranty repair and logistics expenses. Under the terms of the Amended Arthrex Agreement, Arthrex will assume manufacturing and supply responsibilities for the Angel product line at a date to be determined by Arthrex, but not later than March 31, 2016. Once fully transitioned the Company will no longer reflect revenue related to Angel product sales and product cost of sales, only the related Angel royalties, will be reflected in the Condensed Consolidated Statements of Operations.

 

 

Operating Expenses

 

Operating expenses increased $18,012,000 (89%) to $38,161,000 comparing the nine months ended September 30, 2015 to the same period last year. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing increased $1,275,000 (33%) to $5,188,000 comparing the nine months ended September 30, 2015 to the previous year. The increase was primarily due to the planned expansion of our commercial and marketing organization that began in the second quarter of 2014. The growth of the commercial organization led to increased employee compensation and travel expenses which was partially offset by reduced consulting and external marketing costs.

 

Research and Development

 

Research and development expenses decreased $1,908,000 (51%) to $1,847,000 comparing the nine months ended September 30, 2015 to the previous year. The decrease was primarily due to lower clinical trial costs as a result of the discontinuation of the ALD-401 clinical trial in 2014 and reduced external CED costs related to the development of Aurix CED protocols, partially offset by an increase in employee compensation for the clinical team leading the AU (Gold) study.

 

General and Administrative

 

General and administrative expenses decreased $412,000 (5%) to $7,385,000 comparing the nine months ended September 30, 2015 to the previous year. The decrease in expenses is primarily the result of lower compensation expense, including lower expense related to the closure of our Durham, North Carolina facility in 2014, and reduced employee stock-based compensation. This is partially offset by higher severance expense related to the recent realignment of the company along with increased depreciation expense, legal fees, and professional service fees.

 

Impairment of Intangible Assets

 

Because of recent events, including a substantial reduction in our stock price and our situation under the Deerfield Facility Agreement and liquidity situation, we determined that it was more likely than not that the fair value of our single reporting unit was reduced below the carrying value of its net equity, requiring an impairment test as of September 30, 2015. We compared the carrying value of our single reporting unit to its fair value and concluded the carrying value of the unit exceeded its fair value. We then performed the second step of the goodwill impairment test and determined that our goodwill was impaired. As a result, we recognized a non-cash goodwill impairment charge of approximately $1.1 million to write-down the goodwill to its estimated fair value as of September 30, 2015.

 

Additionally, there were triggering events identified during the three months ended September 30, 2015 indicating that our IPR&D asset may be impaired and, as a result, we performed an impairment test as of September 30, 2015. In connection with determining the fair value of our goodwill associated with our reporting unit, we determined the fair value of our one reporting unit based on our market capitalization as of September 30, 2015 (see “Goodwill” above).  Based on that fair value, we determined that our IPR&D asset was impaired as of September 30, 2015 and recognized a non-cash IPR&D impairment charge of approximately $22.6 million during the three month period ended September 30, 2015.

 

As a result of our decision to discontinue further funding of the ALD-401 development program during the nine months ended September 30, 2014, we recognized a non-cash impairment charge of approximately $3.7 million to our IPR&D asset and $1.0 million to our trademarks. We will continue to develop the IPR&D Bright Cell technology platform for other uses, and will conduct a Phase 1/2 clinical trial in critical limb ischemia (PACE), that is being funded by the National Institutes of Health, and a Phase 1 clinical trial in grade IV malignant glioma following surgery, that is funded by Duke University.

 

Other Income and Expense

 

Other expense, net decreased $27,244,000 (989%) to other income, net of $24,489,000 comparing the nine months ended September 30, 2015 to the previous year. The difference was primarily due to the $27,408,000 change in the fair value of derivative liabilities from an unrealized loss of $159,000 to an unrealized gain of $27,249,000 for the nine months ended September 30, 2014 and 2015, respectively.

 

Liquidity and Capital Resources

 

Since our inception we have incurred, and continue to incur, significant losses from operations. For the nine months ended September 30, 2015, we incurred a loss from operations of approximately $35.1 million and have an accumulated deficit at September 30, 2015 of $120.7 million. At September 30, 2015, we had working capital of approximately $0.4 million.

 

 

At September 30, 2015 we had total debt outstanding under the Deerfield Facility Agreement of $37.6 million, including accrued interest. Pursuant to the terms of the Deerfield Facility Agreement, we are required to maintain a compensating cash balance of $5.0 million in deposit accounts subject to control agreements in favor of the lenders. As of September 30, 2015, we had approximately $4.1 million in cash and cash equivalents and were not in compliance with that covenant. The terms of the Deerfield Facility Agreement also required us to pay Deerfield the accrued interest amount of approximately $2.6 million on October 1, 2015, which we were unable to do. In addition, because our revenue for the three month period ended September 30, 2015 was less than the net sales threshold contemplated in the Deerfield Facility Agreement, Deerfield has the option of requiring us to prepay on March 31, 2016, an amount equal to one-third of the aggregate amount of the credit facility together with accrued and unpaid interest thereon. On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) between November 11, 2015 and December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015. We believe the modification agreement will allow us to continue our substantive discussions with the lenders to reduce our risk of default, thereby permitting us to continue our operations, but we can provide no assurance that we will be successful in this effort. We cannot provide any assurance that the lenders will agree to modify the Deerfield Facility Agreement, whether any proposed modifications to the agreement would be on terms favorable, or acceptable, to us, or whether the lenders will declare an event of default under the agreement and foreclose on our assets by enforcing their rights under our agreements with them. If we cannot agree on additional modifications to the Deerfield Facility Agreement, we may be required to curtail or cease operations or, alternatively, seek court supervised protection from creditor claims. Even if we can reach an agreement to further modify the Deerfield Facility Agreement in a manner that is acceptable to us, management believes that we will be required to identify additional sources of capital in the near term to continue our operations beyond January 2016. Any additional agreement that we reach with the lenders under the Deerfield Facility Agreement is expected to involve substantial dilution to the ownership interests of holders of our common stock, and could involve other conditions causing the value of our common stock to decline.

 

We had cash and cash equivalents on hand at September 30, 2015 of approximately $4.1 million. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results. The accompanying unaudited interim condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet our obligations as they become due.

 

We believe that our current resources, expected revenue from current products, royalty revenue and license fees will be adequate to maintain our operations into January 2016. Management believes the going-concern basis is appropriate for the accompanying condensed consolidated financial statements, however our inability to negotiate modifications to the existing Deerfield Facility Agreement that are favorable to us will create substantial doubt regarding our ability to continue as a going concern. If we are unable to increase our revenues as much as expected or if capital infusions are not available to the Company from future strategic partnerships, from the sale of shares under the purchase agreements we entered into with Lincoln Park, or through the sale of debt, equity and equity-linked securities, licensing, or royalty arrangements, then we may be required to curtail portions of our strategic plan or to cease operations. Specific programs that may require additional funding include, without limitation, continued investment in the sales, marketing, distribution, and customer service areas, further expansion into the international markets, significant new product development or modifications, and pursuit of other opportunities. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations could be materially negatively impacted.

 

Historically, we have financed our operations by raising debt, issuing equity and equity-linked instruments, executing licensing arrangements, and to a lesser extent by generating royalties and product revenues. In 2014, we raised approximately $36.7 million, net from the issuance of convertible debt and warrants and the sale of common stock and warrants. We used approximately $6.2 million of the proceeds from these transactions to retire outstanding debt and accrued interest in 2014, and we converted approximately $3.1 million of previously outstanding convertible debt and interest into common stock. We have incurred, and continue to incur, recurring losses and negative cash flows. If we continue to incur negative cash flow from sources of operating activities for longer than expected, even if we reach agreement with Deerfield our ability to continue as a going concern could be in substantial doubt and we will require additional funds through debt facilities, and/or public or private equity or debt financings to continue operations. We cannot provide any assurance that we will be able to obtain the capital we require on a timely basis or on terms acceptable to us.

  

In January 2015 we granted to Rohto Pharmaceutical Co., Ltd. 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. In connection with and effective as of the entering into the Rohto Agreement, we executed Amendment No. 5 to the Licensing and Distribution Agreement with Millennia dated September 10, 2009, as subsequently amended to terminate the Millennia Agreement and to allow us to transfer the 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 to Millennia.

 

The Company will continue to pursue exploratory conversations with companies regarding their interest in our various products and technologies. We will seek to leverage these relationships if and when they materialize to secure non-dilutive sources of funding. There is no assurance that we will be able to secure such relationships or, even if we do, the terms will be favorable to us.

 

On August 11, 2015, our Board of Directors approved our Realignment Plan with the goal of preserving and maximizing, for the benefit of our stockholders, the value of our existing assets. The plan eliminated approximately 30% of our workforce and was aimed at the preservation of cash and cash equivalents to finance our future operations and support our revised business objectives. We intend to maintain sufficient resources and personnel so that we can seek partners, co-developers or acquirers for our regenerative therapies and continue to execute under our existing agreements with our customers. In connection, with the Realignment Plan, Martin P. Rosendale, stepped down as Chief Executive officer effective August 14, 2015, and continues to serve us as a consultant on an as needed basis. Effective August 15, 2015, Dean Tozer was appointed as our President and Chief Executive Officer. Immediately prior to such appointment, Mr. Tozer served as our Chief Commercial Officer. We recognized severance costs to executives and non-executives in connection with the Realignment Plan of approximately $0.80 million. All such severance expenses are expected to be paid by the end of the first quarter of 2016. 

 

 

We can offer no assurances that we have correctly estimated the resources or personnel necessary to seek partners, co-developers or acquirers for our regenerative therapies or execute under our customer agreements. If a larger workforce or one with a different skillset is ultimately required to implement our Realignment Plan successfully, we may be unable to maximize the value of our existing regenerative therapy assets. We also cannot assure you that we have accurately estimated the cash and cash equivalents necessary to finance our operations. If revenues from our customers are less than we anticipate, if operating expenses exceed our expectations or cannot be adjusted accordingly, or if we have underestimated the time it will take for us to successfully negotiate modifications to our current Deerfield Facility Agreement and secure additional capital to support our revised business objectives, then our business, results of operations, financial condition and cash flows will be materially and adversely affected.

 

 

Net cash provided by (used in) operating, investing, and financing activities for the nine months ended September 30, 2015 and 2014 were as follows:

 

		September 30,				September 30,
		2015				2014
		(in millions)
Cash flows used in operating activities		$	(11.7	)		$	(13.6	)
Cash flows used in investing activities		$	(0.2	)		$	(0.1	)
Cash flows provided by financing activities		$	—			$	30.4

 

Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2015 of $11.7 million primarily reflects our net loss of $10.6 million adjusted by a (i) $27.2 million decrease for changes in derivative liabilities resulting from a change in their fair value, (ii) $23.7 million increase for the impairment of goodwill and IPR&D, (iii) $1.2 million increase for amortization of deferred costs and debt discount relating to debt issuances, (iv) $0.7 million increase for stock-based compensation, and (v) $0.5 million increase for depreciation and amortization.

 

Cash used in operating activities for the nine months ended September 30, 2014 of $13.6 million primarily reflects our net loss of $21.7 million adjusted by a (i) $4.7 million increase for the impairment of trademarks and IPR&D, (ii) $1.4 million increase for amortization of deferred costs and debt discount, (iii) $0.9 million increase for stock-based compensation, (iv) $0.5 million increase for depreciation and amortization, (v) $0.2 million increase for change in derivative liabilities, (vi) $0.2 million increase for a loss on the abandonment of the Aldagen North Carolina lease and (vii) $0.1 million increase for the loss on the disposal of property and equipment.

 

Investing Activities

 

Cash used in investing activities for the nine months ended September 30, 2015 primarily reflects the capitalization of CED software configuration costs for data management and the net activity of purchases of Angel centrifuge equipment for research and development purposes and their subsequent sale.

 

Cash used in investing activities for the nine months ended September 30, 2014 primarily reflects the net activity of purchases and sales of Angel and Aurix™ centrifuge equipment. In addition, we capitalized $0.1 million in business software implementation costs and received $0.1 million from the sale of assets resulting from the closing of our research and development facility related to the ALD-401 clinical trial.

 

Financing Activities

 

We did not have any financing activities for the nine months ended September 30, 2015. Net cash provided by financing activities was $30.45 million for the nine months ended September 30, 2014.

 

For the nine months ended September 30, 2014, we raised $3.7 million through the issuance of common stock and received $35.8 million from convertible debt facilities, both before placement agent fees and offering expenses. This was offset by $2.8 million in debt issuance costs, a $0.3 million cash repayment of a portion of our convertible debt, and a $5.9 million principal balance pay-out of our term loans.

 

 

The following provides additional details regarding our cash flows from available financing facilities and activities.

 

		Nine Months Ended September 30,
		2015				2014
		(in millions)
Proceeds from the issuance of common stock, net		$	-			$	3.7
Proceeds from the issuance of debt, net			-				32.9
Debt repayments			-				(6.2	)
Cash flows provided by financing activities		$	-			$	30.4

 

 

Issuance of Common Stock

 

We raised approximately $1.8 million during the six months ended June 30, 2014 from the sale of shares under the purchase agreement entered into with Lincoln Park on February 18, 2013.

 

On March 31, 2014 we raised $2.0 million, before placement agent’s fees and other offering expenses, from the private placement of 3,846,154 shares of common stock (at a price of $0.52 per share) and five-year stock purchase warrants to purchase 2,884,615 shares of common stock at $0.52 per shares. We paid $0.1 million in placement agent fees and other offering expenses related to this raise.

 

Debt

 

On March 31, 2014, we executed the Deerfield Facility Agreement with Deerfield for the issuance of a five-year senior secured convertible credit facility. Under the terms of this agreement, Deerfield agreed to provide to us a convertible credit facility in an amount up to $35 million, before placement agent fees and other offering expenses. We received $9 million in March 2014 and the remaining $26 million in June 2014. We paid approximately $2.7 million in placement agent fees and other offering expenses related to this credit facility in the six months ended June 30, 2014. Prior to November 10, 2015, a technical event of default occurred under this facility.

 

On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) between November 11, 2015 and December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015. We believe the modification agreement will allow us to continue our substantive discussions with the lenders to reduce our risk of default, thereby permitting us to continue our operations, but we can provide no assurance that we will be successful in this effort. We cannot provide any assurance that the lenders will agree to modify the Deerfield Facility Agreement, whether any proposed modifications to the agreement would be on terms favorable, or acceptable, to us, or whether the lenders will declare an event of default under the agreement and foreclose on our assets by enforcing their rights under our agreements with them. If we cannot agree on additional modifications to the Deerfield Facility Agreement, we may be required to curtail or cease operations or, alternatively, seek court supervised protection from creditor claims. Even if we can reach an agreement to further modify the Deerfield Facility Agreement in a manner that is acceptable to us, management believes that we will be required to identify additional sources of capital in the near term to continue our operations beyond January 2016. Any additional agreement that we reach with the lenders under the Deerfield Facility Agreement is expected to involve substantial dilution to the ownership interests of holders of our common stock, and could involve other conditions causing the value of our common stock to decline.

 

On February 19, 2013, we entered into a Credit and Security Agreement with Mid-Cap Financial from which we received $4.5 million on February 27, 2013, before placement agent fees and other offering expenses. On March 31, 2014, we paid the remaining balance of the term loan of approximately $3.8 million.

 

On November 21, 2013, we executed agreements with certain investors for the subsequent issuance of 10% subordinated convertible notes and stock purchase warrants, for gross proceeds of $3 million, before placement agent fees and other offering expenses. We received $2.25 million of the expected gross proceeds on December 10, 2013. We received $0.75 million of the gross proceeds in February 2014. On March 31, 2014 the holders of the December 2013 convertible bridge notes (except for one holder), agreed to convert their outstanding notes pursuant to its terms, converting into 5,981,859 shares of common stock. The Company repaid, in its entirety, the portion of the debt excluded from the conversion (including interest and prepayment penalties) pursuant to its terms, for a total cash payment of approximately $339,000.

 

The $2.1 million JP Nevada Trust 12% Note entered into in April 2011 was repaid in full in June 2014.

 

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.

 

Contractual Obligations

 

Our primary office and warehouse facilities are located in Gaithersburg, Maryland, and comprise approximately 12,000 square feet. This facility falls under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $17,000 per month with the leases expiring September 2019. In addition, we also lease approximately 2,100 square feet in Nashville, Tennessee which is being utilized as a commercial operations office. The lease is approximately $4,000 per month excluding our shares of annual operating expenses and expires April 30, 2018.We also lease a 16,300 square foot facility located in Durham, NC. This facility falls under one lease with monthly rent, including our share of certain annual operating costs and taxes, at approximately $20,000 per month with the lease expiring December 31, 2018. Following the discontinuation of funding for our ALD-401 program in May 2014, we have subleased the facility. The sublease rent is approximately $13,000 per month and expires December 31, 2018. 

 

 Purchase obligations consist of a commitment to purchase 600 Aurix centrifuges, 200 of which were paid for during the three months ended June 30, 2015. Receipt of the centrifuges is expected to commence during the fourth quarter of 2015, with the remaining 200 units expected to be delivered during the first quarter of 2016. In addition, we have committed to rebranding and enhancing 270 additional Aurix centrifuges with this same supplier. The September 30, 2015 remaining balance to be paid under this commitment was approximately $350,000. Under the terms of our purchase agreement for Angel machines, we provide an upfront deposit for the purchase of the units and pay the remaining balance upon shipment of the units from our manufacturer. We were obligated to purchase 53 Angel machines based on our deposit balance held at our supplier at September 30, 2015. The remaining balance to be paid for these 53 Angel machines as of September 30, 2015 was approximately $280,000. In addition, as of September 30, 2015, we were obligated to purchase a combination of Angel cPRP processing sets and activAT kits from our supplier which were valued at approximately $1,050,000.

 

 

Critical Accounting Policies

 

In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our consolidated financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our consolidated results of operations. For further information on our critical and other accounting policies, (See Note 1 – Business and Summary of Significant Accounting Principles to our unaudited Condensed Consolidated Financial Statements).

 

Stock-Based Compensation

 

Under the Company’s 2002 Long Term Incentive Plan (the “LTIP”) and 2013 Equity Incentive Plan (the “EIP”), the Company grants share-based awards, typically in the form of stock options and stock awards, to eligible employees, directors, and service providers to purchase shares of common stock. The fair values of these awards are determined on the dates of grant or issuance and are recognized as expense over the requisite service periods.

 

The Company estimates the fair value of stock options on the grant issuance date using the Black-Scholes-Merton option-pricing formula. The determination of fair value using this model requires the use of certain estimates and assumptions that affect the reported amount of compensation cost recognized in the Company’s condensed consolidated statements of operations. These include estimates of the expected term of the option, expected volatility of the Company’s stock price, expected dividends and the risk-free interest rate. These estimates and assumptions are highly subjective and may result in materially different amounts should circumstances change and the Company employ different assumptions in future periods.

 

For stock options, expected volatilities are based on historical volatility of the Company’s stock. Company data was utilized to estimate option exercises and employee terminations within the valuation model for the period ending September 30, 2015 and the year ended December 31, 2014. No cash dividends have ever been declared or paid on the Company’s common stock and currently none is anticipated. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the options.

 

The Company estimates the fair value of stock awards based on the closing market value of the Company’s stock on the issuance date of the grant. In certain select cases, the Company has issued stock purchase warrants, outside the LTIP, to service providers in exchange for the performance of consulting or other services. These warrants have generally been immediately vested and expense was recognized equal to the fair value of the warrant on the date of grant using the Black-Scholes option pricing model. The same assumptions (and related risks) as discussed above apply, with the exception of the expected term; for warrants issued to service providers, the Company estimates that the warrant will be held for the full term.

 

Revenue Recognition

 

The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured.

 

Sales of products

 

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.

 

Usage or leasing of blood separation equipment

 

As a result of the acquisition of the Angel business, we acquired various multiple element revenue arrangements that combined the (i) usage or leasing of blood separation processing equipment, (ii) maintenance of processing equipment, and (iii) purchase of disposable processing sets and supplies. We assigned these multiple element revenue arrangements to Arthrex in 2013 and no longer recognize revenue under these arrangements.

 

Percentage-based fees on licensee sales of covered products, including those sold by Arthrex, 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.

 

Deferred revenue at September 30, 2015 consists of prepaid licensing revenue of approximately $1,140,000 from the licensing of Angel centrifuges and $182,000 from product sales billed and not yet shipped. Prepaid licensing revenue is being recognized on a straight-line basis over the five-year term of the agreement. Deferred revenue related to products billed and not yet shipped will be recognized when the product is shipped to the customer. Revenue of approximately $302,000 related to the prepaid license was recognized during both the nine months ended September 30, 2015 and 2014. In 2013, a medical device excise tax came into effect that required manufacturers to pay tax of 2.3% on the sale of certain medical devices; we report the medical device excise tax on a gross basis, recognizing the tax as both revenue and costs of sales.

 

 

License Fees

 

The Company’s license agreement with Rohto contains multiple elements that include the delivered license and other ancillary performance obligations, such as maintaining its intellectual property and providing regulatory support and training to Rohto. The Company has determined that the ancillary performance obligations are perfunctory and incidental and are expected to be minimal and infrequent. Accordingly, the Company has combined the ancillary performance obligations with the delivered license and is recognizing revenue as a single unit of accounting following revenue recognition guidance applicable to the license. Because the license is delivered, the Company recognized the entire $3.0 million license fee as revenue in the three months ended March 31, 2015. Other elements contained in the license agreement, such as fees and royalties related to the supply and future sale of the product, are contingent and will be recognized as revenue when earned.

 

Intangible Assets and Goodwill

 

Intangible assets were acquired as part of our acquisition of the Angel business and Aldagen, and consist of definite-lived and indefinite-lived intangible assets, including goodwill.

 

Definite-lived intangible assets

 

Our definite-lived intangible assets include trademarks, technology (including patents) and customer 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.

 

We determined that our definite-lived intangible assets were not impaired as of September 30, 2015. During the three months ended June 30, 2014 we recognized a non-cash impairment charge related to our trademarks of approximately $1.0 million in the three month period ended June 30, 2014. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

 Indefinite-lived intangible assets

 

We evaluate our indefinite-lived intangible asset, consisting solely of in-process research and development (“IPR&D”) acquired in the Aldagen acquisition, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of that excess.

 

We determined that our IPR&D asset was impaired as of September 30, 2015 and recognized a non-cash IPR&D impairment charge of approximately $22.6 million during the three month period ended September 30, 2015. During the three months ended June 30, 2014 we recognized a non-cash impairment charge related to our IPR&D of approximately $3.7 million. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

Goodwill

 

Goodwill represents the purchase price of acquisitions in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Goodwill is tax deductible in all relevant jurisdictions. As a result of our acquisition of Aldagen in February 2012, we recorded goodwill of approximately $422,000. Prior to the acquisition of Aldagen, we had goodwill of approximately $707,000 as a result of the acquisition of the Angel business in April 2010. 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 generic pharmaceutical 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.

 

We determined that goodwill was impaired as of September 30, 2015 and recognized a non-cash goodwill impairment charge of approximately $1.1 million to write-down the goodwill to its estimated fair value of zero as of September 30, 2015. (See Note 4 — Goodwill and Intangible Assets for additional details.)

 

Fair Value Measurements

 

The balance sheets include various 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 I 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.

 

The Company remeasures to fair value its derivative liabilities at each balance sheet date. We determine the fair value of these derivative liabilities using the Black-Scholes option pricing model. When determining the fair value of our financial instruments using the Black-Scholes option pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.

 

In March and June 2014, we issued stock purchase warrants and convertible notes that contained embedded conversion options; the embedded conversion options are accounted for as a derivative liability. We determine the fair value of these derivative liabilities using the binomial lattice model. When determining the fair value of our financial instruments using binomial lattice models, we also are required to use various estimates and unobservable inputs, including in addition to those listed above, the probability of certain events.

 

Changes in fair value are classified in “other income (expense)” in the condensed consolidated statement of operations.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued guidance for the disclosure of uncertainties about an entity’s ability to continue as a going concern. Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Previously, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This was issued to provide guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We are currently evaluating the impact, if any, that the adoption will have on our consolidated financial statements. 

 

 

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. The FASB approved a one-year deferral in July 2015, 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. We are currently evaluating the impact, if any, that this new accounting pronouncement will have on our financial statements.

 

In April 2015, the FASB issued guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment is effective for reporting periods beginning after December 15, 2015 and may be applied on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of this new accounting pronouncement to have a material impact on our financial statements.

 

In April 2015, the FASB issued guidance to simplify the balance sheet disclosure for debt issuance costs. Under the guidance, debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, in the same manner as debt discounts, rather than as an asset. The standard is effective for reporting periods beginning after December 15, 2015 and early adoption is permitted. We intend to adopt this requirement in 2016, and currently anticipates that the impact of adoption will solely be a reclassification of our deferred financing costs from asset classification to contra-liability classification.

 

In July 2015, the FASB issued guidance for the accounting of inventory. The main provisions are that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value, except when inventory is measured using LIFO or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. In addition, the Board has amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. The amendments in this update for public business entities are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact, if any, that the adoption will have on our financial statements.

 

In September 2015, the FASB issued accounting guidance to simplify the accounting for measurement period adjustments resulting from business combinations. Under the guidance, an acquirer will be required to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined. The guidance requires an entity to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. The standard is effective for reporting periods beginning after December 15, 2015. The amendments in this pronouncement should be applied prospectively, with earlier application permitted. The Company is currently evaluating the impact, if any, that this new accounting pronouncement will have on its 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 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. Based on that evaluation, the Certifying Officers concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Changes in Internal Control Over Financial Reporting

 

Management has identified changes in our internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during 2015, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, including the resignation of our Chief Financial Officer during the second quarter of 2015 and the implementation of a new financial accounting system. We are in the process of completing but have not yet completed our internal documentation of all the changes in our internal controls over financial reporting.

 

 

To specifically address the changes identified in our internal controls over financial reporting as of September 30, 2015, David E. Jorden relinquished his role as Executive Chairman of the Board and transitioned to Acting Chief Financial Officer of the Company, a role which he officially assumed effective as of May 25, 2015. In addition, we developed and performed additional analytical and substantive procedures during our quarter closing process. Management believes that these additional procedures provide reasonable assurance that our condensed consolidated financial statements as of and for the nine months ended September 30, 2015, are fairly stated in all material respects in accordance with U.S. GAAP.

 

Inherent Limitations on Disclosure Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

PART II

 

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may be subject to certain legal proceedings and claims arising in connection with the normal course of our business. In the opinion of management, there are currently no claims that would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

 

Except for certain updates set forth below, there are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2015 for the year ended December 31, 2014 and the Company’s subsequent filings with the SEC.

 

Our inability to negotiate modifications to the existing Deerfield Facility Agreement that are favorable to us will create substantial doubt regarding our ability to continue as a going concern.

 

As of September 30, 2015, we had approximately $4.1 million in cash and cash equivalents. Pursuant to the terms of the Deerfield Facility Agreement, prior to its temporary modification, we were required to maintain cash on deposit, subject to control agreements in favor of the Deerfield lenders, of not less than $5.0 million. As of September 30, 2015, we were not in compliance with that covenant, resulting in a technical failure to satisfy the covenant and an event of default under the Deerfield Facility Agreement. In addition, the terms of the Deerfield Facility Agreement required us to pay Deerfield the accrued interest amount of approximately $2.6 million on October 1, 2015, which we were unable to do. Subject to the terms of the modification agreements we were, and continue to be, required to make the October 1, 2015 interest payment in cash, as our ability to pay in freely tradable shares of our common stock is contingent upon, among others, no default occurring or continuing under Deerfield Facility Agreement, our market capitalization not being less than $50 million, and our common stock closing at not less than $0.35 per share, on the last trading day prior to the date of our notice electing to pay such interest in common stock. Our inability to maintain sufficient cash on deposit and make the required interest payment when due resulted in the occurrence of events default under the Deerfield Facility Agreement. As a result, Deerfield may declare the principal, including accrued and unpaid interest, on, all of the notes or any part of any of them, immediately due and payable by providing written notice to us as of December 4, 2015 for failure to maintain sufficient cash on deposit accounts or to pay interest when due, or prior thereto for any other event of default thereunder. As of the date of this filing, Deerfield has not declared a default under the Deerfield Facility Agreement. In addition, because our revenue for the three month period ended September 30, 2015 was less than the net sales threshold contemplated in the Deerfield Facility Agreement, Deerfield has the option of requiring us to prepay on March 31, 2016, an amount equal to one-third of the aggregate amount of the credit facility together with accrued and unpaid interest thereon.

 

On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) between November 11, 2015 and December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015. We believe the modification agreement will allow us to continue our substantive discussions with the lenders to reduce our risk of default, thereby permitting us to continue our operations, but we can provide no assurance that we will be successful in this effort. We cannot provide any assurance that the lenders will agree to modify the Deerfield Facility Agreement, whether any proposed modifications to the agreement would be on terms favorable, or acceptable, to us, or whether the lenders will declare an event of default under the agreement and foreclose on our assets by enforcing their rights under our agreements with them. If we cannot agree on additional modifications to the Deerfield Facility Agreement, we may be required to curtail or cease operations or, alternatively, seek court supervised protection from creditor claims. Even if we can reach an agreement to further modify the Deerfield Facility Agreement in a manner that is acceptable to us, management believes that we will be required to identify additional sources of capital in the near term to continue our operations beyond January 2016. Any additional agreement that we reach with the lenders under the Deerfield Facility Agreement is expected to involve substantial dilution to the ownership interests of holders of our common stock, and could involve other conditions causing the value of our common stock to decline. Therefore, our inability to negotiate modifications to the existing Deerfield Facility Agreement that are favorable to us will create substantial doubt regarding our ability to continue as a going concern.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

Except for matters described in Note 5 and Note 10 of the financial statements, there have been no defaults in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

On November 11, 2015, we entered into a letter agreement with Deerfield and certain of its affiliates pursuant to which the Deerfield Facility Agreement was modified to provide that, (i) through December 4, 2015, the amount of cash that is required to be maintained in a deposit account subject to control agreements in favor of our senior lenders was reduced from $5,000,000 to $1,750,000 and (ii) the date for payment of the accrued interest amount originally payable on October 1, 2015 was extended to December 4, 2015.

 

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: November 12, 2015	By:
	/s/ Dean Tozer
	Dean Tozer, CEO
	(Principal Executive Officer)
Date: November 12, 2015	By:
	/s/ David E. Jorden
	David E. Jorden, Acting CFO
	(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
10.76		Separation Agreement with Martin P. Rosendale, dated August 13, 2015.
10.77		Amendment No. 2 to Employment Agreement with Dean Tozer, dated August 13, 2015.
10.78		Amended and Restated License Agreement with Arthrex, Inc., dated October 16, 2015.
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of 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 September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (iv) Notes to the Unaudited Condensed Consolidated Financial Statements.