UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number 001-32518

 

 

 Nuo Therapeutics, Inc.

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware	23-3011702
(State or Other Jurisdiction of Incorporation or Organization)	(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 ☒ 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 ☒ No ☐

 

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

 

Large Accelerated Filer ☐	Accelerated Filer  ☐
Non-accelerated Filer ☐	Smaller Reporting Company ☒   Emerging Growth Company ☐

 

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

 

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

 

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

 

Indicate by check make whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes   ☒   No   ☐

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 7, 2017, the number of shares outstanding of the registrant’s New Common Stock, $0.0001 par value, was 22,727,112.

 

 

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	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	43
Signatures	44
Exhibit Index	45

 

 

Explanatory Note

 

As described in Notes 1 and 2 to the unaudited consolidated financial statements of Nuo Therapeutics, Inc. (“we,” “us,” “Nuo Therapeutics,” “Nuo” and the “Company”) appearing in Part I of this Quarterly Report on Form 10-Q for the period ended September 30, 2017 (this “Quarterly Report”), the Company emerged from bankruptcy protection effective May 5, 2016 (the “Effective Date”) in accordance with the Modified First Amended Plan of Reorganization of the Debtor under Chapter 11 of the Bankruptcy Code, as confirmed by the April 25, 2016 Order Granting Final Approval of Disclosure Statement and Confirming Debtor’s Plan of Reorganization (as so confirmed, the “Plan of Reorganization”).

 

This Quarterly Report contains the Company’s unaudited consolidated financial statements as of September 30, 2017 and December 31, 2016, for the three and nine month periods ended September 30, 2017 and for the periods between January 1, 2016 and May 4, 2016 and between May 5, 2016 and September 30, 2016, and the accompanying footnotes (the “Q3 Financial Statements”), as well as a discussion comparing the Company’s results of operations for the periods ended September 30, 2017 and 2016 in the section titled “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “Period-to-Period Comparison”).  The historical financial and share-based information contained in the Q3 Financial Statements and the Period-to-Period Comparison relating to periods ending on dates prior to the Effective Date reflects the Company’s results of operations prior to its emergence from bankruptcy, and therefore is not indicative of the Company’s results of operations from and after May 5, 2016.

 

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

 

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

NUO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		Successor				Successor
		September 30, 2017				December 31, 2016
ASSETS
Current assets
Cash and cash equivalents		$	1,923,172			$	2,620,023
Restricted cash			50,008				53,503
Accounts and other receivable, net			163,628				294,298
Inventory, net			64,135				69,954
Prepaid expenses and other current assets			367,484				334,437
Total current assets			2,568,427				3,372,215
Property and equipment, net			255,887				486,116
Deferred costs and other assets			188,105				278,730
Intangible assets, net			7,201,358				7,840,408
Goodwill			-				2,079,284
Total assets		$	10,213,777			$	14,056,753
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	434,467			$	392,615
Accrued expenses and liabilities			1,251,043				1,054,677
Total current liabilities			1,685,510				1,447,292
Other liabilities			58,994				123,434
Total liabilities			1,744,504				1,570,726
Commitments and contingencies (see Note 11)
Stockholders' equity
Preferred stock; $0.0001 par value, 1,000,000 shares authorized, 29,038 shares issued and outstanding; liquidation value $29,038,000			3				3
Common stock; $0.0001 par value, 31,500,000 shares authorized, 22,727,112 and 9,927,112 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively			2,273				993
Additional paid-in capital			21,144,184				18,180,658
Accumulated deficit			(12,677,187	)			(5,695,627	)
Total stockholders' equity			8,469,273				12,486,027
Total liabilities and stockholders' equity		$	10,213,777			$	14,056,753

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Successor				Successor
		Three Months ended September 30, 2017				Three Months ended September 30, 2016
Revenue
Product sales		$	122,087			$	139,000
Royalties			40,109				37,773
Total revenue			162,196				176,773
Costs of revenue
Costs of sales			263,993				277,603
Total costs of revenue			263,993				277,603
Gross loss			(101,797	)			(100,830	)
Operating expenses
Sales and marketing			162,867				331,636
Research and development			299,477				323,455
General and administrative			811,034				1,099,915
Total operating expenses			1,273,378				1,755,006
Loss from operations			(1,375,175	)			(1,855,836	)
Other income (expense)
Interest, net			(3,900	)			(1,059	)
Other			2,176				55,371
Reorganization items			-				(115,149	)
Total other income (expense)			(1,724	)			(60,837	)
Net loss		$	(1,376,899	)		$	(1,916,673	)
Basic and diluted loss per share
Basic		$	(0.09	)		$	(0.19	)
Diluted		$	(0.09	)		$	(0.19	)
Weighted average shares outstanding
Basic			15,852,764				9,927,112
Diluted			15,852,764				9,927,112

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Successor				Successor				Predecessor
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
Revenue
Product sales		$	382,884			$	247,890			$	922,608
License fees			--				--				139,534
Royalties			140,655				63,740				670,079
Total revenue			523,539				311,630				1,732,221
Costs of revenue
Costs of sales			811,451				453,416				829,095
Costs of royalties			--				--				54,543
Total costs of revenue			811,451				453,416				883,638
Gross profit (loss)			(287,912	)			(141,786	)			848,583
Operating expenses
Sales and marketing			537,248				568,950				833,943
Research and development			1,008,377				547,824				554,586
General and administrative			3,058,046				1,702,732				2,307,009
Impairment of goodwill			2,079,284				--				--
Total operating expenses			6,682,955				2,819,506				3,695,538
Loss from operations			(6,970,867	)			(2,961,292	)			(2,846,955	)
Other income (expense)
Interest, net			(11,738	)			(1,168	)			(252,956	)
Other			1,045				75,495				2,495
Reorganization items			--				(324,551	)			31,271,350
Total other income (expense)			(10,693	)			(250,224	)			31,020,889
Net income (loss)		$	(6,981,560	)		$	(3,211,516	)		$	28,173,934
Basic and diluted earnings (loss) per share
Basic		$	(0.59	)		$	(0.33	)		$	0.22
Diluted		$	(0.59	)		$	(0.33	)		$	0.15
Weighted average shares outstanding
Basic			11,924,035				9,876,605				125,951,100
Diluted			11,924,035				9,876,605				193,258,792

 

 

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

 

 

 NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Successor				Successor				Predecessor
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(6,981,560	)		$	(3,211,516	)		$	28,173,934
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Non-cash gain on reorganization			--				--				(34,869,565	)
Impairment of goodwill			2,079,284				--				--
Stock-based compensation			42,306				--				55,081
Depreciation and amortization			868,570				518,209				289,360
Write off of debt issuance costs			--				--				278,303
Bad debt (recovery) expense			(97,115	)			1,651				--
Inventory obsolescence expense			5,101				2,308				--
Gain on disposal of fixed assets			(1,205	)			--				--
Change in operating assets and liabilities:
Accounts and other receivable			227,785				380,144				(274,200	)
Inventory			718				5,815				106,108
Prepaid expenses and other current assets			(33,047	)			(133,514	)			194,835
Other assets			90,625				46,803				(61,427	)
Accounts payable			41,852				(2,378,882	)			2,024,959
Accrued liabilities			118,866				(1,681,926	)			1,159,737
Accrued interest			--				--				172,651
Deferred revenue			--				--				(261,075	)
Other liabilities			(64,440	)			(28,422	)			(76,992	)
Net cash used in operating activities			(3,702,260	)			(6,479,330	)			(3,088,291	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in restricted cash			3,495				(26	)			(14	)
Proceeds from sale of equipment			1,914				--				--
Net cash provided by (used in) investing activities			5,409				(26	)			(14	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and preferred stock, net of issuance costs			3,000,000				--				7,052,500
Proceeds from issuance of debtor-in-procession note payable, net of issuance costs			--				--				5,471,697
Net cash provided by financing activities			3,000,000				--				12,524,197
Net increase in (decrease in) cash and cash equivalents			(696,851	)			(6,479,356	)			9,435,892
Cash and cash equivalents, beginning of period			2,620,023				10,358,209				922,317
Cash and cash equivalents, end of period		$	1,923,172			$	3,878,853			$	10,358,209
Supplemental cash flow information
Interest expense paid in cash		$	9,812			$	1,241			$	78,822
Cash flows related to reorganization item, net		$	--			$	1,507,863			$	1,839,560
Non-cash financing and investing activities
Issuance of common stock to settle outstanding accruals		$	--			$	217,936			$	--
Issuance of preferred stock to settle debt		$	--			$	8,288,719			$	--
Accrued cost related to issuance of common stock		$	77,500			$	--			$	--
Issuance of common stock to prior investors		$	--			$	226			$	--

 

 

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

 

 

NUO THERAPEUTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Description of Business and Bankruptcy Proceedings

 

Description of Business

Nuo Therapeutics, Inc. (“Nuo Therapeutics,” the “Company,” “we,” “us,” or “our”) is a biomedical company marketing its products primarily within the U.S. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long-term recovery in complex chronic conditions with significant unmet medical needs. Growth opportunities for the Aurix System in the United States in the near to intermediate term include the treatment of chronic wounds with Aurix in: (i) the Medicare population under a National Coverage Determination (“NCD”), when registry data is collected under the Coverage with Evidence Development (“CED”) program of the Centers for Medicare & Medicaid Services (“CMS”); and (ii) the Veterans Affairs (“VA”) healthcare system and other federal accounts settings.

 

As of September 30, 2017, our commercial offering consists solely of the Aurix point of care technology for the safe and efficient separation of autologous blood to produce a platelet based therapy for the chronic wound care market. Prior to the Effective Date (as defined below), we had 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. Prior to the Effective Date, Arthrex, Inc. (“Arthrex”) was our exclusive distributor for Angel. Pursuant to the Plan of Reorganization (as defined below), on May 5, 2016, the Company assigned its rights, title and interest in and to its existing license agreement with Arthrex to Deerfield (as defined below), as well as rights to collect royalty payments thereunder.

 

Bankruptcy Proceedings

On January 26, 2016, the Company filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), which is administered under the caption “In re: Nuo Therapeutics, Inc.”, Case No. 16-10192 (MFW) (the “Chapter 11 Case”).

 

On April 25, 2016 (the “Confirmation Date”), the Bankruptcy Court entered an Order Granting Final Approval of Disclosure Statement and Confirming Debtor’s Plan of Reorganization (the “Confirmation Order”), which confirmed the Modified First Amended Plan of Reorganization of the Debtor under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan,” or “Plan of Reorganization”).

 

Scenario A contemplated by the Plan of Reorganization became effective on May 5, 2016 (the “Effective Date”). Pursuant to the Plan, as of the Effective Date: (i) all equity interests of the Company, including but not limited to all shares of the Company’s common stock, $0.0001 par value per share (including its redeemable common stock) (the “Old Common Stock”), warrants, and options that were issuable or issued and outstanding immediately prior to the Effective Date, were cancelled; (ii) the Company’s certificate of incorporation that was in effect immediately prior to the Effective Date was amended and restated in its entirety; (iii) the Company’s by-laws that were in effect immediately prior to the Effective Date were amended and restated in their entirety; and (iv) the Company issued New Common Stock, Warrants and Series A Preferred Stock (all as defined below).

 

Upon emergence from bankruptcy on the Effective Date, the Company applied fresh start accounting, resulting in the Company becoming a new entity for financial reporting purposes (see Note 2 – Fresh Start Accounting). As a result of the application of fresh start accounting, the Company reflected the disposition of its pre-petition debt and changes in its equity structure effected under the Confirmation Order in its balance sheet as of the Effective Date. Accordingly, all financial statements prior to May 5, 2016 are referred to as those of the "Predecessor Company," as they reflect the periods prior to application of fresh start accounting. The financial statements for periods subsequent to May 4, 2016 are referred to as those of the "Successor Company." Under fresh start accounting, the Company's assets and liabilities were adjusted to their fair values, and a reorganization value for the entity was determined by the Company based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The fresh start adjustments are material and affect the Company’s results of operations from and after May 5, 2016. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after May 5, 2016 are not comparable to the financial statements prior to that date.

 

 

Common Stock

Recapitalization

In accordance with the Plan of Reorganization, as of the Effective Date, the Company issued 7,500,000 shares (the “Recapitalization Shares”) of new common stock, par value $0.0001 per share (the “New Common Stock”), to certain accredited investors (the “Recapitalization Investors”) for gross cash proceeds of $7,300,000 and net cash to the Company of $7,052,500 (the “Recapitalization Financing”).  200,000 of the 7,500,000 shares of New Common Stock were issued in partial payment of an advisory fee.  The net cash amount excludes the effect of $100,000 in offering expenses paid from the proceeds of the DIP Financing (as defined below in Note 8 - Debt), which was converted into Series A Preferred Stock as of the Effective Date, as described below under “Series A Preferred Stock.” As part of the Recapitalization Financing, the Company also issued warrants to purchase 6,180,000 shares of New Common Stock to certain of the Recapitalization Investors (the “Warrants”). The Warrants terminate on May 5, 2021, and are exercisable at any time on or after November 5, 2016 at exercise prices ranging from $0.50 per share to $1.00 per share.  The number of shares of New Common Stock underlying a Warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations. A significant majority of the Recapitalization Investors executed backstop commitments to purchase up to 12,800,000 additional shares of New Common Stock for an aggregate purchase price of up to $3,000,000 (collectively, the “Backstop Commitment”).  During the quarter ended September 30, 2017, the Company exercised its rights under the Backstop Commitment in full and issued an aggregate of 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3.0 million. 

  

As of the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Recapitalization Investors.  The Registration Rights Agreement provides certain resale registration rights to the Recapitalization Investors with respect to securities received in the Recapitalization Financing.  Pursuant to the Registration Rights Agreement, the Company filed, and has to update periodically, a registration statement covering the resale of all shares of New Common Stock issued to the Recapitalization Investors on the Effective Date until such time as such shares have been sold or may be sold without registration or restriction pursuant to Rule 144 under the Securities Act.

 

Issuance of New Common Stock to Holders of Old Common Stock

As of the Effective Date, the Company committed to the issuance of up to 3,000,000 shares of New Common Stock and subsequently issued 2,264,612 shares of New Common Stock (the “Exchange Shares”) to record holders of the Old Common Stock as of March 28, 2016, who executed and timely delivered the required release documents no later than July 5, 2016, in accordance with the Confirmation Order and the Plan.  The holders of Old Common Stock who executed and timely delivered the required release documents are referred to as the “Releasing Holders.”

 

The 2,264,612 Exchange Shares were issued as of the Effective Date to Releasing Holders who asserted ownership of a number of shares of Old Common Stock that matched the Company’s records or could otherwise be confirmed at a rate of one share of New Common Stock for every 41.8934 shares of Old Common Stock held by such holders as of March 28, 2016.  In accordance with the Plan, if the calculation would otherwise have resulted in the issuance to any Releasing Holder of a number of shares of New Common Stock that is not a whole number, then the number of shares actually issued to such Releasing Holder was determined by rounding down to the nearest number.

 

Issuance of Shares in Exchange for Administrative Claims

On June 20, 2016, the Company issued 162,500 shares of New Common Stock (the “Administrative Claim Shares”) pursuant to the Order Granting Application of the Ad Hoc Equity Committee Pursuant to 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) for Allowance of Fees and Expenses Incurred in Making a Substantial Contribution, entered by the Bankruptcy Court on June 20, 2016.   The Administrative Claim Shares were issued to holders of administrative claims under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. Of the 162,500 shares, 100,000 shares were issued to outside counsel to the Ad Hoc Equity Committee of the Company’s equity holders as compensation of all remaining allowed fees for legal services provided by such counsel.  The remaining 62,500 were issued to designees of the Ad Hoc Equity Committee who had granted loans in an aggregate amount of $62,500 to the Ad Hoc Equity Committee in December 2015 as repayment of such loans.

 

Series A Preferred Stock

On the Effective Date, the Company filed a Certificate of Designations of Series A Preferred Stock (the “Certificate of Designations”) with the Delaware Secretary of State, designating 29,038 shares of the Company’s undesignated preferred stock, par value $0.0001 per share, as Series A Preferred Stock (the “Series A Preferred Stock”). On the Effective Date, the Company issued 29,038 shares of Series A Preferred Stock to Deerfield in accordance with the Plan pursuant to the exemption from the registration requirements of the Securities Act provided by Section 1145 of the Bankruptcy Code. Deerfield did not receive any shares of New Common Stock or other equity interests in the Company.

                                                                       

 

The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable, and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of New Common Stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction.  For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect one member of the board of directors of the Company (the “Board of Directors”) and to have such director serve on a standing committee of the Board of Directors established to exercise powers of the Board of Directors in respect of decisions or actions relating to the Backstop Commitment.   The holders of the Series A Preferred Stock nominated and elected one member of the Board of Directors to serve as the designee of the holders of Series A Preferred Stock. The Series A Preferred Stock has voting rights, voting with the New Common Stock as a single class, with each share of Series A Preferred Stock having the right to five votes, which currently represents less than 1% of the voting rights of the capital stock of the Company.  The holders of Series A Preferred Stock have the right to approve certain transactions and incurrences of debt. The Certificate of Designations limits the Company’s ability to pay dividends on or purchase shares of its capital stock.

 

Assignment and Assumption Agreement; Transition Services Agreement

Pursuant to the Plan, on May 5, 2016, the Company entered into an Assignment and Assumption Agreement with Deerfield SS, LLC (the “Assignee”), the designee of Deerfield, to assign to the Assignee the Company’s rights, title and interest in and to its existing license agreement with Arthrex, and to transfer and assign to the Assignee associated intellectual property owned by the Company and licensed thereunder, as well as rights to collect royalty payments thereunder. The assignment and transfer was effected in exchange for a reduction of $15,000,000 in the amount of the allowed claim of Deerfield pursuant to the Plan. As a result of the assignment and transfer, the Aurix System currently represents the Company’s only commercial product offering.

 

Termination of Deerfield Facility Agreement and DIP Credit Agreement

On the Effective Date, the obligations of the Company under the Deerfield Facility Agreement, and under the DIP Credit Agreement (as defined below in Note 8 - Debt), were cancelled in accordance with the Plan of Reorganization, and the Company ceased to have any obligations thereunder.

 

Note 2 – Fresh Start Accounting

 

Upon the Company’s emergence from Chapter 11 bankruptcy, the Company applied the provisions of fresh start accounting to its financial statements because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity, and (ii) the reorganization value of the Company’s assets immediately prior to confirmation was less than the sum of post-petition liabilities and allowed claims. The Company applied fresh start accounting as of May 4, 2016, with results of operations and cash flows in the period from January 1, 2016 through May 4, 2016 attributed to the Predecessor Company.

 

Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the consolidated balance sheet as goodwill.

 

The Company, with the assistance of external valuation specialists, estimated the enterprise value of the Company upon emergence from Chapter 11 bankruptcy to be approximately $17.9 million. Enterprise value is defined as the total invested capital, which includes cash and cash equivalents. The estimate is based on a calculation of the present value of the projected future cash flows of the Company from May 5, 2016 through the year ending December 31, 2025, along with a terminal value. The Company estimated a terminal value using the Gordon Growth Model, applying a constant growth rate of 3.4% to the debt-free net cash flows subsequent to 2025.

 

The Company’s future cash flow projections included a variety of estimates and assumptions that had a significant effect on the determination of the Company’s enterprise value. While the Company considered such estimates and assumptions reasonable, they are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may not be realized. The assumptions used in the calculations for the discounted cash flow analysis included the following: forecasted revenue; costs and free cash flows through 2025; and a discount rate of 29% that considered various factors, including bonds yields, risk premiums, tax rates and the likelihood of various business outcomes to determine an appropriate discount rate. In applying fresh start accounting, the Company followed these principles:

 

●

The reorganization value, estimated at approximately $24.0 million, which represents the sum of the enterprise value and estimated fair value of noninterest bearing liabilities, was allocated to the Successor Company's assets based on their estimated fair values. The reorganization value exceeded the sum of the fair value assigned to the assets, and the excess was recognized as goodwill of the Successor Company as of May 5, 2016.

 

 

●

Each liability existing as of May 5, 2016 has been stated at its estimated fair value.

●

Deferred tax assets and liabilities have been recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities, and have been fully valued as of May 5, 2016 to reduce deferred tax assets to the amounts expected to be realized.

Pursuant to fresh start accounting, the Company allocated the determined reorganization value to the Successor Company’s assets as follows (in thousands):

 

Enterprise Value		$	17,889
Plus estimated fair value of liabilities			6,161
Reorganization Value			24,050
Less:
Estimated fair value of tangible assets			(13,574	)
Estimated fair value of identifiable intangible assets			(8,397	)
Goodwill		$	2,079

  

Upon the adoption of fresh start accounting, the Successor Company adopted the significant accounting policies of the Predecessor Company (see Note 3 – Liquidity and Summary of Significant Accounting Policies). The adjustments set forth in the following table as of May 4, 2016 reflect the effect of the consummation of the transactions contemplated by the Plan of Reorganization (reflected in the column “Reorganization Adjustments”), as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”).

 

As a result of events and circumstances in the quarter ended June 30, 2017, it was determined that goodwill was fully impaired and consequently, the goodwill balance of approximately $2.1 million was charged off as of June 30, 2017 (see Note 7 – Goodwill and Other Intangible Assets).  

 

 

		Predecessor Company				Reorganization Adjustments				Fresh Start Adjustments				Successor Company
ASSETS
Current assets
Cash and cash equivalents		$	3,305,709							$	7,052,500	(1)		$	10,358,209
Restricted cash			53,463												53,463
Accounts and other receivable, net			1,288,445												1,288,445
Inventory, net			56,348												56,348
Prepaid expenses and other current assets			611,593			$	(16,053	)(b)							595,540
Total current assets			5,315,558				(16,053	)			7,052,500				12,352,005
Property and equipment, net			865,716												865,716
Deferred costs and other assets			355,741												355,741
Intangible assets, net			2,406,457				(2,406,457	)(a)			8,397,000	(2)			8,397,000
Goodwill			-								2,079,284	(2)			2,079,284
TOTAL ASSETS		$	8,943,472			$	(2,422,510	)		$	17,528,784			$	24,049,746
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities not subject to compromise
Accounts payable		$	2,877,170											$	2,877,170
Accrued expenses and liabilities			3,112,244												3,112,244
Deferred revenue, current portion			899,920			$	(899,920	)(c)							-
Short term debtor-in-possession note payable			5,750,000				(5,750,000	)(d)							-
Total current liabilities not subject to compromise			12,639,334				(6,649,920	)		$	-				5,989,414
Non-current liabilities not subject to compromise
Deferred revenue			-												-
Other liabilities			171,613												171,613
Total non-current liabilities not subject to compromise			171,613				-				-				171,613
Liabilities subject to compromise
Accounts payable			214,554				(214,554	)(e)							-
Accrued expenses and liabilities			559,202				(559,202	)(e)							-
Accrued interest			3,316,121				(3,316,121	)(d)							-
Deferred revenue			-												-
Convertible debt subject to put rights			35,000,000				(35,000,000	)(d)							-
Total liabilities subject to compromise			39,089,877				(39,089,877	)			-				-
TOTAL LIABILITIES			51,900,824				(45,739,797	)			-				6,161,027
Conditionally redeemable common stock			500,000				(500,000	)(f)							-
Common stock outstanding, at par			12,477				(12,477	)(f)			750	(1)			750
Common stock issuable			392,950				(392,950	)(f)							-
Preferred stock outstanding, at par			-								3	(3)			3
Additional paid-in capital			126,011,808				(126,011,808	)(f)			17,887,966	(4)			17,887,966
Retained earnings (accumulated deficit)			(169,874,587	)			170,234,522	(g)			(359,935	)(5)			-
TOTAL EQUITY (DEFICIT)			(43,457,352	)			43,817,287				17,528,784				17,888,719
TOTAL LIABILITIES AND EQUITY (DEFICIT)		$	8,943,472			$	(2,422,510	)		$	17,528,784			$	24,049,746

 

 

 Reorganization Adjustments

 

(a)

As a result of fresh start accounting, all intangible assets existing as of the Effective Date were established at fair value. This adjustment eliminates the carrying value of previously existing intangible assets as of the Effective Date, as the underlying Angel assets were assigned to Deerfield pursuant to the Plan of Reorganization.

 

(b)

Pursuant to the Plan of Reorganization, the Company assigned to Deerfield the Company’s: (i) rights, title and interest in and to its existing license agreement with Arthrex; (ii) the associated intellectual property owned by the Company and licensed under such agreement; and (iii) rights to collect royalty payments thereunder. As such, certain prepaid expenses related to the Angel business were eliminated.

 

(c)

Pursuant to the Plan of Reorganization, the Company assigned to Deerfield the Company’s (i) rights, title and interest in and to its existing license agreement with Arthrex, (ii) the associated intellectual property owned by the Company and licensed under such agreement, and (iii) rights to collect royalty payments thereunder. As such, all deferred revenue related to the existing license agreement with Arthrex as of the Effective Date was eliminated.

 

(d)

Pursuant to the Plan of Reorganization, the Company’s obligations under the Deerfield Facility Agreement, including accrued interest, were cancelled, and the Company ceased to have any obligations thereunder. Additionally, pursuant to the Plan of Reorganization, the DIP Credit Agreement was terminated.

 

(e)

Represents claims not expected to be settled in cash.

 

(f)

Pursuant to the Plan of Reorganization, all equity interests of the Company, including but not limited to all shares of Old Common Stock, warrants and options that were issuable or issued and outstanding immediately prior to the Effective Date, were cancelled. The elimination of the carrying value of the cancelled equity interests was reflected as a direct charge to retained earnings (deficit).

 

(g)

Represents the cumulative impact of the reorganization adjustments:

 

Description		Adjustment		Amount
Elimination of existing intangible assets		(a)		$	(2,406,457	)
Elimination of prepaid Angel expenses		(b)			(16,053	)
Elimination of Angel deferred revenue		(c)			899,920
Termination of debt agreements and accrued interest		(d)			44,066,121
Elimination of various payables and accruals		(e)			773,756
Cancellation of existing equity		(f)			126,917,235
Cumulative impact of the reorganization adjustments		(g)		$	170,234,522

 

Fresh Start Adjustments

 

(1)

Pursuant to the Plan of Reorganization, as of the Effective Date, the Company issued 7,500,000 shares of New Common Stock to certain accredited investors for net cash to the Company of $7,052,500. The Company also issued Warrants to purchase 6,180,000 shares of New Common Stock to certain of the investors. The Warrants terminate on May 5, 2021, and are exercisable at any time on or after November 5, 2016 at exercise prices ranging from $0.50 per share to $1.00 per share. The number of shares of New Common Stock underlying a Warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations. Certain investors also provided Backstop Commitments to purchase up to 12,800,000 additional shares of New Common Stock for an aggregate purchase price of up to $3,000,000. The Company closed on the issuance of the additional 12,800,000 shares of New Common Stock in August and September 2017. The New Common Stock, Warrants and Backstop Commitment are classified as equity.

 

(2)

Represents identifiable intangible assets of approximately $8.4 million and goodwill of approximately $2.1 million. Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the consolidated balance sheet as goodwill.

 

The Company, with the assistance of external valuation specialists, estimated the enterprise value of the Company upon emergence from Chapter 11 bankruptcy to be $17.9 million. Enterprise value is defined as the total invested capital, which includes cash and cash equivalents. The estimate is based on a calculation of the present value of the projected future cash flows of the Company from May 5, 2016 through the year ending December 31, 2025, along with a terminal value. The Company estimated a terminal value using the Gordon Growth Model.  As a result of events and circumstances in the quarter ended June 30, 2017, it was determined that goodwill was fully impaired and consequently, the goodwill balance of approximately $2.1 was charged off as of June 30, 2017 (see Note 7 - Goodwill and Other Intangible Assets).

 

 

 

In applying fresh start accounting, the Company followed these principles:

 

●

The reorganization value, estimated as approximately $24.0 million, which represents the sum of the enterprise value and estimated fair value of noninterest bearing liabilities, was allocated to the Successor Company's assets based on their estimated fair values. The reorganization value exceeded the sum of the fair value assigned to the assets, and the excess was recognized as goodwill of the Successor Company as of May 5, 2016.

●

Each liability existing as of May 5, 2016 has been stated at its estimated fair value.

●

Deferred tax assets and liabilities have been recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities, and have been fully valued as of May 5, 2016 to reduce deferred tax assets to the amounts expected to be realized.

 

Pursuant to fresh start accounting the Company allocated the determined reorganization value to the Successor Company’s assets as follows (in thousands):

 

 

Enterprise Value		$	17,889
Plus estimated fair value of liabilities			6,161
Reorganization Value			24,050
Less:
Estimated fair value of tangible assets			(13,574	)
Estimated fair value of identifiable intangible assets			(8,397	)
Goodwill		$	2,079

 

(3)

Pursuant to the Plan of Reorganization, on the Effective Date, the Company issued 29,038 shares of Series A Preferred Stock to Deerfield. The Series A Preferred Stock has no stated maturity date, is not convertible or redeemable, and carries a liquidation preference of $29,038,000, which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of New Common Stock (and other capital stock that is not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction. The Series A Preferred Stock is carried at par value and is classified as equity.

 

(4)

Reflects the cumulative impact of the fresh start adjustments described above on additional paid-in-capital:

 

Description		Adjustment				Amount
Cash proceeds from issuance of common stock			(1)			$	7,052,500
Establishment of intangible assets			(2)				10,476,284
Net assets of the predecessor			(5)				359,935
Less par value of common and preferred stock			(3)				(753	)
Cumulative impact of the fresh start adjustments described above on additional paid-in-capital			(4)			$	17,887,966

 

(5)

Reflects the elimination of retained earnings upon the application of fresh start accounting.

 

Reorganization Items, net

Costs directly attributable to the bankruptcy proceedings and the implementation of the Plan are reported as reorganization items, net. A summary of reorganization items for the period ended September 30, 2016 follows:

 

		Successor					Predecessor
		Period from May 5, 2016 through September 30, 2016					Period from January 1, 2016 through May 4, 2016
Professional fees		$	324,551				$	3,598,216
Net gain on reorganization adjustments			-					(34,869,566	)
Reorganization items, net		$	324,551				$	(31,271,350	)
Cash payments for reorganization items		$	1,507,863				$	1,839,560

 

 

Note 3 – Liquidity and Summary of Significant Accounting Principles

 

Liquidity

Our operations are subject to significant risks and uncertainties including, among others, those relating to ease of access to capital on acceptable terms, current and potential competitors with greater resources, dependence on significant customers, lack of operating history, and uncertainty of future profitability and fluctuations in financial results. Since our inception, we have financed our operations by raising debt, issuing equity and equity-linked instruments, and executing licensing arrangements, and to a lesser extent by generating royalties and product revenues. We have incurred, and continue to incur, recurring operating losses and negative cash flows.  During the quarter ended September 30, 2017, we withdrew our attempted registered offering and related refinancing of our Series A preferred stock, and exercised our rights under the Backstop Commitment in full.  As a result of that exercise, we issued an aggregate of 12,800,000 shares of common stock (the "Backstop Shares") for gross proceeds of approximately $3.0 million, which more than doubled the number of our outstanding shares of common stock. At September 30, 2017, we had cash and cash equivalents on hand of approximately $1.9 million.  

 

The accompanying 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 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 require additional capital prior to the end of the first quarter 2018 and seek to continue financing our operations with external capital for the foreseeable future.   Any equity financings may cause further substantial dilution to our stockholders and could involve the issuance of securities with rights senior to the common stock. Any allowed debt financings (which are restricted under the terms of the Certificate of Designations for our Series A preferred stock) may require us to comply with onerous financial covenants and restrict our business operations. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed equity or debt offering, state of the credit markets at the time of any proposed loan financing, market reception of the Company and perceived likelihood of success of our business model, and on the relevant transaction terms, among other things. We may not be able to obtain additional capital as required to finance our efforts, through asset sales, equity or debt financings, or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.   

 

As noted in Note 2 – Fresh Start Accounting, as part of fresh start accounting, the Successor Company adopted the significant accounting policies of the Predecessor Company. As a result, the following summary of significant accounting policies applies to both the Predecessor Company and Successor Company with the exception of recently adopted accounting pronouncements effective January 1, 2017.

 

Basis of Presentation

The accompanying unaudited interim 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 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 consolidated balance sheet at December 31, 2016, has been derived from audited financial statements of the Successor Company as of that date. The interim unaudited consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. More specifically, upon emergence from bankruptcy on the Effective Date, the Company applied fresh start accounting, resulting in the Company becoming a new entity for financial reporting purposes (see Note 2 – Fresh Start Accounting). As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after May 5, 2016 are not comparable to the financial statements prior to that date. 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 consolidated financial statements are read in conjunction with the audited financial statements and notes previously included in the Successor Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

  

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned and controlled subsidiary Aldagen, Inc. (“Aldagen”). 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 consolidated financial statements, estimates are used for, but not limited to, the application of fresh start accounting, stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, valuation of derivative liabilities, contingent liabilities, fair value and depreciable lives of long-lived assets (including property and equipment, intangible assets and goodwill), deferred taxes and associated valuation allowance and the classification of our long-term debt. Actual results could differ from those estimates.

 

Credit Concentration

We generate accounts receivable from the sale of our products. In addition, other receivables consist primarily of the receivable due from our contract manufacturer for the cost of raw materials required to manufacture the Angel products that are purchased by the Company and immediately resold, at cost, to the contract manufacturer and a refund due for Delaware franchise taxes. Specific customer or other receivables balances in excess of 10% of total receivables at September 30, 2017 and December 31, 2016 were as follows:

 

		Successor				Successor
		September 30, 2017				December 31, 2016
Other receivable A			65%				58%
Customer B			-				10%

 

Revenue from significant customers exceeding 10% of total revenues for the periods presented was as follows:

 

 

 

 

		Successor				Successor
		Three months ended September 30, 2017				Three months ended September 30, 2016
Customer A			25%				21%
Customer B			13%				24%
Customer C			-				14%
Customer D			11%				-

 

 

 

		Successor				Successor				Predecessor
		Nine months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
Customer A			-				-				78%
Customer B			27%				20%				-
Customer C			11%				20%				-
Customer D			-				11%				-

 

 

Historically, we used single suppliers for several components of the Aurix product line. We outsource the manufacturing of various products 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 Inc., with whom we have an established vendor relationship.

 

 

Cash Equivalents

We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents potentially subject us to a concentration of credit risk, as approximately $1.7 million held in financial institutions was in excess of the FDIC insurance limit of $250,000 at September 30, 2017. We maintain our cash and cash equivalents in the form of money market deposit accounts and qualifying money market funds, and checking accounts with financial institutions that we believe are credit worthy.

 

Accounts Receivables

We generate accounts receivables from the sale of our products. 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, 2017, we maintained an allowance for doubtful accounts of approximately $306,000, as we fully reserved for the value added tax receivable due from the contract manufacturer of the Company's prior Angel product line as of that date. At December 31, 2016, we maintained an allowance for doubtful accounts of approximately $409,000, as we fully reserved for both the value added tax receivable and a trade receivable due from the contract manufacturer as of that date.

 

Inventory

Our inventory is produced by third-party manufacturers and consists of raw materials and 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 two years.

 

As of September 30, 2017, our inventory consisted of approximately $35,200 of finished goods and $36,900 of raw materials. As of December 31, 2016, our inventory consisted of approximately $18,100 of finished goods and $59,800 of raw materials.

 

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, 2017 and December 31, 2016, the Company maintained an allowance for expired and excess and obsolete inventory of approximately $8,000. Expired products are segregated and used for demonstration purposes only; the Company records the associated expense for this reserve to cost of sales in the consolidated statements 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 one to six years. Upon emergence from bankruptcy, property and equipment remaining lives were estimated based on the estimated remaining useful lives of the assets. Leasehold improvements are amortized, using the straight-line method, over the lesser of the expected lease term or its estimated useful life ranging from one to three 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 or placed at no charge with customers. Depreciation expense for centrifuges that are available for sale or placed at no charge with customers are charged to cost of sales. Depreciation expense for centrifuges used for sales and marketing and other internal purposes are charged to sales and marketing 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.

 

 

Goodwill and Other Intangible Assets

Predecessor intangible assets and goodwill

In conjunction with the application of fresh start accounting, all then-remaining finite lived intangible assets, including those acquired as part of our acquisition of the Angel business were written off as of the Effective Date (see Note 2 – Fresh Start Accounting).

 

Successor intangible assets and goodwill

In the Successor Company financial statements, intangible assets were established as part of fresh start accounting and relate to trademarks, technology, clinician relationships, and goodwill (see Note 2 – Fresh Start Accounting).

 

Our finite-lived intangible assets include trademarks, technology (including patents), and clinician relationships, and are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators are 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 perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. We periodically reevaluate the useful lives for these intangible assets to determine whether events and circumstances warrant a revision in their remaining useful lives.

 

Goodwill represents the excess of reorganization value over the fair value of tangible and identifiable intangible assets and the fair value of liabilities as of the Effective Date. Goodwill is not amortized, but is subject to periodic review for impairment. Goodwill is reviewed annually, as of December 31, 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.

 

Prior to the adoption of Accounting Standards Update 2017-04 – Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment effective January 1, 2017, before employing detailed impairment testing methodologies, we first evaluated the likelihood of impairment by considering qualitative factors relevant to our reporting unit. When performing the qualitative assessment, we evaluated events and circumstances that would affect the significant inputs used to determine the fair value of the goodwill. Events and circumstances evaluated include: macroeconomic conditions that could affect us, industry and market considerations for the medical device industry that could affect us, cost factors that could affect our performance, our financial performance (including share price), and consideration of any company specific events that could negatively affect us, our business, or the fair value of our business. If we determined that it was more likely than not that goodwill was impaired, we then applied detailed testing methodologies. Otherwise, we concluded that no impairment has occurred.

 

Detailed impairment testing involved comparing the fair value of our one reporting unit to its carrying value, including goodwill. If the fair value exceeded carrying value, then it was concluded that no goodwill impairment had occurred. If the carrying value of the reporting unit exceeded its fair value, a second step was required to measure possible goodwill impairment loss. The second step included 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 was then compared to the carrying value of that goodwill. If the carrying value of our one reporting unit's goodwill exceeded the implied fair value of the goodwill, we recognized an impairment loss in an amount equal to the excess, not to exceed the carrying value.

 

Under the new guidance, we perform our annual, or interim, goodwill impairment test by comparing the fair value of our one reporting unit with its carrying amount. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Successor Company's intangible assets and goodwill were not considered to be impaired as of December 31, 2016 and they were not considered impaired with the adoption of Accounting Standards Update 2017-04. As a result of events and circumstances in the quarter ended June 30, 2017, including a sustained reduction in our stock price, we determined that it was more likely than not that our fair value was reduced below the carrying value of our net equity, requiring an impairment test as of June 30, 2017. We compared our carrying value to our fair value as reflected by our June 30, 2017 market capitalization and concluded that our carrying value exceeded our fair value by approximately $2.8 million. Consequently, we recognized a non-cash goodwill impairment charge of approximately $2.1 million to write down goodwill to its estimated fair value of zero as of June 30, 2017.

 

Revenue Recognition – Successor Company

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

 

 

We provide for the sale of our products, including disposable processing sets and supplies to customers. Revenue from the sale of products is recognized upon shipment of products to the customers. We do not maintain a reserve for returned products, as in the past those returns have not been material and are not expected to be material in the future. Percentage-based fees on licensee sales of covered products are generally recorded as products are sold by licensees, and are reflected as royalties in the condensed consolidated statements of operations. Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.

 

Revenue Recognition – Predecessor Company

The Predecessor Company provided for the sale of our products, including disposable processing sets and supplies to customers, and to Arthrex as distributor of the Angel product line. Revenue from the sale of products was recognized upon shipment.

 

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 pursuant to a license agreement, and further assigned all of our rights, title and interest in and to such license agreement to Deerfield as of the Effective Date; as such, the Successor Company no longer recognizes revenue under these arrangements. 

 

License Agreement with Rohto

The Company’s license agreement with Rohto (see Note 4 – Distribution, Licensing and Collaboration Arrangements) 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 combined the ancillary performance obligations with the delivered license and recognized revenue as a single unit of accounting, following revenue recognition guidance applicable to the license. 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

Approximately 25% and 21% of our total revenue was generated outside of the United States for the three months ended September 30, 2017 and 2016, respectively, and approximately 27% and 12% of our total revenue was generated outside of the United States for the nine months ended September 30, 2017 and 2016, respectively. We operate in one business segment. 

 

Stock-Based Compensation

Prior to the Effective Date, the Company, from time to time, issued stock options or stock awards to employees, directors, consultants, and other service providers under its 2002 Long-Term Incentive Plan (“LTIP”) or 2013 Equity Incentive Plan (“EIP” and, together with the LTIP, the “Incentive Plans”). In some cases, it had issued compensatory warrants to service providers outside the Incentive Plans (see Note 9 – Equity and Stock-Based Compensation).

 

All outstanding stock options were cancelled as of the Effective Date. In July 2016, the Board of Directors approved, and in August 2016 it amended, the Company’s 2016 Omnibus Incentive Compensation Plan (the “2016 Omnibus Plan”). As of November 21, 2016, the Majority Stockholders executed a written consent adopting and approving the 2016 Omnibus Plan, as amended and restated, which provides for the Company to grant equity and cash incentive awards to officers, directors and employees of, and consultants to, the Company and its subsidiaries. During three and the nine months periods ended September 30, 2017, the Board of Directors granted options to purchase zero shares and 56,250 shares, respectively, of New Common Stock to certain of the Company’s management, employees and directors. 1,362,500 options were granted during the three and nine month periods ended September 30, 2016.

 

 

 

The fair value of employee stock options is measured at the date of grant. Expected volatilities for the 2016 Omnibus Plan options are based on the equally weighted average historical volatility from five comparable public companies with an expected term consistent with ours. Expected years until exercise represents the period of time that options are expected to be outstanding. Under the Incentive Plans, expected volatilities were based on historical volatility of the Company’s stock, and Company data was utilized to estimate option exercises and employee terminations within the valuation model. 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. The assumptions used are summarized in the following table:

		Successor						Successor
		Nine Months ended September 30, 2017						Year ended December 31, 2016
Risk free rate			2.0	-	2.1%				1.8	-	2.0%
Weighted average expected years until exercise			5.0	-	6.0				4.8	-	6.0
Expected stock volatility				83%						83%
Dividend yield				-						-

 

Stock-based compensation for awards granted to non-employees is periodically re-measured as the underlying awards vest. The Company recognizes 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. The fair value of stock options and compensatory warrants issued to service providers utilizes the same methodology with the exception of the expected term. For awards to non-employees, the Company estimates that the options or warrants will be held for the full term.

 

The Company adopted new accounting guidance on January 1, 2017 related to stock-based compensation arrangements. Under the new guidance, excess tax benefits and tax deficiencies related to stock-based compensation awards are recognized as income tax expenses or benefits in the income statement, and excess tax benefits are classified along with other income tax cash flows in the operating activities section of the consolidated statement of cash flows. Additionally, the Company elected to account for forfeitures of stock-based awards as they occur, as opposed to estimating those prior to their occurrence. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements in any period.

 

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax rate changes are reflected in income during the period such changes are enacted. All of our tax years remain subject to examination by the tax authorities.

 

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items in 2017 and 2016.

 

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 (including contingently issuable shares when the contingencies have been resolved) during the period.

 

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. 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 (including contingently issuable shares when the contingencies have been resolved) 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.

 

All of the Company’s outstanding stock options and warrants were considered anti-dilutive for the three and nine months ended September 30, 2017. For the periods from January 1, 2016 through May 4, 2016 and April 1, 2016 through May 4, 2016, all of the Company’s outstanding stock options and warrants were out of the money and considered anti-dilutive, while the Company’s convertible debt was dilutive during those periods. The total numbers of anti-dilutive shares underlying common stock options and stock purchase warrants that were excluded from the computation of diluted earnings (loss) per share, were as follows:  for the three and nine months ended September 30, 2017, 1,111,250 shares underlying outstanding common stock options and 6,180,000 shares underlying outstanding stock purchase warrants; for the period from May 5, 2016 through September 30, 2016, 6,180,000 shares underlying outstanding stock purchase warrants; and for the period from January 1, 2016 through May 4, 2016, 9,173,119 shares underlying outstanding common stock options and 113,629,178 shares underlying outstanding stock purchase warrants.

 

 

Earnings (loss) per share are calculated for basic and diluted earnings per share as follows:

 

		Successor				Successor
		Three Months ended September 30, 2017				Three Months ended September 30, 2016
Numerator for net loss for basic and diluted loss per share		$	(1,376,899	)		$	(1,916,673	)
Denominator for basic and fully diluted loss per share weighted average outstanding common shares			15,852,764				9,927,112
Basic and diluted loss per share
Basic		$	(0.09	)		$	(0.19	)
Diluted		$	(0.09	)		$	(0.19	)

 

		Successor				Successor				Predecessor
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
Numerator for basic income (loss) per share		$	(6,981,560	)		$	(3,211,516	)		$	28,173,934
Numerator adjustments for potential dilutive securities			-				-				172,546
Numerator for diluted income (loss) per share		$	(6,981,560	)		$	(3,211,516	)		$	28,346,480
Denominator for basic income (loss) per share weighted average outstanding common shares			11,924,035				9,876,605				125,951,100
Dilutive effect of convertible debt			-				-				67,307,692
Denominator for diluted income (loss) per share			11,924,035				9,876,605				193,258,792
Basic and diluted earnings (loss) per share
Basic		$	(0.59	)		$	(0.33	)		$	0.22
Diluted		$	(0.59	)		$	(0.33	)		$	0.15

 

 

Recently Adopted Accounting Pronouncements

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 FASB 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 adopted this pronouncement effective January 1, 2017; the adoption did not have a material impact to our consolidated financial statements.

 

In November 2015, the FASB issued accounting guidance to simplify the presentation of deferred taxes. Previously, U.S. GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts. Under this guidance, deferred tax liabilities and assets will be classified as noncurrent amounts. The standard is effective for reporting periods beginning after December 15, 2016. We adopted this pronouncement effective January 1, 2017; the adoption did not have a material impact to our consolidated financial statements.

 

 

In March 2016, the FASB issued guidance simplifying the accounting for, and financial statement disclosure of, stock-based compensation awards. Under the guidance, all excess tax benefits and tax deficiencies related to stock-based compensation awards are to be recognized as income tax expenses or benefits in the income statement, and excess tax benefits should be classified along with other income tax cash flows in the operating activities section of the statement of cash flows. Under the guidance, companies can also elect to either estimate the number of awards that are expected to vest, or account for forfeitures as they occur. In addition, the guidance amends some of the other stock-based compensation awards guidance to more clearly articulate the requirements and cash flow presentation for withholding shares for tax-withholding purposes. The guidance is effective for reporting periods beginning after December 15, 2016, and early adoption is permitted, though all amendments of the guidance must be adopted in the same period. The adoption of certain amendments of the guidance must be applied prospectively, and adoption of the remaining amendments must be applied either on a modified retrospective basis or retrospectively to all periods presented. We adopted this pronouncement effective January 1, 2017; the adoption did not have a material impact to our consolidated financial statements. 

  

In January 2017, the FASB issued guidance intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the existing guidance, in computing the implied fair value of goodwill under Step 2, an entity is required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities), following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity is required to adopt the new guidance on a prospective basis. The new guidance is effective for the Company for its annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this pronouncement effective January 1, 2017; the adoption did not have a material impact to our consolidated financial statements upon adoption since goodwill was not considered impaired with the adoption of Accounting Standards Update 2017-04. However, when we performed our interim goodwill impairment test, comparing the fair value of our one reporting unit with its carrying amount as of June 30, 2017, the carrying amount exceeded our reporting unit's fair value by approximately $2.8 million. As a result we recognized a non-cash goodwill impairment charge of approximately $2.1 million to write-down goodwill to its estimated fair value of zero as of June 30, 2017.

 

Unadopted 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. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and contract modifications at transition, with the same effective date. We are currently evaluating the impact, if any, that this guidance will have on our consolidated financial statements.

 

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

 

 

In June 2016, the FASB issued guidance with respect to measuring credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity's current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

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

 

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

 

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

 

In May 2017, the FASB issued guidance clarifying about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless specified conditions are met. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

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

 

Note 4 – Distribution, Licensing and Collaboration 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 gave 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 in return for the right to receive royalties, and on a date to be determined by Arthrex, but not later than March 31, 2016, Arthrex was to 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, the Deerfield Lenders irrevocably released their liens on the product registration rights and intellectual property (other than patents) assets transferred by the Company to Arthrex. The Amended Arthrex Agreement, as further supplemented in April 2016, is referred to collectively as the “Arthrex Agreement.”

 

 

Pursuant to the Plan, on May 5, 2016, the Company entered into an Assignment and Assumption Agreement with Deerfield SS, LLC (the “Assignee”), the designee of the Deerfield Lenders, to assign to the Assignee the Company’s rights, title and interest in and to the Arthrex Agreement, and to transfer and assign to the Assignee associated intellectual property owned by the Company and licensed thereunder, as well as rights to collect royalty payments thereunder. The assignment and transfer was effected in exchange for a reduction of $15,000,000 in the amount of the allowed claim of the Deerfield Lenders pursuant to the Plan. As a result of the assignment and transfer, the Aurix System currently represents the Company’s only commercial product offering.

 

On the Effective Date, the Company and the Assignee entered into a Transition Services Agreement, in which the Company agreed to continue to service the Arthrex Agreement for a transition period. On October 20, 2016, the Company entered into a letter agreement (the “Three Party Letter Agreement”) with Arthrex and Deerfield SS, LLC, which extended the transition period under the Transition Services Agreement through January 15, 2017. Under the terms of the Three Party Letter Agreement, subject to Arthrex making a payment of $201,200 to the Company on October 28, 2016, payment of which was received on October 27, 2016: (a) the Company has sold, conveyed, transferred and assigned to Arthrex its title and interest in the Company’s inventory of Angel products (including spare parts therefor) and production equipment; and (b) the Assignee is obligated to make three equal payments of $33,333 each to the Company as consideration for the extension of the transition period. Three equal payments of $33,333 were received during the three month period ended December 31, 2016 from the Assignee. Under the terms of the Three Party Letter Agreement, the Company has no further obligations under the Transition Services Agreement or the Amended Arthrex Agreement after January 15, 2017. The agreement contains a full and irrevocable release of Arthrex by the Company with respect to any actions, claims or other liabilities for payments of royalty (as defined in the Amended Arthrex Agreement) owed to the Company based on sales of Angel products occurring on or before June 30, 2016, and a full and irrevocable release of the Company and the Assignee by Arthrex with respect to any actions, claims or other liabilities arising under the Amended Arthrex Agreement as of the date of the Three Party Letter Agreement. Neither Arthrex nor the Assignee assumed any liabilities or obligations of the Company in connection with the Three Party Letter Agreement.   

 

Distribution and License Agreement with Rohto

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 if and when the reimbursement price for the national health insurance system in Japan has been achieved after marketing authorization as described below. In connection with and effective as of the entering into the Rohto Agreement, we amended an existing licensing and distribution agreement with Millennia Holdings, Inc. (“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 make certain future payments to Millennia if we receive the milestone payment from Rohto as well as future royalty payments 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. 

 

Collaboration Agreement with Restorix Health

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

 

 

Pursuant to the Collaboration Agreement, the Company agreed to provide: (i) clinical support services by its clinical staff as reasonably agreed between the Company and Restorix as necessary and appropriate, (ii) reasonable and necessary support regarding certain reimbursement activities, (iii) coverage of Institutional Review Board (“IRB”) fees and payment to Restorix for certain training costs subject to certain limitations and (iv) community-focused public relations materials for participating RXH Partner Hospitals to promote the use of Aurix and participation in the Protocols. Pursuant to the Collaboration Agreement, Restorix agreed to: (i) provide access and support as reasonably necessary and appropriate at up to 30 RXH Partner Hospitals to identify and enroll patients into the Protocols, including senior executive level support and leadership to the collaboration and its enrollment goals and (ii) reasonably assist the Company to correct through a query process, any patient data submitted having incomplete or inaccurate data fields.

 

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

 

Under the Collaboration Agreement, the Company will pay Restorix or the RXH Partner Hospital, as the case may be, a per patient data collection (administrative) fee upon full completion and delivery of a patient data set. In addition, the Company is responsible to pay for any IRB fees necessary to conduct the Protocols and enroll patients, and to pay Restorix a training cost stipend per site. Each RXH Partner Hospital will pay the Company the then-current product price ($700 in 2016, and no greater than $750 in the remainder of the initial term) as set forth in the Collaboration Agreement.  

 

Boyalife Distribution Agreement

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

 

Note 5 – Receivables

 

Accounts and other receivable, net consisted of the following:

 

		Successor				Successor
		September 30, 2017				December 31, 2016
Trade receivables		$	116,802			$	100,660
Other receivables			352,722				603,015
			469,524				703,675
Less allowance for doubtful accounts			(305,896	)			(409,377	)
Accounts and other receivable, net		$	163,628			$	294,298

 

Other receivables at September 30, 2017 consisted primarily of a value added tax receivable due from the contract manufacturer of the former Angel product line.  Other receivables at December 31, 2016 consisted primarily of the value added tax receivable, a trade receivable due from our contract manufacturer for the cost of raw materials required to manufacture the Angel products that were purchased by the Company and immediately resold, at cost, to the contract manufacturer, and also included amounts due from Arthrex.  We assigned all of our rights under the Arthrex Agreement to Deerfield on the Effective Date.  The allowance for doubtful accounts at September 30, 2017 reflects a full reserve against the value added tax receivable while the allowance at December 31, 2016 reflects a full reserve against both the value added tax receivable and the receivable due from the contract manufacturer for the Company's former Angel product line.  The change in the allowance for doubtful accounts is due to the partial recovery of the receivable due from the contract manufacturer.

 

 

Note 6 — Property and Equipment

 

Property and equipment, net consisted of the following:

 

		Successor				Successor
		September 30, 2017				December 31, 2016
Medical equipment		$	402,234			$	405,096
Office equipment			48,888				48,888
Software			257,619				257,619
Manufacturing equipment			34,899				34,899
Leasehold improvements			19,215				19,215
			762,855				765,717
Less accumulated depreciation and amortization			(506,968	)			(279,601	)
Property and equipment, net		$	255,887			$	486,116

 

Depreciation and amortization expense reflected in operating expenses was approximately $51,000 and $230,000 for the three and nine month periods ended September 30, 2017, respectively. For the predecessor period from January 1, 2016 through May 4, 2016 depreciation and amortization expense was approximately $182,000, and for the period from May 5, 2016 through September 30, 2016 depreciation and amortization expense was approximately $175,000.

 

Note 7 – Goodwill and Other Intangible Assets

 

Our finite-lived intangible assets as of September 30, 2017 and December 31, 2016 are as follows:

 

		Successor				Successor
		September 30, 2017				December 31, 2016
Trademarks		$	917,000			$	917,000
Technology			6,576,000				6,576,000
Customer and clinician relationships			904,000				904,000
			8,397,000				8,397,000
Accumulated amortization trademarks			(85,784	)			(39,934	)
Accumulated amortization technology			(1,025,290	)			(477,290	)
Accumulated amortization customer and clinician relationships			(84,568	)			(39,368	)
			(1,195,642	)			(556,592	)
		$	7,201,358			$	7,840,408

 

 

Goodwill

Goodwill represents the excess of reorganization value over the fair value of tangible and identifiable intangible assets and the fair value of liabilities as of the Effective Date and as of December 31, 2016. The Successor Company's intangible assets and goodwill were not considered to be impaired as of December 31, 2016 and they were not considered impaired with the adoption of Accounting Standards Update 2017-04 effective January 31, 2017. As a result of events and circumstances in the prior quarter ended June 30, 2017, including a sustained reduction in our stock price, we determined that it was more likely than not, that our fair value was reduced below the carrying value of our net equity, requiring an impairment test as of June 30, 2017. We compared our carrying value to our fair value as reflected by our June 30, 2017 market capitalization and concluded that our carrying value exceeded our fair value by approximately $2.8 million. Consequently, we recognized a non-cash goodwill impairment charge of approximately $2.1 million to write-down goodwill to its estimated fair value of zero as of June 30, 2017. Changes in the amount of goodwill in 2016 and 2017 were as follows:

 

		Successor
Balance, at December 31, 2015		$	-
Fresh start accounting			2,079,284
Balance, at December 31, 2016			2,079,284
Impairment of goodwill			(2,079,284	)
Balance, at September 30, 2017		$	-

 

Finite-lived intangible assets – trademarks, customer and clinician relationships and technology

The Predecessor Company’s finite-lived intangible assets include Angel-related trademarks, technology (including patents) and customer relationships, and were being amortized over their useful lives ranging from eight to twenty years. Amortization expense associated with our Angel related finite-lived intangible assets was approximately $90 thousand and $20 thousand from January 1, 2016 through May 4, 2016 and April 1, 2016 through May 4, 2016, respectively. The remaining Angel related finite-lived intangible assets were eliminated as of May 4, 2016 as the underlying Angel assets were assigned to Deerfield pursuant to the Plan of Reorganization.

 

The Successor Company’s Aurix related finite-lived intangible assets include trademarks, technology (including patents), and clinician relationships, and are being amortized over their useful lives ranging from nine to fifteen years. Amortization expense associated with our Aurix related finite-lived intangible assets was approximately $639,000 for the nine months ended September 30, 2017 of which approximately $548,000 was charged to cost of goods sold. Amortization expense based on our existing intangible assets and their estimated useful lives is expected to be approximately as of September 30, 2017:

 

2017 (Fourth quarter 2017)		$	213,000
2018			852,000
2019			852,000
2020			852,000
2021			852,000
Thereafter			3,580,000

 

Note 8 – Debt

 

Successor Company Debt

As of September 30, 2017, the Company had no debt outstanding.

 

Deerfield Facility Agreement

In 2014, we entered into the Deerfield Facility Agreement, a $35 million five-year senior secured convertible credit facility with Deerfield due March 31, 2019. As of January 26, 2016 (the date of our voluntary filing for bankruptcy protection), we were in default under the Deerfield Facility Agreement, and Deerfield had the right to demand repayment of the entire amount owed to them, including accrued interest. The total amount owing under the Deerfield Facility Agreement, including accrued interest, was compromised by the Bankruptcy Court. This amount of approximately $38.3 million and the $5.75 million outstanding under the DIP Credit Agreement (as defined below) was settled as of the Effective Date through the issuance of 29,038 shares of our Series A Preferred Stock, and the assignment to Deerfield of all rights, title, and interest under the Arthrex Agreement, including the rights to receive royalty payments thereunder.

 

 

Debtor-in-Possession Financing

On January 28, 2016, the Bankruptcy Court entered an interim order approving the Company's debtor-in-possession financing (“DIP Financing”) pursuant to terms set forth in a senior secured, super-priority debtor-in-possession credit agreement (the “DIP Credit Agreement”), dated as of January 28, 2016, by and among the Company, as borrower, each lender from time to time party to the DIP Credit Agreement, including, but not limited to Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., and Deerfield Special Situations Fund, L.P. (collectively, the “Deerfield Lenders”), and Deerfield Mgmt, L.P., as administrative agent (the “DIP Agent”) for the Deerfield Lenders. The Deerfield Lenders comprised 100% of the lenders under the then-existing Deerfield Facility Agreement.

 

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

 

We received $5.75 million in gross proceeds from the DIP Financing in the period from January 1, 2016 through May 4, 2016, and incurred approximately $0.3 million in issuance costs. In accordance with the Plan of Reorganization, as of the Effective Date, the DIP Credit Agreement was terminated.

 

Interest Expense

Interest expense was approximately $5,400 and $14,200, respectively, for the three and nine month periods ended September 30, 2017. For the period from January 1, 2016 through May 4, 2016 interest expense was approximately $253,000 of which approximately $79,000 in interest expense pertained to the DIP Financing and $173,000 to the Deerfield Facility Agreement.

 

Note 9 – Equity and Stock-Based Compensation

 

Under the Second Amended and Restated Certificate of Incorporation of the Successor Company, it has the authority to issue a total of 32,500,000 shares of capital stock, consisting of: (i) 31,500,000 shares of New Common Stock and 1,000,000 shares of preferred stock, par value $0.0001 per share, which will have such rights, powers and preferences as the board of directors of the Company (the “Board of Directors”) shall determine. 

 

In accordance with the Plan, as of the Effective Date, the Company issued 7,500,000 shares of New Common Stock to the Recapitalization Investors for gross cash proceeds of $7,300,000 and net cash to the Company of $7,052,500, which is referred to as the Recapitalization Financing.   The net cash amount excludes the effect of $100,000 in offering expenses paid from the proceeds of the DIP Financing, which was converted into Series A Preferred Stock as of the Effective Date.

 

A significant majority of the Recapitalization Investors executed Backstop Commitments to purchase up to 12,800,000 additional shares of New Common Stock for an aggregate purchase price of up to $3,000,000.  During the quarter ended September 30, 2017, the Company exercised its rights under the Backstop Commitment in full and issued an aggregate of 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3.0 million.

 

Under the Plan of Reorganization, the Company committed to the issuance of up to 3,000,000 shares of New Common Stock, and subsequently issued 2,264,612 shares of New Common Stock (the “Exchange Shares”) on the Effective Date to record holders of the Old Common Stock as of March 28, 2016, who executed and timely delivered the required release documents no later than July 5, 2016, in accordance with the Confirmation Order and the Plan.  The holders of Old Common Stock who executed and timely delivered the required release documents are referred to as the “Releasing Holders.”

 

The 2,264,612 Exchange Shares were issued as of the Effective Date to Releasing Holders who asserted ownership of a number of shares of Old Common Stock that matched the Company’s records or could otherwise be confirmed, at a rate of one share of New Common Stock for every 41.8934 shares of Old Common Stock held by such holders as of March 28, 2016.  In accordance with the Plan, if the calculation would otherwise have resulted in the issuance to any Releasing Holder of a number of shares of New Common Stock that is not a whole number, then the number of shares actually issued to such Releasing Holder was determined by rounding down to the nearest number.

 

On June 20, 2016, the Company issued 162,500 shares of New Common Stock (the “Administrative Claim Shares”) pursuant to the Order Granting Application of the Ad Hoc Equity Committee Pursuant to 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) for Allowance of Fees and Expenses Incurred in Making a Substantial Contribution, entered by the Bankruptcy Court on June 20, 2016.   The Administrative Claim Shares were issued to holders of administrative claims under sections 503(b)(3)(D) and 503(b)(4) of the Bankruptcy Code. Of the 162,500 shares, 100,000 shares were issued to outside counsel to the Ad Hoc Equity Committee of the Company’s equity holders as compensation of all remaining allowed fees for legal services provided by such counsel.  The remaining 62,500 were issued to designees of the Ad Hoc Equity Committee who had granted loans in an aggregate amount of $62,500 to the Ad Hoc Equity Committee in December 2015 as repayment of such loans.

 

 

Successor Company Stock Purchase Warrants

As part of the Recapitalization Financing, the Company also issued Warrants to purchase 6,180,000 shares of unregistered New Common Stock to certain of the Recapitalization Investors. The Warrants terminate on May 5, 2021 and are currently exercisable at exercise prices ranging from $0.50 per share to $1.00 per share. The number of shares of New Common Stock underlying a Warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations. The Warrants are classified in equity. 

 

Successor Company Series A Preferred Stock

On the Effective Date, the Company filed a Certificate of Designations of Series A Preferred Stock with the Delaware Secretary of State, designating 29,038 shares of the Company’s undesignated preferred stock, par value $0.0001 per share, as Series A Preferred Stock (the “Series A Preferred Stock”). On the Effective Date, the Company issued 29,038 shares of Series A Preferred Stock to Deerfield in accordance with the Plan pursuant to the exemption from the registration requirements of the Securities Act provided by Section 1145 of the Bankruptcy Code. Deerfield did not receive any shares of New Common Stock or other equity interests in the Company.

 

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

 

Stock-Based Compensation

Predecessor Company

The Company’s 2002 Long-Term Incentive Plan (“LTIP”) and 2013 Equity Incentive Plan (“EIP” and, together with the LTIP, the “Incentive Plans”) permitted 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 were authorized to issue up to 10,500,000 shares of Old Common Stock under the LTIP, and up to 18,000,000 shares of Old Common Stock under the EIP (as approved by our shareholders on June 9, 2014). All stock options granted under the Incentive Plans were cancelled in their entirety as of the Effective Date.

 

As of May 4, 2016, the Company only issued stock options under the Incentive Plans. Stock option terms were determined by the Board of Directors for each option grant, and options generally vested immediately upon grant or over a period of time ranging up to four years, were exercisable in whole or installments, and expired no longer than ten years from the date of grant. As a result of the cancellation of all outstanding stock options and the application of fresh start accounting as of the Effective Date, unrecognized compensation costs related to the stock options outstanding as of May 4, 2016, are not recognized after the Effective Date.

 

 

Successor Company

In July 2016, the Board of Directors approved, and on August 4, 2016, the Board amended, the Company’s 2016 Omnibus Incentive Plan (the “2016 Omnibus Plan”) to include an evergreen provision, intended to increase the maximum number of shares issuable under the Omnibus Plan on the first day of each fiscal year (starting on January 1, 2017) by an amount equal to six percent (6%) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases may not exceed 1,000,000 shares. As of November 21, 2016, the Majority Stockholders executed a written consent adopting and approving the 2016 Omnibus Plan, as amended and restated, which provides for the Company to grant equity and cash incentive awards to officers, directors and employees of, and consultants to, the Company and its subsidiaries. We were authorized to issue up to 1,590,000 and 1,500,000 shares of common stock under the 2016 Omnibus Plan as of September 30, 2017 and December 31, 2016, respectively.

 

A summary of stock option activity under the 2016 Omnibus Plan as of September 30, 2017, and changes during the nine months ended September 30, 2017, is presented below:  

 

Stock Options – 2016 Omnibus Plan		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at December 31, 2016			1,265,000			$	1.00				9.51			$	-
Granted			56,250			$	1.67				9.53			$	-
Exercised			-
Forfeited or expired			(210,000	)										$	-
Outstanding at September 30, 2017			1,111,250			$	1.03				8.38			$	-
Exercisable at September 30, 2017			491, 248			$	1.00				7.84			$	-
Vested and expected to vest at September 30, 2017			1,111,250			$	1.03				8.38			$	-

 

There were zero and 56,250 stock options granted under the 2016 Omnibus Plan during the three and nine months ended September 30, 2017, respectively. The fair value of stock options granted and vested during 2017 was approximately $8,500 and $31,200, respectively. No stock options were exercised during the nine months ended September 30, 2017. As of September 30, 2017, there was approximately $75,500 of total unrecognized compensation cost related to non-vested stock options, and that cost was expected to be recognized over a weighted-average period of .90 years.

 

The Company recorded stock-based compensation expense in the periods presented as follows:

 

		Successor				Successor				Predecessor
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
Sales and marketing		$	3,906			$	-			$	18,504
Research and development			9,201				-				6,858
General and administrative			29,199				-				29,719
		$	42,306			$	-			$	55,081

 

		Successor				Successor
		Three Months ended September 30, 2017				Three Months ended September 30, 2016
Sales and marketing		$	1,392			$	-
Research and development			2,978				-
General and administrative			9,965				-
		$	14,335			$	-

 

Note 10 – Fair Value Measurements

 

Financial Instruments Carried at Cost

Short-term financial instruments in our consolidated balance sheets, including cash and cash equivalents other than money market funds (which are carried at fair value), accounts, and other receivables and accounts payable, are carried at cost which approximates fair value, due to their short-term nature.

 

Fair Value Measurements

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

 

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

 

 

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

 

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

 

Financial Assets and Liabilities Measured at Fair Value

The Company had no financial assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2017 or December 31, 2016.

 

Non-Financial Assets and Liabilities Measured at Fair Value

The Company’s property and equipment and intangible assets (including goodwill) are measured at fair value on a non-recurring basis, upon establishment pursuant to fresh start accounting, and upon impairment.  As a result of events and circumstances in the quarter ended June 30, 2017, it was determined that goodwill was fully impaired and consequently, the goodwill balance of approximately $2.1 million was charged off as of June 30, 2017 (see Note 7 – Goodwill and Other Intangible Assets).  As a result, the carrying value of our goodwill at September 30, 2017 was zero.

 

Note 11 – Commitments and Contingencies

 

As of the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Recapitalization Investors.  The Registration Rights Agreement provides certain resale registration rights to the Investors with respect to securities received in the Recapitalization Financing.  Pursuant to the Registration Rights Agreement, the Company filed, and has to update periodically, a registration statement with the U.S. Securities and Exchange Commission that covers the resale of all shares of New Common Stock issued to the Investors on the Effective Date until such time as such shares have been sold or may be sold without registration or restriction 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 $18,700 in total per month and expiring in September 2019. In addition, we lease an approximately 2,100 square foot facility in Nashville, Tennessee, which is being utilized as a commercial operations office. The lease is approximately $4,200 per month excluding our share of annual operating expenses, and expires April 30, 2018. We also lease a 16,300 square foot facility located in Durham, North Carolina. Monthly rent, including our share of certain annual operating costs and taxes, is approximately $22,100 per month and the lease expires on 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, including certain annual operating costs and taxes is approximately $14,600 per month and also expires December 31, 2018.

 

 

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

 

The following discussion and analysis of the financial condition and results of operations of Nuo Therapeutics, Inc. ("Nuo Therapeutics," the "Company," "we," "us," or "our") should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”), filed with the U.S. Securities and Exchange Commission, or the Commission.

 

 

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

 

Following the consummation of the Plan of Reorganization, the Company’s results of operations from and after May 5, 2016 are not comparable to the results of operations reflected in the Company’s prior financial statements for the nine months ended September 30, 2016 contained in this Quarterly Report due to the Company’s application of fresh-start accounting to its financial statements from and after May 5, 2016. For that reason, it is difficult to assess our performance in periods beginning on or after May 5, 2016 in relation to certain prior periods. Please refer to “Note 2- Fresh-Start Accounting” in the notes to the unaudited consolidated financial statements for additional details.

 

 

Special Note Regarding Forward Looking Statements

 

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

 

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

 

●

our need for substantial additional financing and our ability to obtain that financing, whether equity or debt, in the post-bankruptcy environment, especially in light of our unsuccessful registered offering and related refinancing of our Series A preferred stock in early summer 2017 and the continuing low liquidity and substantial decrease in share price of our common stock on the OTCQX market;

 

●	our history of losses and expectation that we will incur losses in the foreseeable future;

 

●	our limited operating experience;

 

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

 

●	our ability to obtain adequate reimbursement from third-party payors, including satisfactory completion of the CED program;

 

●

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

 

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

 

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

 

 

●	our ability to maintain classification of Aurix as APC 5054;

 

●	whether CMS will continue to maintain the current national average reimbursement rate of $1,427 per Aurix treatment, and, more generally, our ability to continue to be reimbursed at a profitable national average rate per application in the future;

 

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

 

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

 

●	our ability to protect our intellectual property;

 

●	our compliance with governmental regulations;

 

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

 

●	our ability to contract with healthcare providers;

 

●	our ability to successfully sell and market the Aurix System;

 

●	our ability to attract and retain key personnel; and

 

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

 

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

 

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

 

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

 

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

  

Overview

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Although FDA cleared the Aurix System for marketing in 2007 under Section 510(k) of the FDCA, CMS only established economically viable reimbursement for the product beginning in 2016.

 

In 2017, the CMS national average reimbursement rate for the Aurix System is $1,427 per treatment, which we believe provides fair compensation to physicians and a compelling market opportunity for us. The proposed national average reimbursement rate for 2018 is expected to be $1,568 per treatment. The typical course of therapy consists of six to eight treatments. The national average reimbursement rate for Aurix was $1,411 per treatment in 2016, an increase from approximately $430 in 2015. CMS’ 2016 implementation of the increased reimbursement rate made Aurix significantly more economically attractive to both wound care facilities and the Company. The Company markets the Aurix System at a cost of $700 per treatment to wound care facilities operating in the CED program.

 

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

 

Our Strategy

 

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

 

Our goal is to successfully commercialize the Aurix System in the U.S. for the treatment of chronic wounds. Key elements of our strategy to achieve this goal include steps to secure broad CMS reimbursement under the CED program:

 

●

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

 

 

●

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

 

o

Diabetic Foot Ulcers: The study endpoint is the earlier of complete healing or 12 weeks following enrollment and the estimated enrollment is 760 randomized patients. The first patient was enrolled in May 2015, and 107 patients have enrolled to date.

o

Venous Leg Ulcers: The study endpoint is the earlier of complete healing or 12 weeks following enrollment and the estimated enrollment is 640 patients. The first patient was enrolled in March 2015, and 71 patients have enrolled to date.

o

Pressure Ulcers: The study endpoint is the earlier of complete healing or 16 weeks following enrollment and the estimated enrollment is 800 patients. The first patient was enrolled in April 2015, and 38 patients have enrolled to date.

 

●

To increase the opportunity for greater enrollment at certain sites in our CED program, we, in conjunction with a healthcare facility participating in our CED trials, petitioned the DHHS Office of Inspector General, or OIG, to issue an advisory opinion that if the facility treating Medicare beneficiaries enrolled in one of the CED study protocols reduced or waived any required co-payments based on an individualized assessment of financial ability, the facility would not be subject to civil or administrative penalties under the Social Security Act and regulations. On June 29, 2017, the OIG issued the requested advisory opinion. Although the advisory opinion may provide guidance to healthcare providers other than the facility that submitted the petition, as a legal matter, the opinion only applies to the parties that requested it, and, to date, the opinion has not had a discernable effect on patient enrollment.

 

●

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

 

Based on guidance from the CMS Coverage and Analysis Group (CAG), a CED cycle is considered complete when CMS completes a reconsideration of the existing National Coverage Determination and removes the requirement for study participation as a condition of coverage. The request for reconsideration would typically follow the same nine-month timetable as other NCD requests.  We currently estimate that full enrollment in two of the three protocols can be achieved by the end of 2018 provided that patient access via the collaboration with Restorix improves as anticipated. Each protocol operates independently and the diabetic foot protocol is expected to reach complete enrollment first, although we can provide no assurances to this effect. We can provide no assurances that the pace of enrollment will increase as expected or that any of the three protocols will reach their required enrollment levels. Each protocol also includes the option for Nuo to perform an interim analysis based on 50% enrollment with a view towards earlier submission of study data for publication and subsequent submission to CAG for consideration.

 

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

 

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

 

We intend to manage our overall costs and expenditures while focusing on the completion of the CED protocols. Regardless of our success in managing costs and expenditures, however, we require significant additional capital to fully support an expanded commercialization initiative designed to increase market adoption and penetration of Aurix after completion of the CED protocols. See “– Liquidity and Capital Resources.”

 

The Science Underlying Aurix/Platelet Rich Plasma

 

Normal Wound Healing

 

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

 

 

Chronic Wounds

 

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

 

Aurix Therapy

 

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

 

The Efficacy of Aurix Relates to Biological Activity Released by Platelets

 

Regenerative Capacity

 

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

 

Anti-infective Activity

 

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

 

Clinical Efficacy

 

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

 

●

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

 

●

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

 

●

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

 

 

Bankruptcy and Emergence from Bankruptcy

 

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

 

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

 

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

  

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

 

In accordance with the Plan of Reorganization, as of the Effective Date, the Company issued 7,500,000 shares of common stock and warrants to purchase 6,180,000 shares of common stock to certain accredited investors in a private placement exempt from registration. The warrants terminate on May 5, 2021 and are exercisable at any time at exercise prices ranging from $0.50 per share to $1.00 per share.

 

A significant majority of the accredited investors who purchased shares of common stock on the Effective Date furthermore executed backstop commitments to purchase up to 12,800,000 additional shares of common stock for an aggregate purchase price of up to $3,000,000. We refer to these commitments as the Backstop Commitments or the Backstop Commitment.  During the quarter ended September 30, 2017, the Company exercised its rights under the Backstop Commitment in full and issued an aggregate of 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3.0 million. 

 

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

 

 

Quotation of the New Common Stock commenced on OTCQB on January 20, 2017 under the trading symbol "AURX" and was moved to OTCQX as of March 16, 2017. On March 6, 2017, the shares of New Common Stock became eligible for Deposit/Withdrawal At Custodian, or DWAC, distribution through The Depository Trust Company, or DTC. DWAC transfer allows brokers and custodial banks to make electronic book-entry deposits and withdrawals of shares of common stock into and out of their DTC book-entry accounts using a "Fast Automated Securities Transfer", or FAST, service.  As of the date of filing of this Quarterly Report, trading in our New Common Stock has been very limited and we cannot make any assurances that the trading volume will increase, or, if and when it increases, that it will be sustained at any level. 

 

Results of Operations

 

Upon emergence from bankruptcy on the Effective Date, the Company applied fresh‐start accounting, resulting in the Company becoming a new entity for financial reporting purposes (see Note 2 – Fresh Start Accounting to the consolidated financial statements). As a result of the application of fresh‐start accounting, the Company reflected the disposition of its pre‐petition debt and changes in its equity structure effected under the Confirmation Order in its balance sheet as of the Effective Date. Accordingly, all financial statements for periods prior to May 5, 2016 are referred to as those of the “Predecessor Company” as they reflect the periods prior to application of fresh‐start accounting. The financial statements for periods subsequent to May 4, 2016, are referred to as those of the “Successor Company.” Under fresh‐start accounting, the Company's assets and liabilities were adjusted to their fair values, and a reorganization value for the entity was determined by the Company based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The fresh start adjustments are material and affect the Company’s results of operations from and after May 5, 2016. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after May 5, 2016 are not comparable to the financial statements prior to that date. 

 

When evaluating results of operations below, management views the nine months ended September 30, 2016 as a single, whole measurement period instead of a pair of distinct periods which must be divided and reported separately according to GAAP. Consequently, the Company is presenting the operating results of the Predecessor and Successor on a combined basis for the nine months ended September 30, 2016. This combined presentation is a non-GAAP summation of the Predecessor’s pre-reorganization results of operations for the period from January 1, 2016 through May 4, 2016 and the Successor’s results of operations for the period from May 5, 2016 through September 30, 2016. Management believes that the combined presentation provides additional information that enables meaningful comparison of the Company’s financial performance during uniform periods. Please refer to Note 2 – Fresh Start Accounting in the notes to the consolidated financial statements for a detailed description of the effects of (i) the transactions contemplated by the Plan of Reorganization (reflected in the column “Reorganization Adjustments” in the second table of Note 2) and (ii) fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments” in the second table of Note 2). Please refer to the section titled “Reorganization Items, net” in such note for a summary of the costs directly attributable to the implementation of the Plan of Reorganization. The disclosure provided in Note 2 – Fresh Start Accounting is incorporated herein by reference.

 

Comparison of Three Months Ended September 30, 2017 and 2016

 

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

 

Revenue and Gross Profit 

 

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

 

		Successor				Successor
		Three Months ended September 30, 2017				Three Months ended September 30, 2016
Product sales		$	122,000			$	139,000
Royalties			40,000				38,000
Total revenue			162,000				177,000
Costs of revenue
Costs of sales			264,000				278,000
Costs of royalties			-				-
Total costs of revenue			264,000				278,000
Gross loss		$	(102,000	)		$	(101,000	)
Gross Margin %			(63	)%			(57	)%

 

 

Revenues decreased $15,000 (8%) to $162,000 comparing the three months ended September 30, 2017 to the comparable period in 2016.   Revenues for the three months ended September 30, 2017 were 6% lower than for the quarter ended March 31, 2017 and 14% lower than for the quarter ended June 30, 2017. Until such time as the Company and Restorix make meaningful progress in patient enrollment in the CED program, we expect Aurix product revenues to remain modest.  The Company and Restorix are working diligently to accelerate patient enrollment in appropriate outpatient wound care clinics, but we can provide no assurance that we will be successful in generating increased revenues.

 

Overall gross profit (loss) was essentially flat at $(102,000) while overall gross margin decreased to (63)% from (57)%, comparing the three months ended September 30, 2017 to the comparable period in 2016. Amortization and depreciation costs charged to cost of sales for (i) the finite lived intangible assets resulting from the application of fresh start accounting, (ii) prepaid royalty expense, and (iii) depreciation of Aurix centrifuge equipment were approximately $183,000, $30,000, and $30,000, respectively (in the aggregate representing approximately 92% of total cost of sales) for the three months ended September 30, 2017.  For the full year 2017, they are expected to be approximately $731,000, $121,000 and $122,000, respectively.  

 

Operating Expenses

 

Operating expenses decreased $482,000 (27%) to $1,273,000 comparing the three months ended September 30, 2017 to the three months ended September 30, 2016. The decrease was primarily due to lower sales and marketing and general and administrative costs. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased $169,000 (51%) to $163,000 comparing the three months ended September 30, 2017 to the three months ended September 30, 2016. The decrease was due to lower compensation expense, a decrease in travel expenses, and lower costs associated with professional services. The primary reason for the decrease in all such expenses was the lower number of sales representatives used by the Company in the three months ended September 30, 2017, as the CED program, including regulatory support and operationalization of the CED protocols, is part of our collaboration with Restorix, and as such the Company currently employs only one sales representative.

 

Research and Development

 

Research and development expenses decreased by $24,000 (7%) to $299,000 comparing the three months ended September 30, 2017 to the three months ended September 30, 2016. The decrease was primarily due to a decrease in depreciation expense, due to assets becoming fully amortized, and lower compensation expense.  The decrease was partially offset by higher CED-related expenses with the expansion of the clinical affairs team and efforts in connection with the Restorix collaboration.

General and Administrative

General and administrative expenses decreased by $289,000 (26%) to $811,000 comparing the three months ended September 30, 2017 to the three months ended September 30, 2016. The decrease was primarily due to (i) costs associated with professional services, (ii) a bad debt recovery and (iii) overall lower compensation expenses, which were partially offset by costs associated with our unsuccessful registered offering and related refinancing of our Series A preferred stock in early summer 2017. 

 

Other Income (Expense)

 

Other expense, net decreased $59,000 to $2,000, net comparing the three months ended September 30, 2017 to the three months ended September 30, 2016 due primarily to the absence in the 2017 period of the remaining reorganization items, net incurred in the prior year period.

 

Comparison of Nine Months Ended September 30, 2017 and 2016

 

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

 

 

Revenue and Gross Profit 

 

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

 

		Successor				Successor				Predecessor				Combined
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016				Nine Months ended September 30, 2016
Product sales		$	383,000			$	248,000			$	923,000			$	1,171,000
License fees			-				-				139,000				139,000
Royalties			141,000				64,000				670,000				734,000
Total revenue			524,000				312,000				1,732,000				2,044,000
Costs of revenue
Costs of sales			812,000				453,000				829,000				1,282,000
Costs of royalties			-				-				55,000				55,000
Total costs of revenue			812,000				453,000				884,000				1,337,000
Gross profit (loss)		$	(288,000	)		$	(141,000	)		$	848,000			$	707,000
Gross Margin %			(55	)%			(45	)%			49	%			35	%

 

Revenues decreased $1,520,000 (74%) to $524,000 comparing the nine months ended September 30, 2017 to the comparable combined period in 2016.   Approximately $1.3 million of this decrease in revenues was due to the absence of Angel product sales and Angel-related royalties and license fees in the 2017 period.   Aurix product sales decreased approximately $187,000 during the nine months ended September 30, 2017 compared to the combined nine months ended September 30, 2016. The reduction in Aurix sales was primarily associated with the loss of a long term acute care facility customer totaling approximately $126,000 of Aurix product sales during the combined nine month period ended September 30, 2016.

 

Overall gross profit decreased $995,000 to a gross loss of ($288,000) while overall gross margin decreased to (55%) from 35%, comparing the nine months ended September 30, 2017 to the combined nine month period ended September 30, 2016. The decrease in gross profit resulted primarily from (i) the absence of gross profit of approximately $660,000 associated with Arthrex-related Angel revenue and (ii) an increase of approximately $253,000 of non-cash amortization expense of Aurix intangible technology assets for the nine months in 2017 as compared to the combined nine months ended September 30, 2016. Amortization and depreciation costs charged to cost of sales for (i) the finite lived intangible assets resulting from the application of fresh start accounting, (ii) prepaid royalty expense, and (iii) depreciation of Aurix centrifuge equipment were approximately $548,000, $91,000 and $95,000, respectively (in the aggregate representing approximately 90% of total cost of sales) for the nine months ended September 30, 2017.  For the full year 2017, they are expected to be approximately $731,000, $121,000 and $122,000, respectively.

 

Operating Expenses

 

Operating expenses increased approximately $168,000 (3%) to $6,683,000 comparing the nine months ended September 30, 2017 to the combined nine months ended September 30, 2016. The largest component of this increase was the non-cash goodwill impairment charge of approximately $2.1 million described below which was largely offset by decreased operating expenses in all aspects of the business described in more detail below.  Excluding the effect of the goodwill impairment charge, operating expenses would have decreased $1,911,000 (29%) to approximately $4,604,000. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing decreased $866,000 (62%) to $537,000 comparing the nine months ended September 30, 2017 to the combined nine months ended September 30, 2016. The decrease was due to lower compensation expense and a decrease in travel expenses, and lower costs associated with professional and marketing services.  The primary reason for the decrease in all such expenses was the lower number of sales representatives used by the Company in the nine months ended September 30, 2017, as the CED program is approached as a Clinical Affairs effort, including regulatory support and operationalization of the CED protocols, as part of the Restorix collaboration.

 

Research and Development

 

Research and development expenses decreased by $94,000 (9%) to $1,008,000 comparing the nine months ended September 30, 2017 to the combined nine months ended September 30, 2016. The decrease was due primarily to lower intellectual property/patent maintenance and database management costs, and lower depreciation expense, due to assets becoming fully amortized and lower clinical research costs, which were partially offset by higher compensation expenses with the expansion of the clinical affairs team and efforts in connection with the Restorix collaboration.

 

 

General and Administrative

 

General and administrative expenses decreased $952,000 (24%) to $3,058,000 comparing the nine months ended September 30, 2017 to the combined nine months ended September 30, 2016. The decrease was primarily due to lower compensation expenses, a bad debt recovery, a refund on franchise taxes, lower costs associated with professional services, the absence of a one-time charge in 2016 for manufacturing transfer costs under our agreement with Arthrex, and lower depreciation expenses, which were partially offset by costs associated with our unsuccessful registered offering and related Series A preferred stock exchange agreement in early summer 2017. 

 

Impairment of Goodwill 

 

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

 

Other Income (Expense)

 

Other expense, net was approximately $11,000 for the nine months ended September 30, 2017 compared to other income, net of approximately $30.8 million for the combined nine months ended September 30, 2016.  The difference was almost entirely due to the approximately $30.9 million net gain on reorganization items recognized in the combined 2016 period.

 

Liquidity and Capital Resources

 

We have a history of losses, are not currently profitable, and expect to incur losses and negative cash flows in the foreseeable future. We may never generate sufficient revenues to achieve and maintain profitability. Since our inception, we have financed our operations by raising debt, issuing equity and equity-linked instruments, and executing licensing arrangements, and to a lesser extent by generating royalties and product revenues. Our operations are subject to certain risks and uncertainties including those described in “Risk Factors” in “Item 1.A Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

For the nine months ended September 30, 2017 we incurred net losses from operations of approximately $7.0 million.   During the quarter ended September 30, 2017, we withdrew our attempted registered offering and related refinancing of our Series A preferred stock, and exercised our rights under the Backstop Commitment in full.  As a result of that exercise, we issued an aggregate of 12,800,000 shares of common stock (the "Backstop Shares") for gross proceeds of approximately $3.0 million, which more than doubled the number of our outstanding shares of common stock.  

At September 30, 2017, we had cash and cash equivalents of approximately $1.9 million, total current assets of approximately $2.6 million, and total current liabilities of approximately $1.7 million.

We believe based on the operating cash requirements and capital expenditures expected for the next twelve months, that our current resources, projected revenue from sales of Aurix (including any additional revenue generated as a result of our collaboration with Restorix Health), and limited license fees and royalties from our license of certain aspects of the ALDH technology, are insufficient to support our operations beyond the middle of the first quarter of 2018.  As such, we believe that substantial doubt about our ability to continue as a going concern exists.

 

 

Cash Flows

 

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

 

		Successor				Successor				Predecessor
		Nine Months ended September 30, 2017				Period from May 5, 2016 through September 30, 2016				Period from January 1, 2016 through May 4, 2016
Cash flows used in operating activities		$	(3.7	)		$	(6.5	)		$	(3.1	)
Cash flows used in investing activities		$	-			$	-			$	-
Cash flows provided by financing activities		$	3.0			$	-			$	12.5

 

Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2017 of approximately $3.7 million primarily reflects our net loss of approximately $7.0 million adjusted by (i) approximately $2.1 million for the impairment of goodwill, (ii) approximately $0.9 million of depreciation and amortization expense (iii) an approximate $0.4 million change in operating assets and liabilities and (iv) an approximate $0.1 million bad debt recovery.

 

Cash used in operating activities for the nine months ended September 30, 2016 of $9.6 million primarily reflects our net income of $25.0 million adjusted by the approximately $34.9 million non-cash gain on reorganization and a net decrease in operating assets and liabilities of approximately $0.8 million which were partially offset by (i) an approximately $0.8 million increase for depreciation and amortization charges, and (ii) approximately $0.3 million of DIP Financing debt issuance costs.

 

Investing Activities

 

We did not have any significant investing activities for the nine months ended September 30, 2017 and 2016. 

 

Financing Activities

 

Cash provided by financing activities for the nine months ended September 30, 2017 consisted of $3.0 million in gross proceeds from the call of the Backstop Commitment in full. Issuance costs of approximately $0.1 million were not paid and are included in accrued expenses and liabilities as of September 30, 2017.

 

Cash provided by financing activities for the nine months ended September 30, 2016 of approximately $12.5 million consisted of approximately $5.5 million, net of issuance costs, of DIP Financing provided by Deerfield and net cash of approximately $7.1 million in the Recapitalization Financing. The total amount outstanding under the DIP Credit Agreement as of May 4, 2016 was $5.75 million excluding approximately $0.3 million of debt issuance costs. The DIP Credit Agreement and Deerfield Facility Agreement were terminated and cancelled, respectively, as of the Effective Date of May 5, 2016. 

 

Inflation

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, valuation of derivative liabilities, contingent liabilities, fair value and depreciable lives of long-lived assets (including property and equipment, intangible assets and goodwill), deferred taxes and associated valuation allowance and the classification of our long-term debt. Actual results could differ from those estimates.

 

 

Intangible Assets and Goodwill

 

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

 

Goodwill represents the excess of reorganization value over the fair value of tangible and identifiable intangible assets and the fair value of liabilities as of the Effective Date. Goodwill is not amortized, but is subject to periodic review for impairment. Goodwill is reviewed annually, as of December 31, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable. We perform our review of goodwill on our one reporting unit.

 

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

 

Detailed impairment testing involves comparing the fair value of our one reporting unit to its carrying value, including goodwill. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the fair value of the reporting unit is less than its carrying value, then following the Company's adoption of new accounting guidance on January 1, 2017 the Company recognizes an impairment charge for such deficiency, provided that the loss recognized is limited to the total amount of goodwill allocated to that reporting unit.   

Successor Company Revenue Recognition

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

 

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

 

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

 

Unadopted 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. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. In March 2016, the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In April 2016, the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In May 2016, the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting. In May 2016, the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and contract modifications at transition, with the same effective date. We are currently evaluating the impact, if any, that this guidance will have on our consolidated financial statements.

 

 

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

 

In June 2016, the FASB issued guidance with respect to measuring credit losses on financial instruments, including trade receivables. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity's current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

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

 

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

 

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

 

In May 2017, the FASB issued guidance clarifying about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless specified conditions are met. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated financial statements.

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

 

Our management has carried out an evaluation, under the supervision and with the participation of our principal executive and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2017. Based upon that evaluation, and in light of the remediation actions taken with respect to the material weakness in the design and operation of our internal control over financial reporting identified with respect the quarter ended June 30, 2017 and further discussed below, our principal executive and financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Changes in Internal Control over Financial Reporting

 

With respect to the quarter ended June 30, 2017, we identified a material weakness in our internal controls over the review of the accounting for non-routine transactions, namely in this instance the evaluation and calculation of goodwill impairment. While we correctly identified that an impairment of our goodwill balance at June 30, 2017 existed, the calculation of such impairment was performed incorrectly. During the quarter ended September 30, 2017, we implemented additional controls over all non-routine transactions, including expanded analyses and reviews over periodic impairment assessments of our intangible assets, to ensure that these transactions are subject to full and complete analysis and review. These additional controls were in place during the review for potential impairment of our intangible assets as of September 30, 2017. Management has concluded that such additional controls were operating effectively as of September 30, 2017 and that the previously identified material weakness was remediated as of September 30, 2017.

 

There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II
 
OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company filed its Chapter 11 Case on January 26, 2016 and emerged from bankruptcy on May 5, 2016.  Please see the description of the Company’s Chapter 11 Case contained in “Part I - Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Bankruptcy and Emergence from Bankruptcy”, which is incorporated herein by reference.  Other than the Chapter 11 Case, the Company has not been party to, and its property has not been the subject of, any material legal proceedings required to be disclosed herein.

 

Item 1A. Risk Factors.

 

Not Applicable. 

 

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

 

During the quarter ended September 30, 2017, the Company exercised its rights under the Backstop Commitment in full and issued an aggregate of 12,800,000 shares of its common stock (the “Backstop Shares”) for gross proceeds of $3.0 million at an average price per share of $0.2344, as previously disclosed in its current reports on Form 8-K filed on August 14, 2017 and September 14, 2017.  Among the purchasers of Backstop Shares were the following significant shareholders, directors and officers of the Company:  Charles Sheedy (5,220,000 shares), Boyalife Investment Fund I, Inc. (3,150,000 shares), Scott Pittman (2,045,000 shares) and David Jorden (247,500 shares).

 

Item 3.     Defaults Upon Senior Securities.

 

None.

  

Item 4.     Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

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

 

 

 SIGNATURES

 

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

 

NUO THERAPEUTICS, INC.

 

Date: November 13, 2017	By:
	/s/ David E. Jorden
	David E. Jorden, Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

 

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
31		Certification of Principal Executive and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Principal Executive and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Nuo Therapeutics, Inc. Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 3017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and nine month periods ended September 30, 2017 and for the period from January 1, 2016 through May 4, 2016 and May 5, 2016 through September 30, 2016, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017, and for the period from January 1, 2016 through May 4 and May 5, 2016 through September 30, 2016 and (iv) Notes to the Unaudited Consolidated Financial Statements.

 

 

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