PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 (Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 (Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

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

 

 

NUO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The following discussion and analysis of the financial condition and results of operations of Nuo Therapeutics, Inc. ("Nuo Therapeutics," the "Company," "we," "us," or "our") should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”), filed with the U.S. Securities and Exchange Commission, or the Commission on April 16, 2019. 

 

Special Note Regarding Forward Looking Statements

 

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

 

●	the fact that our cash resources have now been depleted, with only $17,000 of cash left at September 30, 2019, the need for immediate and substantial additional financing (without which we face liquidation) and our ability to obtain that financing, including in light of our outstanding convertible notes, Series A preferred stock and the low share price and significant volatility with respect to our common stock - if we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock;
●	the significant likelihood that the Coverage and Analysis Group (CAG) of the Centers for Medicare & Medicaid Services (CMS) will not approve our request for reopening the national coverage determination (NCD) for diabetic foot ulcers on a timely basis, including in light of the August 7, 2019 email from CMS expressing significant reservations about the CED “study design and adherence to that design,... the wide variation in clinical care patients in both [treatment] groups…and the statistical analysis” and indicating that the NCD would likely not be reopened until sometime in 2020;
●	the lack of resources to adopt and execute an alternate study design and the low likelihood of the Company's ability to attract additional third-party capital for such purposes given the experience with CED to date and CMS’ inability or unwillingness to indicate what would constitute sufficient evidence warranting a favorable coverage determination;
●	significant uncertainty surrounding an agreed path forward for Aurix as an accessible product option for physicians treating Medicare beneficiaries with chronic wounds – in the absence of such a path, the Company will likely have to cease operations;
●	the fact that we have no significant assets left to monetize other than the Aurix System itself;
●	our limited sources of working capital;
●	whether CMS will increase the standard national payment rate for physicians for the use of Aurix so that it will provide an adequate payment to physicians to increase such use sufficiently;
●	our history of losses and expectation that, even if we were to obtain sufficient financing immediately to continue operating, we will incur losses in the foreseeable future;
●	our limited operating experience;
●	acceptance of our products by the medical community and patients;
●	our ability to obtain adequate reimbursement from third-party payors;
●	whether the advisory opinion issued in response to a petition to the Office of Inspector General, or OIG, of the Department of Health and Human Services, or DHHS, effectively permitting the petitioning hospital to reduce or waive Medicare patients’ 20% co-payment with respect to the Aurix CED program in certain cases, will in fact cause other healthcare providers to make similar waivers;
●	whether CMS will continue to consider their treatment of the geometric mean cost of the services underlying the Aurix System, or Aurix, to be comparable to the geometric mean cost of Ambulatory Payment Classification ("APC 5054") in the future;
●	our ability to maintain classification of Aurix as APC 5054;
●	whether CMS will continue to maintain the current national average reimbursement rate of $1,568 per Aurix treatment, and, more generally, our ability to be reimbursed at a profitable national average rate per application in the future;
●	uncertainties surrounding the price at which our common stock will continue trading on the OTC market (with such price having declined substantially) and the limited trading volume or liquidity of our common stock;
●	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;
●	our ability to contract with healthcare providers;

 

 

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

 

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.

 

Business Overview

 

As disclosed below under "Liquidity and Capital Resources," we have depleted our cash resources and our ability to continue to operate is in immediate jeopardy.

 

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 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.  CED programs have been employed for a variety of other therapies, including transcatheter aortic valve repair and cochlear implantation.  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.  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.  

 

Since early 2015, we have been primarily pursuing enrollment of patients into three clinical study protocols authorized and approved by CMS under CED.  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.  The Company’s collaboration with Restorix Health, Inc., or Restorix, initiated in 2016, was intended to expand patient enrollment in these three protocols. The Company and Restorix have been unsuccessful in meaningfully expanding patient enrollment in the three clinical study protocols and the collaboration is effectively on hold pending clarity on the outcome of our discussions with CMS described below under “Our Strategy”.

 

 

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

 

Our Strategy

 

In light of our unsuccessful discussions with CMS’ Coverage and Analysis Group (CAG) concerning our request to reopen the NCD for diabetic foot ulcers (DFU) in a timely manner based on the evidence collected under CED to date for this wound etiology, we are considering all possible options with regards to Aurix as a product and the Company’s continued viability.

 

On October 22, 2018, Company’s management met with representatives of CAG to discuss the status of the three study protocols (for diabetic foot ulcers, venous leg ulcers and pressure ulcers) totaling 2,200 patients under the Company’s CED program. The Company presented to CAG its view that completion of the studies to full enrollment was no longer considered practical and that completion of the CED studies as presently structured was untenable. The Company discussed with CAG a variety of difficulties and limitations that have arisen during the conduct of the CED program that have contributed to slow enrollment, closure of study sites, and physician engagement.

 

At the meeting and based on a suggestion from CAG representatives in prior conversations, we presented preliminary statistical data from the three protocols with an emphasis on diabetic foot ulcers (DFUs) as that protocol had the largest enrollment.  The preliminary analysis indicated that there was a statistically significant healing benefit for the treatment arm (Aurix plus Usual and Customary Care) versus Usual and Customary Care (UCC) alone.  Uniquely for these CED protocols intended to represent real world clinical practice, UCC was defined to include essentially any wound care therapy which the treating clinician and patient determined was in the best interests of promoting a healing benefit for the wound.

 

After our October 2018 meeting, we continued in periodic dialogue with CAG and responded to a request for further analysis of the study data for DFUs and to prepare a draft manuscript appropriate for submission to a peer-reviewed scientific journal that CAG  could use to perform a more substantive review of the study data and outcomes.   We submitted the draft manuscript to CAG in January 2019 and a revised draft in late March 2019 based on questions and clarification requested by CAG in early March.   A substantially similar manuscript was submitted for consideration to the wound care journal, Advances in Skin and Wound Care.  The accepted journal article entitled “A Pragmatic Randomized Controlled Trial Conducted Under Medicare’s Coverage with Evidence Development (CED) Paradigm Demonstrates Aurix Gel is an Effective Intervention for Chronic Diabetic Foot Ulcers” has the following highlights and was published in the September 2019 edition of Advances in Skin and Wound Care along with online access available at https://journals.lww.com/aswcjournal/pages/default.aspx:

 

	●	An Intent to Treat population of 129 patients with DFUs were randomized to either Aurix (n=66) or UCC (n=63) in 28 wound care centers.
	●	Given the intent to focus on standard clinical practice, the study included more severe wounds and a range of difficult comorbidities that are normally not allowed in traditional clinical trials conducted in wound care.
	●	84% of wounds were classified as Wagner grade 2 or 3 (an additional 8% Wagner grade 4) representing wound severity far more pronounced than seen in standard wound care clinical studies.
	●	48.5% (32) of Aurix treatment arm and 30.2% (19) of UCC only control arm wounds healed within the study’s 12-week treatment period (p=0.0304).
	●	In a smaller subgroup of 80 patients where Aurix was the only advanced wound care therapy utilized; i.e., only standard of care dressings and ointments with no usage of hyperbaric oxygen, negative pressure wound therapy, and/or cellular/tissue products:

	o	51% (26/51) of Aurix treatment arm wounds healed
	o	27.6% (8/29) of UCC only control arm wounds healed.

	●	Smoking (52%) and peripheral arterial disease (43%) were the most prevalent health risks and comorbidities present in the study population.
	●	There was no statistical association between these health risks/comorbidities and the treatment and control arms that would confound interpretation of the healing outcomes between the two arms.

 

We believe these data for DFUs as collected and analyzed under CED in combination with the other clinical evidence collected and published by the Company over the past several years provides sufficient evidence to warrant a re-opening of the NCD for DFUs and an ultimate determination that coverage of Aurix is appropriate and in the best interests of Medicare beneficiaries.   

 

We met again with CAG representatives on April 18, 2019 to further discuss the data collected for DFUs in the CED study including opposing interpretations of the appropriate statistical analysis of the data and the generalizable conclusions that might reasonably be made to Medicare beneficiaries as a whole and as a result of the data.   We indicated that we believed the data were remarkably consistent in indicating a positive treatment effect for Aurix especially in view of the wound severities and the health risks and co-morbidities present in the study population.   We reiterated the position emphasized in previous discussions that coverage determinations for autologous blood products used in the treatment of chronic, non-healing wounds should be based on clinical data and outcomes specific to individual products as unique product attributes can lead to differing healing outcomes and that PRP products are improperly considered as essentially the same products.

 

 

On May 8, 2019, we submitted a complete formal request for reconsideration in accordance with the requirements of the Federal Register Notice of August 2013.  On May 17, 2019, we submitted a letter memorandum in support of our reconsideration request summarizing the Company’s efforts over the past 10+ years to obtain a favorable coverage determination for Aurix based on Medicare’s standard of “reasonable and necessary”.  We expressed the view that the totality of clinical data collected over multiple years on healing outcomes from the use of Aurix does, in fact, provide sufficient evidence to warrant a favorable coverage decision because it improves clinically meaningful health outcomes for the Medicare population.  In conclusion, we asserted that a failure to grant a reconsideration request for Aurix that leads to a favorable coverage determination was equivalent to the denial of product access to Medicare beneficiaries by CMS and in direct opposition to recent CMS leadership statements that they "are committed to removing government barriers and modernizing regulations around new technologies to ensure safe and effective treatments are readily accessible to beneficiaries without delaying patient care.”

 

On June 13, 2019, CMS informed us that our reconsideration request was being accepted but that action would be postponed due to internal capacity restraints. CMS indicated that the August 2013 Federal Register Notice permitted them to “prioritize…requests based on the magnitude of the potential impact on the Medicare program and its beneficiaries…” CMS provided no indication at the time of when their resources would allow the request to be acted upon. On July 29, 2019, we met again with CMS to discuss the NCD situation including the timing of any action to be taken on the accepted reconsideration request.  In an email communication received on August 7, 2019, CMS expressed significant reservations about the CED “study design and adherence to that design,... the wide variation in clinical care patients in both [treatment] groups…and the statistical analysis.”  They indicated a recognition of the very real operational and execution challenges we faced in conducting the CED studies and offered to work with us on an alternate study design.  CMS also indicated in such communication that the NCD would likely not be reopened until sometime in 2020.

 

We presently lack the resources to adopt and execute an alternate study design and are skeptical of the ability to attract additional third-party capital for such purposes given the experience with CED to date and CMS’ inability or unwillingness to indicate what would constitute sufficient evidence warranting a favorable coverage determination.   We are presently considering all possible options with regards to Aurix as a product and the Company’s continued viability.

 

The expansion of Medicare reimbursement to patients outside of CED can be achieved only after a successful NCD re-determination. 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 a decision to reopen the NCD for diabetic foot ulcers would substantially increase the potential commercial value of Aurix. Thus, we continue to 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.

 

Even under any plausible scenario by which we can access sufficient short-term capital in a time frame necessary for us to avoid the complete cessation of normal business operations or liquidation in the immediate future, we will require significant additional capital to fully support an expanded commercialization initiative designed to increase market adoption and penetration of Aurix. 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 beyond what is discussed above concerning the recently analyzed CED data in DFUs 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.)

 

 

Results of Operations

  

Comparison of Three Months Ended September 30, 2019 and 2018

 

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

 

Revenue and Gross Profit 

 

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

 

		Three months ended September 30, 2019				Three months ended September 30, 2018
Product sales		$	58,000			$	65,000
Royalties			-				195,000
Total revenues			58,000				260,000
Product cost of sales			35,000				45,000
Total cost of sales			35,000				45,000
Gross profit		$	23,000			$	215,000
Gross margin %			40	%			83	%

 

Revenues decreased by $202,000 to $58,000 comparing the three months ended September 30, 2019 to the three months ended September 30, 2018. The decrease was primarily attributable to the absence of the $195,000 royalty revenue recognized in the prior year period for the Aldeflour royalty buyout. 

 

Overall gross profit decreased $192,000 to $23,000 while overall gross margin decreased to 40% from 83%, comparing the three months ended September 30, 2019 to the three months ended September 30, 2018. The decrease in gross profit primarily reflects the absence of the royalty revenue discussed above (with no associated cost).

 

Operating Expenses

 

Total operating expenses decreased approximately $565,000 to approximately $62,000 comparing the three months ended September 30, 2019 to the three months ended September 30, 2018. The decrease was primarily due to decreases in research and development and general and administrative expense components from reduced headcount and various cost saving initiatives. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased approximately $17,000 to zero comparing the three months ended September 30, 2019 to the three months ended September 30, 2018.

 

Research and Development

 

Research and development expenses decreased approximately $92,000 (97%) to approximately $3,000 comparing the three months ended September 30, 2019 to the three months ended September 30, 2018. The decrease was primarily due to reduced compensation expense as a result of the furlough of company employees effective May 1, 2019 and decreases in all clinical affairs costs.

 

General and Administrative

 

General and administrative expenses decreased approximately $456,000 (89%) to $59,000 comparing the three months ended September 30, 2019 to the three months ended September 30, 2018.  The decrease was primarily due to (i) an approximately $233,000 decrease in employee payroll compensation expense due to the furlough of company employees effective May 1, 2019 and (ii) the aggregate decrease across multiple expense categories including professional fees, IT services, and board fees resulting from the effective ceasing of normal business operations.

 

 

Other Income (Expense)

 

Other expense, net decreased by approximately $184,000 to approximately $54,000 comparing the three months ended September 30, 2019 to the three months ended September 30, 2018.  The increase was primarily due to a charge of approximately $235,000 for fair value of derivatives in excess of convertible notes in the prior year period partially offset by (i) $7,000 in cash fees and $20,000 increase in principal balance related to August 2019 amendments to the 2018 Convertible Notes treated as interest expense, and (ii) a difference of approximately $30,000 between a gain of sale of assets of approximately $14,000 for the three months ended September 30, 2018 compared to a loss on abandonment of assets of approximately $16,000 for the three months ended September 30, 2019.

 

 

Comparison of Nine Months Ended September 30, 2019 and 2018

 

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

 

Revenue and Gross Profit 

 

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

 

		Nine months ended September 30, 2019				Nine months ended September 30, 2018
Product sales		$	141,000			$	270,000
Royalties			-				288,000
Total revenues			141,000				558,000
Product cost of sales			97,000				132,000
Total cost of sales			97,000				132,000
Gross profit		$	44,000			$	426,000
Gross margin %			31	%			76	%

 

Revenues decreased by $417,000 to $141,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The decrease was primarily attributable to (i) a $129,000 decrease in Aurix product sales and (ii) the absence of royalty revenues due to the buyout of future Aldeflour related royalties effective September 30, 2018. Aurix revenues declined primarily due to meaningfully lower enrollment in the CED study protocols (and resulting fewer treatments) as study enrollment is now dramatically curtailed in light of ongoing discussions with CAG regarding the NCD reconsideration and as the Company's limited resources have negatively impacted viability perceptions. 

 

Overall gross profit decreased $382,000 to $44,000 while overall gross margin decreased to 31% from 76%, comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The decrease in gross profit primarily reflects (i) the absence of the royalty revenue discussed above (with no associated cost) and (ii) the negative impact on gross profit from the decreased Aurix product sales discussed above.

 

Operating Expenses

 

Total operating expenses decreased approximately $1,002,000 to approximately $1,087,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The decrease was primarily due to decreases in research and development and general and administrative expense components for employee compensation and various cost saving initiatives. A discussion of the various components of operating expenses follows below.

 

Sales and Marketing

 

Sales and marketing expenses decreased approximately $69,000 (70%) to approximately $30,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The decrease was primarily due to elimination of the remaining direct sales personnel early in the first quarter 2018.

 

 

Research and Development

 

Research and development expenses decreased approximately $313,000 (63%) to approximately $181,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018. The decrease was primarily due to reduced headcount in the clinical affairs area and the May 1, 2019 furlough of company employees resulting in corresponding lower compensation expenses and decreased clinical affairs costs as a result of reduced CED activity.

 

General and Administrative

 

General and administrative expenses decreased approximately $621,000 (41%) to $876,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018.  The decrease was primarily due to (i) an approximately$ 540,000 decrease in employee payroll compensation expense due to reduced headcount and the May 1, 2019 furlough of company employees, and (ii) an aggregate decrease across multiple expense categories including board fees, insurance, and information technology services resulting from the effective ceasing of normal business operations which was partially offset by an approximately $240,000 bad debt recovery in the prior year nine month period ending September 30, 2018.

 

Other Income (Expense)

 

Other expense, net decreased by approximately $38,000 to approximately $210,000 comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018.  The decrease was primarily due to a charge of approximately $235,000 for fair value of derivatives in excess of convertible notes in the prior year period partially offset by increased interest expense of approximately $185,000 comprised primarily of (i) approximately $24,000 increased amortization of debt discount and (ii) $69,000 in cash fees and $60,000 increase in principal balance related to the March, May, June and August 2019 amendments to the 2018 Convertible Notes.

 

  

Liquidity and Capital Resources

 

We have depleted our cash resources and our ability to continue to operate is in immediate jeopardy. At September 30, 2019, we had cash and cash equivalents of approximately $17,000, total current assets of approximately $24,000 and total current liabilities of approximately $1.3 million. As of January 27, 2019, we had cash and cash equivalents of approximately $10,000.  As of May 1, 2019, we ceased normal payroll practices with regards to our remaining employees and furloughed our employees pending access to additional resources and a resolution to the discussions with CMS concerning the Aurix reconsideration request.

 

We have a history of losses and are not currently profitable. Our ongoing operating revenues have continued to decline significantly since 2016. For the nine months ended September 30, 2019, we incurred a net loss of approximately $1.25 million.  As of September 30, 2019, our accumulated deficit was approximately $23.5 million and our stockholders' deficit was approximately $1.3 million.

 

During the year ended December 31, 2018, the Company was able to monetize several of its remaining assets, including through agreements with Rohto and with STEMCELL.  While the sale of those assets provided critical inflow of funds to alleviate the Company's ongoing liquidity concerns, the Company now has no further assets left to monetize. 

 

On May 28, 2018, we entered into a pair of agreements with Rohto Pharmaceutical Co., Ltd. (“Rohto”). Pursuant to a securities purchase agreement, dated as of May 28, 2018, the Company issued to Rohto, and Rohto agreed to purchase from the Company, 1,000,000 shares of the Company’s common stock at a price of $0.50 per share on June 11, 2018.

 

Convertible Note Issuance and Amendments 

 

On September 17, 2018, we entered into two separate financing transactions with two separate investors, Auctus Fund, LLC (“Auctus”) and EMA Financial, LLC (“EMA” and, collectively with Auctus, the “Convertible Note Investors”).  Pursuant to separate securities purchase agreements, the Company issued and sold to the Convertible Note Investors 12% convertible promissory notes, each in the principal amount of $175,000, for an aggregate purchase price of $315,800 (reflecting a combined $34,200 in original issue discount and transaction fees) (the “2018 Convertible Notes” or the “notes”). On September 17, 2018, the Company issued the notes to the Convertible Note Investors. Pursuant to the purchase agreements, the Company also issued to each Convertible Note Investor a warrant exercisable to purchase 233,333 shares of the Company’s common stock, for an aggregate of 466,666 shares of common stock, subject to adjustment as referenced below.

 

The 2018 Convertible Notes had an original maturity nine months from the date of issuance (June 17, 2019) and, in addition to any original issue discount, accrue interest at a rate of 12% per year. The maturity date of the note issued to EMA could be extended up to one year beyond the original maturity date at the option of EMA. The maturity date of the EMA note was extended until June 17, 2020 by EMA in conjunction with the third amendment to the convertible note discussed below.

 

 

Under the original terms of the notes, the Company may prepay the notes, in whole or in part, for 130% of outstanding principal and interest ending on the date that is 90 days following the date of issuance, and for 145% of outstanding principal and interest at any time commencing on the date that is 91 days following the date of issuance and ending on the date that is 180 days following the date of issuance, to the extent that it is not then in default under the notes. Under the original terms of the notes, beginning on the date that is 181 days following the date of issuance, the Company may no longer prepay the notes. Under the original terms of the notes, after six months from the date of issuance, the Convertible Note Investors may convert the notes, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price corresponding to a 40% discount to the average of the two lowest trading prices of the common stock during the 25 trading days prior to the conversion, subject to certain adjustments and price-protection provisions contained in the notes, including full-ratchet anti-dilution protection in the case of dilutive issuance of securities that do not meet the requirements of “exempt issuance” as defined in the notes.

 

On March 19, 2019, May 3, 2019, June 10, 2019, and August 6, 2019, the Company entered into amendments to the 2018 Convertible Notes. The amendments extended the date when the Company may prepay the notes and deferred the date upon which the Convertible Note Investors can initiate conversion of the notes into common shares of the Company pursuant to the notes’ terms until September 17, 2019 in the case of the fourth amendment.  The Company paid the Convertible Note Investors cumulative amendment fees totaling $69,000 representing approximately 20% of the face value of the 2018 Convertible Notes and agreed to an increase in the principal balance of each note to $205,000. The maturity date of the Auctus note was also extended until September 17, 2019.  See Fifth Amendment to 2018 Convertible Notes below for settlement of the convertible note obligations entered in December 2019.

 

The Company is required to maintain authorized and unissued shares of its common stock equal to seven times the number issuable upon conversion of the notes. Each note contains potential additional discounts to the conversion price upon the occurrence of an event of default or specified other events related to the trading status of the Company’s common stock (which would result in a higher number of shares being issued if converted).

 

The notes include certain event of default provisions, a default interest rate of 24% per year and certain penalties for specified breaches that would be added to the principal amount of such note. Upon the occurrence of an event of default, the Investors may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. The notes also restrict the Company’s ability to make distributions to its shareholders, repurchase its shares, borrow funds, or sell its assets (with limited exceptions).

 

The warrants are exercisable at any time, at an exercise price per share equal to $0.15, subject to certain adjustments and price protection provisions (including full ratchet anti-dilution protection) contained in the warrants. The warrants have five-year terms.

 

The transaction documents also include most favored nations provisions and limitations on the Company’s ability to offer additional securities (unless the use of proceeds is to repay the notes).

 

Senior Secured Note Issuance

 

On November 15, 2019 and December 6, 2019, the Company entered into note purchase agreements with certain individual accredited investors (the “Senior Note Investors”) for the issuance and sale to the Investors of 12% senior secured promissory notes (the “Senor Notes”), in the aggregate principal amount of $305,000 with an overall $500,000 cap under the note purchase agreements. Pursuant to the purchase agreements, the Company also issued to the Senior Note Investors warrants exercisable to purchase an aggregate 457,500 shares of the Company’s common stock, subject to adjustment as referenced below.

 

In conjunction with the note issuance, the Company granted a first-priority security interest in all the assets of the Company but fundamentally consisting of the Aurix asset including all regulatory files and approvals and relevant intellectual property. The purchase agreements contain certain representations, warranties and covenants by, among and for the benefit of the respective parties. The purchase agreements also provide for customary indemnification of the Senior Note Investors by the Company.

 

The notes have a maturity date of June 30, 2020 and accrue interest at a rate of 12% per year. The Company may prepay the Senior Notes, in whole or in part, at any time. The warrants are exercisable at any time, at an exercise price per share equal to $0.40, subject to certain adjustments and price protection provisions (including full ratchet anti-dilution protection) contained in the warrants. The warrants have five-year terms.

 

The use of proceeds from the Notes beyond the initial $50,000 and up to an estimated aggregate amount of $270,000 (for the sake of clarity, such aggregate amount is not deemed to include the initial $50,000) was specifically dedicated to payment to the Convertible Note Investors, in a final amount to be agreed between the Company and the Convertible Note Investors such that the 2018 Convertible Notes are considered retired and no longer in effect.

 

 

Fifth Amendment to 2018 Convertible Notes

 

On December 10, 2019, the Company entered into fifth amendments to the 2018 Convertible Notes pursuant to which the Company’s obligations under such notes will be extinguished in their entirety upon receipt by each Convertible Note Investor of (i) a cash payment of $110,000 and (ii) 175,000 unrestricted shares of the Company’s common stock no later than February 10, 2020. The Company made the required cash payments totaling $220,000 on December 10, 2019. Issuance of the common shares is expected to occur shortly after the filing of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2019.

 

Current Liquidity Situation

 

Our continuing losses and depleted cash raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds immediately in order to continue to conduct business operations.   If we are unable within the next 90 days to raise substantial additional funds, we will likely be forced to permanently cease operations and liquidate our assets. If we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock as a result of the outstanding 2018 Convertible Notes, the Senior Notes, and the liquidation preference of the holder of our Series A Preferred Stock.

 

Any equity financings, to the extent permitted under the terms of the 2018 Convertible Notes and the Certificate of Designations for our Series A Preferred Stock, 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 2018 Convertible Notes and the Certificate of Designations for our Series A Preferred Stock) may require us to comply with onerous financial covenants and restrict our business operations.   The 2018 Convertible Notes, for example, contain severely restrictive covenants and default provisions.  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 equity or debt financings or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.

 

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

 

Our business is subject to certain risks and uncertainties including those described in "Item 1.A Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Cash Flows

 

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

 

		Nine months ended September 30, 2019				Nine months ended September 30, 2018
Cash flows used in operating activities		$	(620,000	)		$	(1,261,000	)
Cash flows used in investing activities		$	-			$	2,000
Cash flow provided by financing activities		$	-			$	816,000

  

Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2019 of approximately $620,000 primarily reflects our net loss of approximately $1,253,000 adjusted by (i) approximately $434,000 increase for changes in operating assets and liabilities, (ii) approximately $101,000 combined non-cash debt discount amortization and increase in the convertible note principal balance, and (iii) approximately $75,000 of depreciation expense.

 

Cash used in operating activities for the nine months ended September 30, 2018 of approximately $1,261,000 million primarily reflects our net loss of approximately $1,910,000 million adjusted by (i) approximately $231,000 net change in fair value of derivative liabilities, (ii) approximately $77,000 of depreciation expense, and (iii) an approximately $538,000 increase for changes in operating assets and liabilities partially offset by an approximately $240,000 bad debt recovery.

 

Investing Activities Investing Activities

 

We did not have any material investing activities for the nine months ended September 30, 2019 and 2018. 

 

 

Financing Activities

 

We did not have any financing activities for the nine months ended September 30, 2019.

 

Cash provided by financing activities for the nine months ended September 30, 2018 of approximately $816,000 represents the sale of 1,000,000 shares of common stock to Rohto for net proceeds of $500,000 in June 2018 and net proceeds of approximately $316,000 from the issuance of two convertible notes in September 2018.

 

Inflation

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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

 

Use of Estimates

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

 

Revenue Recognition

The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

 

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

 

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

 

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

 

Adopted Accounting Guidance

For a discussion of significant accounting guidance recently adopted, see Note 2 of the Notes to Unaudited Consolidated Financial Statements included elsewhere herein.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable. 

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Our management has carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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

 

 

PART II
 
OTHER INFORMATION

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Not Applicable.

 

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

 

None. 

 

Item 3.    Defaults Upon Senior Securities.

 

None.

  

Item 4.    Mine Safety Disclosures.

 

Not applicable. 

 

Item 5.    Other Information.

 

None.

 

Item 6.    Exhibits.

 

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

 

Exhibit Number		Description
10.1		Convertible Promissory Note Fourth Amendment with Auctus Fund LLC dated August 6, 2019 (previously filed on August 7, 2019 as Exhibit 10.1 to the Current Report on Form 8-K and incorporated by reference herein).
10.2		Convertible Promissory Note Fourth Amendment with EMA Financial LLC dated August 6, 2019 (previously filed on August 7, 2019 as Exhibit 10.2 to the Current Report on Form 8-K and incorporated by reference herein).
10.3		Form of Senior Secured Promissory Note (previously filed on November 20, 2019 as Exhibit 4.1 to the Current Report on Form 8-K and incorporated by reference herein)
10.4		Form of Warrant (previously filed on November 20, 2019 as Exhibit 4.2 to the Current Report on Form 8-K and incorporated by reference herein)
10.5		Form of Security Agreement (previously filed on November 20, 2019 as Exhibit 4.3 to the Current Report on Form 8-K and incorporated by reference herein)
10.6		Note Purchase Agreement dated November 15, 2019 (previously filed on November 20, 2019 as Exhibit 10.1 to the Current Report on Form 8-K and incorporated by reference herein)
10.7		Convertible Promissory Note Fifth Amendment with Auctus Fund LLC dated December 10, 2019 (previously filed on December 12, 2019 as Exhibit 10.1 to the Current Report on Form 8-K and incorporated by reference herein)
10.8		Convertible Promissory Note Fifth Amendment with EMA Financial LLC dated December 10, 2019 (previously filed on December 12, 2019 as Exhibit 10.2 to the Current Report on Form 8-K and incorporated by reference herein)
31		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Nuo Therapeutics, Inc. Form 10-Q for the quarter ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and nine month periods ended September 30, 2019 and 2018, (iii) Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine month periods ended September 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2019 and 2018 and (v)  Notes to the Unaudited Consolidated Financial Statements.

 

 

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: January 31, 2020
By:	/s/ David E. Jorden
	David E. Jorden Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

 

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