aurx20211231b_10k.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal years ended December 31, 2019, 2020 and 2021
or
For the transition period from _______________ to _______________
Commission file number 000-28443
NUO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
8285 El Rio, Suite 190
Houston, TX77054
(Address of principal executive offices) (Zip Code)
(346) 396-4770
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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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 every Interactive Data File required to be submitted 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 such files).
Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as reported on the OTCQB and OTC Pink tiers of the OTC Markets Group, LLC for the registrant’s common stock, as of June 28, 2019, June 30, 2020, and June 30, 2021, the last business day of the registrant’s second fiscal quarter of 2019, 2020 and 2021 was approximately $1.612 million, $0.812 million and $4.758 million, respectively. There were no shares of non-voting common equity outstanding as of June 28, 2019, June 30, 2020 or June 30, 2021.
As of March 15, 2022, the number of shares outstanding of the registrant’s common stock was 37,124,205.
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 ☐
DOCUMENTS INCORPORATED BY REFERENCE
None.
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NUO THERAPEUTICS, INC.
TABLE OF CONTENTS
Explanatory Note
Special Note Regarding Forward-Looking Statements
Trademark Notice
PART I 1
ITEM 1. Business 1
ITEM 1A. Risk Factors 10
ITEM 1B. Unresolved Staff Comments 18
ITEM 2. Properties 18
ITEM 3. Legal Proceedings 18
ITEM 4. Mine Safety Disclosures 18
ITEM 6. Selected Financial Data 20
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 34
ITEM 8. Financial Statements and Supplementary Data 34
ITEM 9A. Controls and Procedures 35
ITEM 9B. Other Information 36
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 36
PART III 37
ITEM 10. Directors, Executive Officers and Corporate Governance 37
ITEM 11. Executive Compensation 40
ITEM 14. Principal Accounting Fees and Services 48
ITEM 15. Exhibits and Financial Statement Schedules 49
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Explanatory Note
This Annual Report on Form 10-K (this “Annual Report” or this “Form 10-K”) is a comprehensive filing for the fiscal years ended December 31, 2019, 2020 and 2021 by Nuo Therapeutics, Inc. (“Nuo,” the “Company,” “we,” “us” or “our,” unless the context indicates otherwise). It is being filed by us in order to move toward becoming current in our filing obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This is our first periodic filing with the Securities and Exchange Commission (the “SEC”) since we filed a Form 10-Q for the Quarterly Period ended September 30, 2019 on January 31, 2020.
The delinquencies with respect to our Annual Reports on Form 10-K for the years ended December 31, 2020, and December 31, 2019 (the “2020 and 2019 Reports”) were due to the Company’s limited resources and decision to cease daily operating activities while awaiting a determination concerning the reconsideration request submitted to the Centers for Medicare and Medicaid Services for reimbursement coverage for the Company’s Aurix product. Because of the delay in filing our 2020 and 2019 Reports, we did not timely file our Quarterly Reports on Form 10-Q for the first three quarters of our 2020 and 2021 fiscal years or the Annual Reports on Form 10-K for the fiscal years ended December 31, 2020, and December 31, 2019.
In order to provide stockholders a composite presentation of information, this filing includes more information than would routinely be included in an Annual Report on Form 10-K. This Form 10-K includes:
We believe that presenting all of the information for the periods indicated above in this Form 10-K will allow investors and others to review all pertinent data in a single presentation. We have not filed and do not intend to file Quarterly Reports on Form 10-Q for any of our 2021 and 2020 fiscal quarters.
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Special Note Regarding Forward-Looking Statements
Certain statements, other than purely historical information, in this Annual Report (including the section titled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) constitute “forward-looking statements”. 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,” “will,” “will be,” “will continue,” “will likely result,” “could,” “may” and words of similar import. These statements reflect the Company’s current view of future events and are subject to certain risks and uncertainties as noted in this Annual Report and in other reports filed by us with the SEC, including Forms 8-K and 10-Q. These risks and uncertainties include, among others, the following:
● our limited revenue base and sources of working capital;
● our limited operationg experience;
● our ability to continue as a going concern;
● the dilutive impact of raising additional equity or debt;
● acceptance of our product by the medical community and patients;
● our ability to obtain adequate reimbursement from third-party payors;
● our ability to contract with healthcare providers;
● our ability to protect our intellectual property;
● our compliance with governmental regulations;
● our ability to successfully sell and market the Aurix System;
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from those anticipated in these forward-looking statements.
In addition to the risks identified under the heading “Item 1A. Risk Factors” in this Annual Report and the other filings referenced above, other sections of this report may include additional factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
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Trademark Notice
The Company owns or has rights to various copyrights, trademarks and trade names used in its business, including, but not limited to, Aurix®. This Annual Report also includes discussions of or references to other trademarks, service marks, and trade names of other companies, including, but not limited to, the Angel Whole Blood Separation System®. Other trademarks and trade names appearing in this Annual Report are the property of the holder of such trademarks and trade names.
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PART I
ITEM 1. Business
Corporate Overview
Nuo Therapeutics, Inc. is a Delaware corporation organized in 1998 under the name Informatix Holdings, Inc. In 1999, Autologous Wound Therapy, Inc., an Arkansas Corporation, merged with and into Informatix Holdings, Inc. and the name of the surviving corporation was changed to Autologous Wound Therapy, Inc. In 2000, Autologous Wound Therapy, Inc. changed its name to Cytomedix, Inc. (“Cytomedix”). In 2001, Cytomedix, filed for bankruptcy under Chapter 11 of the United States (“U.S.”) Bankruptcy Code, after which Cytomedix was authorized to continue to conduct its business as a debtor and debtor-in-possession. Cytomedix emerged from bankruptcy in 2002 under a Plan of Reorganization. In September 2007, Cytomedix received 510(k) clearance for the Aurix System (“Aurix”), formerly known as the AutoloGelTM System, from the U. S. Food and Drug Administration (“FDA”). In April 2010, Cytomedix acquired the Angel Whole Blood Separation System (“Angel”) and the Angel Business, from Sorin Group USA, Inc. In February 2012, Cytomedix, acquired Aldagen, Inc. (“Aldagen”), a privately held developmental cell-therapy company located in Durham, NC. In 2014, Cytomedix changed its name to Nuo Therapeutics, Inc. In 2016, Nuo filed for and emerged from bankruptcy under Chapter 11 as described below under “- 2016 Bankruptcy and Emergence from Bankruptcy.” Effective May 1, 2019, Nuo furloughed its remaining employees and ceased standard operational activities as it awaited developments concerning its reconsideration request with the Centers for Medicare & Medicaid Services (“CMS”) regarding Medicare coverage for Aurix. Based on a favorable National Coverage Determination issued in April 2021, Nuo initiated restart activities for the business beginning in October 2021 with an expectation that the Aurix product will be available for commercial sale by May 2022. Aldagen is a non-operational, wholly owned subsidiary of Nuo. Our principal offices are presently located in Houston, Texas.
Our Business
We are a regenerative therapies company focused on 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 (i.e., from self, the patient’s own) 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 effective separation of autologous blood to produce a platelet-based therapy for the chronic wound care market. This offering is known as “Aurix” or the “Aurix System”. The FDA cleared the Aurix System for marketing in 2007 as a device under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FDCA”). Aurix is one of two platelet derived products 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 $10.8 billion global market in 2021 with the North American market estimated at approximately $4.15 billion in 2020. Estimates remain that 1-2% of population in the developed countries will suffer from a chronic wound at least once in their lifetime. According to the National Institute of Health, treatment of diabetic foot ulcers cost an estimated $9-$13 billion annually in the U.S. alone. An aging population and the still increasing prevalence of diabetes suggests a continued increase in the patient population at risk of developing chronic, non-healing wounds.
The Aurix System produces a platelet rich plasma (“PRP”) gel at the point of care using the patient’s own platelets and plasma sourced from a small draw of peripheral blood. 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.
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In 2012, a Medicare National Coverage Determination (“NCD”) from CMS reversed a twenty-year old non-coverage decision for autologous blood derived products used in wound care. This NCD allowed for Medicare coverage under the Coverage with Evidence Development (“CED”) program. CED programs have been employed for a selected number 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 was reimbursed by Medicare when health outcomes data were 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.
On May 17, 2019, we transmitted a letter memorandum to CMS’ Coverage and Analysis Group (“CAG”) in support of our complete formal request for reconsideration of the then existing national coverage determination based on clinical data collected and published under the CED program. The complete formal public request for reconsideration was made on May 8, 2019 in accordance with the applicable requirements.
On April 13, 2021, CMS issued a final coverage decision memo indicating that Medicare would nationally cover autologous PRP for the treatment of chronic non-healing diabetic wounds for a duration of 20 weeks under Section 1862(a)(1)(A) of the Social Security Act. This coverage applies when using devices whose FDA-cleared indications include the management of exuding cutaneous wounds, such as diabetic ulcers. Coverage of autologous PRP beyond 20 weeks for diabetic foot ulcers and for the treatment of all other chronic, non-diabetic, non-healing wounds will be determined by local Medicare Administrative Contractors.
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 2022, the CMS national average reimbursement rate for the Aurix System is $1,749 per treatment, which we believe provides appropriate payment to facilities for product usage. We will market the Aurix System at an approximate cost of $800 per treatment to wound care providers.
Our Strategy
Upon the expected re-initiation of commercial sales activities by May 2022, our immediate focus will be on engagement with providers treating chronic non-healing wounds to describe the clinical benefits we believe result from the use of Aurix in the treatment of complex wounds. Increasing physician awareness of the differentiating attributes of Aurix will be key to establishing a base of product revenues upon which to grow.
Over the period from the cessation of normal operational activities in May 2019 through the final NCD in April 2021 leading to the decision to reinitiate business activities, the Company was focused on engaging with CMS as appropriate, monitoring the developments concerning our reconsideration request, advancing our positions during various public comment periods and maintaining overall yet limited corporate viability in the event that a sufficiently favorable coverage and reimbursement setting developed for Aurix.
In addition, the Company took actions during this period to address its capital structure by eliminating both its debt and exchanging the Series A Preferred Stock issued at the time of the May 2016 recapitalization for common stock.
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.
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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), which 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:
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Aurix Licensing and Collaboration Arrangements
On October 24, 2018, the Company entered into an Agreement for Sale of Intellectual Property (the “IP Sale Agreement”) and a License and Service Agreement (the “Service Agreement” and collectively the “Rohto Agreements”) with Rohto Pharmaceutical Co., Ltd. (“Rohto”), the licensee of the exclusivity rights to Aurix in Japan.
The IP Sale Agreement provided for the sale to Rohto of the intellectual property under license pursuant to the amended license and distribution agreement (consisting of two of our patents in Japan, our know-how in Japan and trademarks for Aurix and AutoloGel (the prior product name for Aurix) in Japan). The IP Sale Agreement provided that, upon the completion of such transfers and payments, the amended license and distribution agreement would be terminated. Under the IP Sale Agreement, we are subject to a five-year non-compete in Japan.
Under the Service Agreement, we agreed to the sale of a patent application in Brazil, the grant of a royalty-free license to our know how in the Field of Use in Brazil and India, and the grant of a royalty-free non-exclusive license to the use of our device patent in the Field of Use in the U.S., Canada, and Mexico. The latter license becomes effective if and only if we cease our business with respect to the Aurix System or grant a non-exclusive license to a third party to use the device patent in the Field of Use in the U.S., Canada, and Mexico. The “Field of Use” is defined as the use of the Aurix System and a modified medical device being developed by Rohto under the Japan patents sold to Rohto for all wound care and topical dermatology applications in human and animal medicine. Under the Service Agreement, we are subject to a non-compete in Brazil and India.
The aggregate consideration received under the Rohto Agreements was $750,000.
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Effective as of May 5, 2016, the Company and Boyalife Hong Kong Ltd. (“Boyalife”), an entity affiliated with the Company’s significant stockholder, Boyalife Investment Fund I, Inc., entered into an Exclusive License and Distribution Agreement (the “Distribution Agreement”) with an initial term of five years, unless the Distribution Agreement is terminated earlier in accordance with its terms. Under the Distribution 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. In particular, Boyalife is entitled to import, use for development, promote, market, sell and distribute the Aurix Products in greater China (China, Hong Kong, Taiwan, and Macau) for all regenerative medicine applications, including but not limited to wound care and topical dermatology applications in human and veterinary medicine. For purposes of the Distribution Agreement, “Aurix Products” are defined as the combination of devices to produce a wound dressing from the patient’s blood, as of May 5, 2016 consisting of centrifuge, wound dressing kit and reagent kit. Under the Distribution Agreement, Boyalife is obligated to pay the Company (a) $500,000 within 90 days of approval of the Aurix Products by the China Food and Drug Administration, but no earlier than December 31, 2018, and (b) a distribution fee per wound dressing kit and reagent kit of $40, payable quarterly, subject to an agreement by the parties to discuss in good faith the appropriate distribution fee if the pricing of such kits exceeds the current general pricing in greater China. Under the Distribution 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 Distribution Agreement.
Customer Concentration
As a result of the circumstances described above, we had no revenues in 2021 or 2020. In 2019, our revenues consisted of product sales of approximately $146,000 as we concluded study treatments under the CED program and sold the remaining Aurix inventory to select wound care facilities.
Licenses and Property Rights
Nuo relies on a combination of trademarks, trade secrets, copyright laws as well as confidentiality agreements, contractual provisions, and other similar measures, to establish and protect its business interests.
On September 28, 2018, Aldagen entered into a first amendment (the “Amendment”) to the existing license agreement (the “License Agreement”) with STEMCELL Technologies Canada, Inc. (previously known as STEMCELL Technologies, Inc.) (“STEMCELL”) to provide for the buyout by STEMCELL of the remaining royalty obligations under the License Agreement in exchange for a payment of $195,000. Upon receipt of the payments of $100,000 on October 31, 2018 and $95,000 on December 15, 2018, STEMCELL had a fully paid up, irrevocable and royalty free license to the intellectual property under the License Agreement for the Aldeflour product sold by STEMCELL. Aldagen additionally agreed to the transfer of the Aldeflour trademark to STEMCELL upon receipt of the final payment described above.
Government Regulation
Government authorities in the U.S., Canada, the European Union, and other countries extensively regulate pharmaceutical products, biologics, and medical devices. The Company’s products and product candidates are subject to approval or clearance by the governing bodies prior to and during the marketing and distribution of a product. Regulatory requirements apply to, but are not limited to, research and development, safety and efficacy, clinical studies, manufacturing, labeling, distribution, advertising and marketing, and the import and export of products. Before a product candidate is approved by the governing bodies for commercial marketing, rigorous preclinical and human clinical testing may be necessary to conduct to determine the safety and efficacy or effectiveness of the product. If the Company fails to comply with the applicable laws and regulations at any time during the product development process, approval, or clearance process, or during commercialization, it may become subject to administrative and/or judicial sanctions. These sanctions may include, but are not limited to, refusal to approve or clear pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of the Company’s operations, injunctions, fines, civil penalties and/or criminal prosecution. Any enforcement action could have a material adverse effect on the Company.
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Medical Device Regulation
The Company expects to again manufacture and distribute the Aurix System again by May 2022. As such, this and future products manufactured and/or distributed by the Company may be subject to regulations by the applicable governing bodies, including but not limited to, the FDA, Health Canada, the European Medicines Agency, the Japanese Ministry of Health & Welfare, and other regulatory agencies. The Company currently has no meaningful business development initiatives outside of the U.S. Each of the foreign governing bodies noted above serve a similar function as the FDA. As such, the Company and its products and product candidates are subject to the regulations enforced by the outside governing bodies. These regulations include, but are not limited to, product clearance, documentation requirements, good manufacturing practices and medical device reporting. Labeling and promotional activities are also subject to regulation by the U.S. Federal Trade Commission, in certain circumstances. Current enforcement policies prohibit the marketing of approved medical devices for unapproved uses. Each governing body reviews the labeling and advertising of medical devices to ensure that unapproved uses are not promoted. Before a new medical device can be introduced to the market, the manufacturer must obtain clearance or approval from the applicable regulatory agency, depending upon the device classification. In the U.S., medical devices are classified into one of three classes — Class I, II, or III. The regulations enforced by the FDA and/or the appropriate governing bodies to the medical device(s) provide reasonable assurance that the device is safe and effective. In the U.S., Class I devices are non-critical products that the FDA believes can be adequately regulated by “general controls” which include provisions relating to labeling, manufacturer registration, defect notification, records and reports, and current good manufacturing practices, or cGMP, based on the FDA’s Quality Systems Regulations. Most Class I devices are exempt from pre-market notification and some are also exempt from cGMP requirements. Class II devices are products for which the general controls of Class I devices, by themselves, are not sufficient to assure safety and effectiveness and, therefore, require additional controls. Additional controls for Class II devices may include performance standards, post-market surveillance patient registries, and the use of FDA guidelines. Standards may include both design and performance requirements. Class III devices have the most restrictive controls and require pre-market approval by the FDA. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. All of the governing bodies with responsibility over the Company’s products have the ability to inspect medical device manufacturers, order recalls of medical devices in some circumstances, seize non-complying medical devices, and to pursue prosecution of either civil or criminal violations.
Section 510(k) of the Federal Food, Drug, and Cosmetic Act (“FDCA”) requires individuals or companies manufacturing medical devices intended for human use to file a notice with the FDA at least ninety days before intending to introduce the device into the market. This notice, commonly referred to as a 510(k) premarket notification, must identify the type of classified device into which the product falls, the class of that type, and a specific product already being marketed or cleared by the FDA and to which the product is “substantially equivalent.” In some instances, the 510(k) must include data from human clinical studies to establish “substantial equivalence.” The FDA must agree with the claim of “substantial equivalence” before the device can be marketed. The statutory time frame for clearance of a 510(k) is ninety days, though it often takes longer. Nuo currently only markets a product that is subject to 510(k) clearance.
The Company expects to market the Aurix System by May 2022, consisting of the Aurix Wound Dressing Kit, Aurix Reagent Kit, and Aurix System Centrifuge II. Each component of the Aurix System is a legally marketed product that has been cleared by FDA. The Aurix System Centrifuge II, when used with the Aurix Wound Dressing Kit and Aurix Reagent Kit, are suitable for use on exuding wounds such as leg ulcers, pressure ulcers and diabetic ulcers, and for the management of mechanically or surgically debrided wounds.
As a specification developer, manufacturer, and distributor of medical devices, the Company complies with other regulations and standards, such as the FDCA and implementing regulations set forth in 21 CFR et seq. and also ISO 13485. As a manufacturer and distributor of medical devices, the Company, and in some instances its subcontractors, is required to register its facilities and products manufactured annually with the appropriate governing bodies and certain state agencies. Additionally, the Company is subject to periodic inspections by the governing bodies to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state, or local agencies. Accordingly, manufacturers such as the Company must continue to expend time, money, and effort around production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
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Fraud and Abuse Laws
The Company may also be indirectly subject to federal and state anti-kickback and physician self-referral laws. Federal physician self-referral legislation (commonly known as the Stark Law) prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain designated health services (“DHS”) if the physician or an immediate family member has a financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral, and any person collecting any amounts in connection with an unlawful referral is obligated to refund such amounts. CMS has issued numerous regulations containing exceptions to the prohibitions of the Stark Law. If a physician and a DHS entity have financial relationship subject to the Stark Law, then an exception must be met or else the DHS entity cannot bill for the service. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. The penalties for violating the Stark Law also include civil monetary penalties of up to $15,000 per referral and possible exclusion from federal health care programs such as Medicare and Medicaid. Violations of the Stark Law have also been the basis for False Claims Act actions, discussed below. Various states have corollary laws to the Stark Law (so-called “baby Stark” laws), including laws that require physicians to disclose any financial interest they may have with a health care provider to their patients when referring patients to that provider. Both the scope and exception for such laws vary from state to state.
The Company may also be subject to federal and state anti-kickback laws. Section 1128B(b) of the Social Security Act, commonly referred to as the Anti-Kickback Law, prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal health care program, such as Medicare and Medicaid. The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are otherwise lawful in businesses outside of the health care industry. The Office of the Inspector General (“OIG”) of the U.S. Department of Health and Human Services (“DHHS”) has issued regulations, commonly known as “safe harbors” that set forth certain provisions which, if fully met, will assure health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Although full compliance with these provisions ensures against prosecution under the Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. As with the Stark Law, violations of the Anti-Kickback Law can result in a False Claims Act action. Many states have adopted laws similar to the federal Anti-Kickback Law, and some of these state prohibitions apply to patients for health care services reimbursed by any source, not only federal health care programs such as Medicare and Medicaid.
In addition, there are other U.S. health care fraud laws to which the Company may be subject that prohibit knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any health care benefit program, including private payers (“fraud on a health benefit plan”) and that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. These laws apply to any health benefit plan, not just Medicare and Medicaid.
The Company may also be subject to other U.S. laws that prohibit submitting, or causing to be submitted, claims for payment or causing such claims to be submitted that are false. Violation of these false claims’ statutes may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded state health programs. These statutes include the federal False Claims Act, which prohibits the knowing filing of a false claim (or causing the submission of a false claim) or the knowing use of false statements to obtain payment from the U.S. federal government. Under provisions of the Affordable Care Act, the failure to report and refund an overpayment to the Medicare or Medicaid programs within 60 days of the identification of the overpayment may also be an obligation subjecting the defendant to a False Claims Act action. Finally, a recent U.S. Supreme Court case, Universal Health Services v. United States ex rel. Escobar, upheld the “implied false certification” theory under which a defendant submits a claim for payment that makes a specific representation about the goods or services provider, but fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement that would be material to the Government’s payment decision. When an entity is determined to have violated the False Claims Act, the entity must pay three times the actual damages sustained by the government, plus mandatory civil penalties. Suits filed under the False Claims Act can be brought by an individual on behalf of the government (a “qui tam action”). Such individuals (known as “qui tam relators”) may share in the amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the False Claims Act. “Qui tam” actions have increased significantly in recent years causing greater numbers of health care companies to have to defend false claim actions, pay fines or be excluded from the Medicare, Medicaid or other federal or state health care programs as a result of an investigation arising out of such action.
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Several states also have referral, fee splitting and other similar laws that may restrict the payment or receipt of remuneration in connection with the purchase or rental of medical equipment and supplies. State laws vary in scope and have been infrequently interpreted by courts and regulatory agencies but may apply to all health care products and services, regardless of whether Medicaid or Medicare funds are involved.
Employees
The Company had only one part-time non-compensated employee as of December 31, 2021. As of January 1, 2022, the Company initiated limited hiring practices and, as of the date of filing of this Annual Report on Form 10-K, has five employees of which four are compensated as salaried employees. None of the Company’s employees is covered by a collective bargaining agreement or represented by a labor union. The Company considers its employee relations to be good.
Research and Development
During the years ended December 31, 2021 and 2020, we incurred no costs for research and development activities. For the year ended December 31, 2019, we incurred approximately $181,000 of costs for research and development activities.
Competition
While Aurix has limited competition in the chronic wound care market from any other FDA cleared platelet derived products, we face competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors in the areas of advanced wound care dressings, wound care devices, and wound care biologics. Leading companies in the advanced wound care market include Smith and Nephew, 3M, MoInlycke, and ConvaTec. Leading competitors in the wound care market that offer other biologic products such as tissue-based products include companies such as MiMedx, Organogenesis, Integra Life Sciences, as well as a significant number of smaller companies. While we believe that Aurix can compete favorably on the basis of broad application across multiple wound etiologies, we expect that many physicians and allied professionals will continue to employ other treatment approaches and technologies, separately and in combination, in an attempt to treat chronic and hard-to heal wounds. The chronic wound market has many therapies that compete with Aurix that have established habitual use patterns and provider contracts to encourage standardized use. Furthermore, other companies have developed or are developing products that could be in direct future competition with our current product line. We may not be able to compete effectively against such companies. Many of these companies have substantially greater capital resources, larger marketing staffs and more experience in commercializing products than we do. See “Item 1A.Risk Factors – Risks Relating to Our Business, Industry, and Regulatory Approval of Our Product - Our Product Has Existing Competition in the Marketplace.”
Raw Materials
A reagent, bovine thrombin (Thrombin JMI), used for our Aurix product is available exclusively through Pfizer. Pfizer may unilaterally raise the price for the reagent. If a temporary or permanent interruption in the supply of the reagent were to occur, or the manufacturing costs charged by Pfizer exceed what we can reasonably afford, it would have a material adverse effect on our business.
2016 Bankruptcy and Emergence from Bankruptcy
On January 26, 2016, the Company filed a voluntary petition in the U.S. Bankruptcy Court for the District of Delaware, or the Bankruptcy Court, seeking relief under Chapter 11 of Title 11 of the U.S. 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.
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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. Unless the context otherwise indicates, references in this Annual Report to common stock are to the 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 had no stated maturity date, was not convertible or redeemable and carried a liquidation preference of $29,038,000, which was required to be paid to holders of such Series A Preferred Stock before any payments were made with respect to shares of common stock (and other capital stock 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 was outstanding, the holders of Series A Preferred Stock had the right to nominate and elect one member of our Board of Directors. Lawrence S. Atinsky served as the designee of the holders of Series A Preferred Stock. While he served as a director of the Company, Mr. Atinsky was a Partner of Deerfield. The Series A Preferred Stock had voting rights, voting with common stock as a single class, with each share of Series A Preferred Stock having the right to five votes, then representing less than 1% of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock had the right to approve certain transactions. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limited 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 terms of the warrants provided for their expiration on May 5, 2021 and were exercisable at any time at exercise prices ranging from $0.50 per share to $0.75 per share.
A significant majority of the accredited investors who purchased shares of common stock on the Effective Date furthermore executed backstop commitments to purchase up to 12,800,000 additional shares of common stock for an aggregate purchase price of up to $3,000,000. During the year ended December 31, 2017, the Company exercised its rights under the backstop commitments in full and issued an aggregate of 12,800,000 shares of its common stock for gross proceeds of $3.0 million.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Because our website (http://nuot.com) is being rebuilt, we do not currently make available through our website our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed it electronically with, or furnished it to, the SEC. However, we intend to make those filings available for download free of charge on our website upon its full development. Until that time, we will voluntary provide electronic or paper copies of those filings – including our annual report with audited financial statements – free of charge upon request. Information appearing on our website is not and will not be part of this Annual Report.
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ITEM 1A. Risk Factors
An investment in the Company involves a high degree of risk. Before making an investment decision with respect to our common stock, you should consider the risks described below in addition to the cautionary statements and risks described elsewhere and the other information in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks described below may not be the only risks the Company faces. Additional risks not yet known or currently believed to be immaterial may also impair our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition or results of operations could suffer and our common stock could be adversely impacted, resulting in a loss of part or all of your investment.
Risks Related to Our Financial Position
Our Revenue Base Is Limited to a Single Product Seeking Market Adoption, We Need Substantial Additional Financing and Our Ability to Effect Such Financing Successfully Could Be Limited
Our current revenue base is limited to our Aurix product, and our Aurix revenue has been minimal. Our ongoing product revenues have continued to decline significantly since 2016.
We have a history of losses and are not currently profitable. For the year ended December 31, 2021, we incurred a net loss from operations of approximately $90,000. Even if we succeed in raising substantial additional funds, we expect to incur losses and negative operating cash flows in the future. We may never generate sufficient revenues to achieve and maintain profitability.
Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, licensing, royalty, and product revenues. Until we can generate a sufficient amount of revenues to finance our cash requirements, which we may never do, we need to finance future cash needs. It is substantially uncertain whether we will be able to obtain such financing on satisfactory terms or at all.
If adequate capital cannot be obtained on a timely basis and on satisfactory terms, it would have a material adverse effect on our ability to implement our business plan, and our revenues and operations and the value of our common stock would be materially and negatively impacted, and we may be forced to curtail or cease our operations.
We Have a Limited Operating History and Limited Operating Experience
We have only recently began re-implementing our commercialization strategy for Aurix. Thus, we have a very limited operating history. Continued operating losses, together with the risks associated with our ability to gain new customers for Aurix, may have a material adverse effect on our liquidity. We may also be forced to respond to unforeseen difficulties, such as decreased demand for our products and services, downward pricing trends, regulatory requirements and unanticipated market pressures.
Our Financial Position Creates Doubt as to Whether We Will Continue as a Going Concern
The Company did not generate any revenues in 2021 or 2020. For the years ended December 31, 2021, 2020 and 2019, the Company had a net loss of approximately $0.1 million, $0.1 million, and $1.2 million, respectively. There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain funding from additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. It is uncertain whether we will be able to obtain such financing on satisfactory terms or at all. Our continuing losses and limited cash resources raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds in order to continue to conduct our business. If we are unable to secure sufficient capital to fund our operating activities, we may be forced to delay the completion of, or significantly reduce the scope of, our current business plan, delay the pursuit of commercial insurance reimbursement for our wound treatment technologies, and postpone the hiring of new personnel.
We Anticipate Issuing Additional Equity or Debt Securities Which Will Likely Dilute and May Materially and Adversely Affect the Price of Our Common Stock
Additional issuance of our common stock or other equity or convertible debt securities will likely dilute the ownership interests of our stockholders. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur, could negatively affect the market price of our common stock. We have used, and will likely continue to use, our common stock or securities convertible into or exchangeable for common stock to fund working capital needs or to acquire technology, product rights or businesses, or for other purposes. If additional equity and/or equity-linked securities are issued, particularly during times when our common stock is trading at relatively low-price levels, the price of our common stock may be materially and adversely affected.
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We May Not Be Able to Timely and Accurately Report Our Financial Results or Prevent Fraud If We Are Unable to Maintain Effective Disclosure and Internal Controls
Effective disclosure controls and procedures and internal control over financial reporting is necessary for us to provide reliable financial reports in a timely manner. Our management concluded there was a material weakness in our internal control over financial reporting as of the periods covered by this Form 10-K. Although we have taken steps to remediate such weakness, the material weakness cannot be considered remediated until the controls operate for a sufficient period of time and management concludes that our internal controls are operating effectively. While we believe that our remediation efforts will resolve the identified material weakness, there is No assurance that such efforts will be sufficient or that additional actions will not be necessary, which may undermine our ability to provide timely, accurate and reliable reports on our financial and operating results. Further, if we remediate our current material weakness but identify new material weaknesses in our internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the value of our common stock may be negatively affected. As a result of such failures, we could also become subject to investigations by the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our business.
Risks Related to Our Business, Industry and Regulatory Approval of Our Product
The Success of AurixIs Dependent on Acceptance by the Medical Community
The commercial success of our product will depend upon the medical community and patients accepting the therapies as safe and effective. It will also depend on our success introducing the Aurix product within the broad chronic wound market and encouraging provider evaluation and adoption of Aurix in the context of pre-existing wound treatment clinical practice.
Furthermore, the willingness of the medical community to accept or evaluate our products and processes may be impacted by the medical community’s acceptance of the quality of the clinical information that was collected and published as a result of the CED process. If the medical community and patients do not ultimately accept the therapies as safe and effective, or we are unable to raise awareness of our products and processes, our ability to sell our product may be materially and adversely affected, and the results of our operations may be adversely affected.
TheSuccessful Commercialization of the Aurix System Will Depend on Obtaining Reimbursement from Third-Party Payors
In the U.S., the market for any pharmaceutical or biologic product is affected by the availability of reimbursement from third party payors, such as government health administration authorities, private health insurers, health maintenance organizations and pharmacy benefit management companies. If we cannot demonstrate favorable outcomes or a cost-benefit relationship, we may have difficulty obtaining adequate coverage or reimbursement for our products from these payors. Third-party payors may also deny coverage for our product if they determine that the product is experimental, unnecessary, or inappropriate. Coverage and reimbursement are often determining factors in predicting a product’s success, with some physicians and patients strongly favoring only those products for which they will be reimbursed.
The Aurix System is marketed to healthcare providers. Some of these providers, in turn, seek reimbursement from third-party payors such as Medicare, Medicaid, and other private insurers. While we have established Medicare coverage of Aurix through the NCD reconsideration, we may not be successful with our complete reimbursement strategy, including, without limitation, obtaining any additional regulatory approvals.
Should we seek to expand our commercialization internationally, we would be subject to international regulations, where the pricing of prescription pharmaceutical products and services and the level of government reimbursement may be subject to governmental control. In some countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct one or more clinical trials that compare the cost effectiveness of our product or product candidates to other available therapies. Conducting one or more of these clinical trials would be expensive and result in delays in commercialization of our current and future products.
Managing and reducing healthcare costs has become a major priority of federal and state governments in the U.S. As a result of healthcare reform efforts, we might become subject to future regulations or other cost-control initiatives that materially restrict the price we can receive for our current and future products. Third-party payors may also limit access and reimbursement for newly approved healthcare products generally or limit the indications for which they will reimburse providers or suppliers who use any products that we may develop. Cost control initiatives could decrease the price for any products that we may develop, which would result in lower product revenues to us.
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A Disruption in Healthcare Provider Networks Could Have an Adverse Effect on Operations and Profitability
Our operations and future profitability are dependent, in large part, upon the ability to contract with healthcare providers on favorable terms. In any particular service area, healthcare providers could refuse to contract with us or take other actions that could result in higher healthcare costs or create difficulties in meeting our regulatory requirements. In some service areas, certain healthcare providers may have a significant market presence. If healthcare providers refuse to contract with us, use their market position to negotiate unfavorable contracts or place us at a competitive disadvantage, our ability to market services or to be profitable in those service areas could be adversely affected. Provider networks could also be disrupted by the financial insolvency of a large healthcare provider group. Any disruption in provider networks could adversely impact our business, results of operations and financial condition.
Liquidity Problems or Bankruptcy of our Key Customers or Collaborators Could Have a Significant Adverse Effect on our Business, Financial Condition and Results of Operations
Our sales to customers are typically made on credit without collateral. There is a risk that key customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers, weak sales, or other factors beyond our control, which could increase our exposure to losses from bad debts. In addition, if our key customers were to cease doing business as a result of bankruptcy or significantly reduce their orders from us, it could have a significant adverse effect on our business, financial condition, and results of operations. In addition, if our collaborators face liquidity problems or file for bankruptcy, they may choose to divert resources away from their continued cooperation and engagement with us or otherwise choose or be forced to reduce operations, which could also have a significant adverse effect on our business, financial condition, and results of operation.
We May Be Unable to Attract a Strategic Partner for the Further Development of Potential Future Product Candidates
Even if positive clinical data is eventually achieved in any future clinical trials, we may not be able to enter into strategic partnerships, licensing, or other similar arrangements that we may consider necessary or appropriate to commercialize product candidates successfully, or even have the resources necessary to seek such arrangements. Furthermore, even if such a strategic relationship regarding any of our current and future products or product candidates is reached, development milestones, clinical data, or other such benchmarks may not be achieved. Therefore, our products and product candidates may never proceed toward commercialization or drive cash infusions for us, and we may ultimately not be able to monetize the patents, existing clinical data, and other intellectual property.
Our Efforts to Secure Commercial Partners May Not Be Successful
From time to time, we may engage in discussions with larger companies regarding potential strategic partnerships involving the broad commercialization of Aurix. The resources and expertise of such a partner would greatly facilitate the capture of market share within the wound care market but would require that the economic benefits of such a broad penetration would be shared with said partner. We may not be successful in securing such a partner. Furthermore, even if a partner is secured, the partnership may not attain the market penetration contemplated, and the profits ultimately realized by us, if any, may not be sufficient to allow us to execute our business strategy.
We May Use Third-Party Collaborators and Service Providers to Help Us Support, Develop or Commercialize Our Product Candidates, and Our Ability to Commercialize Such Candidates May Be Impaired or Delayed if such Collaborations or Engagements Are Unsuccessful
We may in the future selectively pursue strategic collaborations or engagements for, among other purposes, development, data collection, analysis, and/or commercialization of our product candidates, domestically or otherwise. There can be no assurance as to our ability to utilize the data from such engagements to their potential. Nor can there be any assurance, in general, that we will be able to identify future suitable collaborators or negotiate collaboration agreements on terms that are acceptable to us or at all. In any current or future third-party collaborations, we are and would be dependent upon the success of the collaborators in performing their responsibilities and their continued cooperation and engagement. For a variety of reasons outside of our control, our collaborators or third-party providers may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities under our agreements with them. Our collaborators may choose to pursue alternative technologies in preference to those being developed in collaboration with us. The development and commercialization of our product candidates will be delayed if collaborators fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their collaboration agreements with us. Disputes with our collaborators could also result in product development delays, decreased revenues and litigation expenses.
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Our Limited Number of Staff May Affect our Ability to Conduct our Operations and Other Functions Effectively
Our future success depends on our ability to attract, retain, and motivate highly skilled management, scientific and sales personnel. As part of our prior cost containment efforts, we reduced staff significantly, from 15 full-time employees at December 31, 2017 to 7 full-time employees as of December 31, 2018 to 1 part-time employee as of December 31, 2021. Upon the anticipated re-introduction of the Aurix product to the commercial marketplace by May 2022, we expect to have only eight employees.
Our ability to maintain and provide services to our customers and our ability to provide the necessary support as part of any collaborations depends upon our ability to hire and retain business development and scientific and technical personnel with the skills necessary to keep pace with continuing changes in regenerative biological therapy technologies. Our current liquidity situation makes it unlikely that we will be able to hire additional personnel in the immediate future. Even assuming that we can resolve our immediate liquidity concerns, competition for such personnel is intense; we compete with pharmaceutical, biotechnology and healthcare companies with greater access to resources. Our inability to hire qualified personnel may lead to higher recruiting, relocation and compensation costs for such personnel. These increased costs may make hiring new key personnel impractical.
We Are Substantially Dependent Upon Our Executive Officers
Our success substantially depends on the continued service of key management, particular David E. Jorden, our Chief Executive and Financial Officer. We currently do not have an employment agreement with, or maintain key person insurance on, Mr. Jorden. The loss of Mr. Jorden, or other key employees or executive officers, could adversely impact our ability to continue operations unless and until a replacement is identified.
We Rely on a Single Supplier for the Reagent Used for Aurix and an Interruption in Our Supply Chain Could Have a Material Adverse Effect on Our Business
A reagent used for our Aurix product, bovine thrombin (Thrombin JMI), is available exclusively through Pfizer. Pfizer may unilaterally raise the prices for the reagent. If a temporary or permanent interruption in the supply of the reagent were to occur, or the manufacturing costs charged by Pfizer exceed what we can reasonably afford, it would have a material adverse effect on our business.
We Could Be Affected by Malpractice or Product Liability Claims
Providing medical care entails an inherent risk of professional malpractice and other claims. We do not control or direct the practice of medicine by physicians or health care providers who use our product and do not assume responsibility for compliance with regulatory and other requirements directly applicable to physicians. There is no assurance that claims, suits, or complaints relating to the use of our products, and treatment administered by physicians, will not be asserted against us in the future. The production, marketing and sale, and use of our product entails risks that product liability claims will be asserted against us. These risks cannot be eliminated, and we could be held liable for any damages that result from adverse reactions or infectious disease transmission. Such liability could materially and adversely affect our business, prospects, operating results, and financial condition. We currently maintain professional and product liability insurance coverage, but the coverage limits of this insurance may not be adequate to protect against all potential claims. We may not be able to obtain or maintain professional and product liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities.
Our Product Has Existing Competition in the Marketplace and We May Not Be Able to Compete Effectively.
In the market for biotechnology products, we face competition from pharmaceutical companies, biopharmaceutical companies, medical device companies, and other competitors. The chronic wound market has many therapies that compete with Aurix that have established habitual use patterns and provider contracts to encourage standardized use. Furthermore, other companies have developed or are developing products that could be in direct future competition with our current product line. Biotechnology development projects are characterized by intense competition. Thus, we may not be the first to the market with any newly developed products and we may not successfully be able to market these products. If we are not able to participate and compete in the regenerative biological therapy market, our financial condition will be materially and adversely affected. We may not be able to compete effectively against such companies in the future. Many of these companies have substantially greater capital resources, larger marketing staffs and more experience in commercializing products than we do. Recently developed technologies, or technologies that may be developed in the future, may be the basis for developments that will compete with our current and future products.
Risks Related to Government Regulations
Our Product Is Subject to Governmental Regulation
Our success is also impacted by factors outside of our control. Our current technology and products are subject to extensive regulation by numerous governmental authorities in the U.S., both federal and state, and in foreign countries by various regulatory agencies. Specifically, our product is subject to regulation by the U.S. Food and Drug Administration, or FDA, and state regulatory agencies. The FDA regulates drugs, medical devices, and biologics that move in interstate commerce and requires that such products receive clearance or pre-marketing approval based on evidence of safety and efficacy. The regulations of government health ministries in foreign countries are analogous to those of the FDA in both application and scope. In addition, any change in current regulatory interpretations by, or positions of, state regulatory officials where our product is used could materially and adversely affect our ability to sell our product in those states. The FDA will require us to obtain clearance or approval of new or modified devices when used for treating specific wounds or marketed with specific wound-healing claims, or for other products under development.
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We believe all our current product for sale is legally marketed. As we expand and offer and/or develop additional products in the U.S. and in foreign countries, clearance or approval from the FDA and comparable foreign regulatory authorities prior to introduction of any such products into the market may be required. We provide no assurance that we will be able to obtain all necessary approvals from the FDA or comparable regulatory authorities in foreign countries for these products. Failure to obtain the required approvals would have a material adverse impact on our business and financial condition.
Compliance with FDA and other governmental requirements imposes significant costs and expenses. Further, our failure to comply with these requirements could result in sanctions, limitations on promotional or other business activities, or other adverse effects on our business. Further, recent efforts to control healthcare costs could negatively affect demand for our current and future products and services.
We Must Comply With the Physician Payment Sunshine Act
We are required to comply with the United States Physician Payment Sunshine Act, which requires certain manufacturers of drugs, medical devices, biologicals and medical supplies that participate in U.S. federal healthcare programs to report certain payments and items of value given to physicians and teaching hospitals. Manufacturers are required to report this information annually to CMS. The period between August 1, 2013 and December 31, 2013 was the first reporting period for which manufacturers were required to report aggregate payment data to CMS by March 31, 2014. Manufacturers are required to report aggregate payment data to CMS by the 90th day of each subsequent calendar year. We cannot assure you that we will collect and report all data timely and accurately. If we fail to accurately and timely report this information, we could suffer severe penalties.
Any applicable manufacturer that fails to timely, accurately, or completely report the information required in accordance with the rules of the Sunshine Act is subject to a civil monetary penalty of not less than $1,000, but not more than $10,000, for each payment or other transfer of value or ownership or investment interest not reported timely, accurately, or completely (up to $150,000). For “knowing” failures to report, the penalties increase to not less than $10,000, but not more than $100,000, for each such failure (up to $1,000,000). The amount of civil monetary penalties imposed on each applicable manufacturer or applicable group purchasing organization is aggregated separately. Subject to separate aggregate totals, the maximum combined annual total is $1,150,000.
Several of the U.S. states have parallel reporting laws, sometimes accompanied with “gift bans” prohibiting manufacturers from making gifts or other remunerations to prescribers. Massachusetts and Vermont are two such states. There are various penalties associated with noncompliance with the state laws, as well.
Legislative and Administrative Action May Have an Adverse Effect on Our Company
Political, economic, and regulatory influences are subjecting the health care industry in the U.S. to fundamental change. We cannot predict what other legislation relating to our business or to the health care industry may be enacted, including legislation relating to third-party reimbursement, or what effect such legislation may have on our business, prospects, operating results and financial condition. We expect federal and state legislators to continue to review and assess alternative health care delivery and payment systems, and possibly adopt legislation affecting further changes in the health care delivery system. Such laws may contain provisions that may change the operating environment for hospitals and managed care organizations. Health care industry participants may react to such legislation by curtailing or deferring expenditures and initiatives, including those relating to our current and futre products. Future legislation could result in modifications to the existing public and private health care insurance systems that would have a material adverse effect on the reimbursement policies discussed above. With growing pressures on government budgets, government efforts to contain or reduce health care spending in some way or another are likely to continue. Any measures to restrict health care spending could result in decreased revenue from products and decrease potential returns from any future research and development initiatives. Furthermore, we may not be able to successfully neutralize any lobbying efforts against any initiatives we may have with governmental agencies. In addition to legislative initiatives, we may be subject to changes in current regulations and policies affecting coverage and reimbursement for our current and future products. Administrative agencies such as the Centers for Medicare and Medicaid Services have broad discretion to adopt or modify polices through rulemaking, and adoption of rules that curtail access to our products or limit reimbursement could have a material adverse effect on the adoption of our current and future products by health care providers, which would have a material adverse effect on our business.
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Failure to Obtain Regulatory Approval in International Jurisdictions Would Prevent Us from Marketing Our Product Abroad
We may in the future seek to market some of our product candidates outside the U.S. In order to market our product candidates in the European Union and many other jurisdictions, we must submit clinical data concerning our product candidates and obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval from foreign regulators may be longer than the time required to obtain FDA approval. The regulatory approval process outside the U.S. may include all of the risks associated with obtaining FDA approval. In addition, in many countries outside the U.S., it is required that the product candidate be approved for reimbursement before it can be approved for sale in that country. In some cases, this may include approval of the price we intend to charge for our product, if approved. We may not obtain approvals from regulatory authorities outside the U.S. on a timely basis, or at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the U.S. does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA, but a failure or delay in obtaining regulatory approval in one country may negatively affect the regulatory process in other countries. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize any products in any market and therefore may not be able to generate sufficient revenues to support our business.
Risks Related to Our Intellectual Property and Cyber-Security
Our Intellectual Property Assets Are Critical to Our Success
We regard our trademarks, trade secrets and other intellectual property assets as critical to our success. We rely on a combination of trademarks, and trade secret and copyright laws, as well as confidentiality procedures, contractual provisions, and other similar measures, to establish and protect our intellectual property. We attempt to prevent disclosure of our trade secrets by restricting access to sensitive information and requiring employees, consultants, and other persons with access to our sensitive information to sign confidentiality agreements. Despite these efforts, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology in the future. Furthermore, policing the unauthorized use of our intellectual property assets is difficult and expensive. Litigation could result in substantial costs and diversion of resources. We can provide no assurance that we will be successful in any litigation matter relating to our intellectual property assets. Any misappropriation of our intellectual property assets could have a material adverse effect on our ability to increase sales of our commercial product and/or continue the development of any future pipeline candidates.
If We Are Unable to Protect the Confidentiality of Our Proprietary Information and Know-how, Our Competitive Position Would be Impaired
A significant amount of our technology, especially regarding manufacturing processes, is unpatented and is maintained by us as trade secrets. The background technologies used in the development of our product candidates are known in the scientific community, and it is possible to duplicate the methods we use to create our product candidates. In an effort to protect these trade secrets, we require our employees, consultants and contractors to execute confidentiality agreements with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. The disclosure of our trade secrets would impair our competitive position.
If We Infringe, or Are Alleged to Infringe, Intellectual Property Rights of Third Parties, Our Business Could be Harmed
Our research, development, and commercialization activities, including any product candidates resulting from these activities, may infringe, or be claimed to infringe, patents or other proprietary rights owned by third parties, and to which we do not hold licenses or other rights. There may be patent applications owned by third parties that have been filed but not published that, when issued, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages.
Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. We have not conducted an exhaustive search or analysis of third-party patent rights to determine whether our research, development, or commercialization activities, including any product candidates resulting from these activities, may infringe or be alleged to infringe any third-party patent rights. As a result of intellectual property infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the licensee would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. All of the issues described above could also affect our potential collaborators to the extent we have any collaborations then in place, which would also affect the success of the collaboration and therefore us. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including inter partes review and/or interference proceedings declared by the U. S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our product candidates and technology.
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Our Business May Be Adversely Impacted by Cyber-Security Attacks
Disruption in our computer systems could adversely affect our business. We rely on computer systems to process transactions, communicate with customers, manage our business, and process and maintain information. Cyber-security attacks are evolving and disruptions can be caused by a variety of events, such as viruses, malicious malware, unauthorized access attempts to data, or other types of cyber-security attacks. Such events could produce disruptions that result in an unexpected delay in operations, loss of confidential or otherwise protected information, corruption of data, and expenses related to the repair or replacement of our computer systems. Compromising and/or loss of information could result in loss of sales or legal or regulatory claims which could adversely affect our revenues and profits or damage our reputation.
Risks Related to Our Common Stock
A Retail Trading Market for Our Common Stock May Not Resume or Actively Develop.
Due to the lack of current and publicly available information about the Company, trading in shares of our common stock since September 28, 2021 has been eligible only for unsolicited quotes on the “Expert Market” of the OTC Markets Group. Quotations in Expert Market securities are restricted from public viewing. This designation by the OTC Markets Group severely limits the number of investors that might purchase shares our common stock and effectively prevents the development of an active trading market in our common stock. Even if we become current in filing our financial and other information publicly, there can be no assurance as to whether OTC Markets Group will ever enable shares of our common stock to be quoted on a retail market or whether shares of our common stock can successfully be traded on other trading platforms, or if they do, whether the value of shares of our common stock will return or have any value. As a result, any limited trading of shares of our common stock subject to having a higher risk of wider spreads, increased volatility, and price dislocations.
Trading on an Over-the-Counter Market Could Adversely Affect the Liquidity of Our Common Stock.
Subsequent to filing this Form 10-K, shares of our common stock may become eligible for quotations on the OTC Pink or other tier of the OTC Trading Market. Shares of our common stock previously traded on the OTCQB and OTC Pink tiers of the OTC Markets Group. However, trading in our common stock was very limited and we cannot make any assurances that the trading volume will increase, or, if and when it increases, that it will be sustained at any level. Over-the-counter markets are generally considered to be less efficient than, and not as broad as, a stock exchange. Stockholders may have difficulties reselling significant numbers of shares of common stock at any particular time and may not be able to resell their shares of common stock at or above the price paid for such shares. As a result, stockholders may be required to hold shares of common stock for an indefinite period of time. In addition, sales of substantial amounts of common stock could lower the prevailing market price of our common stock.
U.S. Broker-Dealers May Be Discouraged from Effecting Transactions in Shares of our Common Stock.
Our Common Stock is deemed a “penny stock” under SEC rules. As a result, trading in our common stock may be subject to the requirements of SEC rules that require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-exchange listed equity security that has a market price share of less than $5.00 per share, subject to certain exceptions) and a two business day “cooling off period” before broker and dealers can effect transactions in penny stocks. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction before the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. These, and the other burdens imposed upon broker-dealers by the penny stock requirements, could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of our common stock and the ability of holders of our common stock to sell it.
The Compliance and Reporting Requirements of Being a Public Reporting Company Can Be Expensive.
We are a public reporting company and, accordingly, are subject to the information and reporting requirements of the Exchange Act, and other federal securities laws, including compliance with the Sarbanes-Oxley Act. Preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is costly. In addition, we may face time consuming and costly effects to develop and implement internal controls and reporting procedures required by the Sarbanes-Oxley Act.
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Rule 144 May Not Be Available to Holders of Restricted Shares During Any Period in Which We Fail to Comply With our Reporting Obligations Under the Exchange Act.
From time to time, we have issued shares in transactions exempt from registration. Shares issued pursuant to exemptions from registration are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or pursuant to Rule 144 or other applicable exemption from registration under the Securities Act. If we fail to comply with its reporting obligations under the Exchange Act, Rule 144 may not be available to holders of restricted shares, which may limit your ability to sell your restricted shares.
Our Officers, Directors and Principal Stockholders Can Exert Significant Influence Over Us and May Make Decisions That Are Not in the Best Interests of All Stockholders
As of March 15, 2022, our officers and directors beneficially owned approximately 22.8% of our shares of common stock, while our principal stockholders Charles E. Sheedy and Boyalife Asset Holding II, Inc. together beneficially owned an additional approximately 40.7% of our shares of common stock. As a result, our officers, directors, and certain principal holders of common stock are able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors. This concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock, if and when it commences trading. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
Transactions Engaged in by Our Largest Stockholders, Our Directors or Officers Involving Our Common Stock May Have an Adverse Effect on the Value of Our Common Stock
Sales of our common stock by our officers, directors and principal stockholders could have the effect of lowering the price or value of our common stock. The perceived risk associated with the possible sale of a large number of shares of common stock by those stockholders could cause some of our stockholders to sell their stock, thus adversely affecting the value of our common. Our largest stockholders, directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business. Our stockholders may perceive these sales as a reflection on management’s view of the business, which may result in some stockholders selling their shares of our common stock. These sales also could adversely affect the value of our common stock.
Volatility of Our Stock Price Could Adversely Affect Current and Future Stockholders
The market price of our common stock is likely to fluctuate widely in response to various factors which are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors that could cause the market price to fluctuate substantially include, among others:
● our ability or inability to execute our business plan;
● investor perception of our company and of the industry;
● the success of competitive products or technologies;
● regulatory developments in the U.S. or overseas;
● developments or disputes concerning patents or other proprietary rights;
● the recruitment or departure of key personnel; or
● general economic, political and market conditions.
The stock market in general can often experience extreme price and volume fluctuations. Any such market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility could be worse if the trading volume of our common stock is low.
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ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
Our principal executive offices are located in a leased space at 8285 El Rio Street, Suite 190, Houston, TX 77054. We also lease commercial office space at 6646 Willow Park Drive, Naples, FL 34109. Both leases were entered into subsequent to December 31, 2021.
The Company does not own any real property and does not intend to invest in any real property in the foreseeable future.
ITEM 3. Legal Proceedings
There are currently no claims or actions pending against us, the ultimate disposition of which could have a material adverse effect on our results of operations, financial condition, or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
From June 7, 2018 through approximately July 15, 2019, shares of our common stock traded on the OTCQB tier of the over-the counter market operated by OTC Markets Group, Inc. under the symbol “AURX”. On or about July 15, 2019, trading in shares of our common stock was downgraded to the OTC Pink tier of the over-the counter market operated by OTC Markets Group continuing under the symbol “AURX”.
On September 28, 2021, upon the effective date of amendments to Rule 15c2-11 under the Exchange Act, trading in shares of our common stock became eligible only for unsolicited quotes on the Expert Market of the OTC Markets Group. Quotations in Expert Market securities are restricted from public viewing. This designation by the OTC Markets Group severely limits the number of investors that might purchase shares of our common stock and effectively prevents the development of an active trading market in shares of our common stock. As a result, there currently is no established public trading market for the shares of our common stock. Since becoming eligible for trading on the Expert Market on September 28, 2021, we are aware of only two days through December 31, 2021 on which trades occurred in shares of our common stock, both at prices of $0.0001 per share, according to information provided by the OTC Markets Group.
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily reflect actual transactions.
Even if upon or subsequent to filing this Form 10-K we are deemed current in filing financial and other information, there can be no assurance as to whether OTC Markets Group will enable shares of our common stock to be quoted on a retail tier or that the shares of our common stock can successfully be traded on other trading platforms.
Holders
According to information provided by the transfer agent of the Company, there were approximately 780 holders of record of our common stock as of each of March 15, 2020, 2021, and 2022, respectively.
Dividends
We have never paid or declared cash distributions or dividends in our history and we do not intend to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain all earnings, if and when generated, for reinvestment in our business.
Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Our common stock is currently deemed a “penny stock.” The definition of penny stock under SEC rules generally includes equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document, which generally: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities’ laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; and (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks. The broker-dealer also must provide to the customer, prior to effecting any transaction in a penny stock, (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for shares of our common stock.
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Issuer Purchases of Equity Securities
None.
Recent Sales of Unregistered Securities
Except as previously reported in the Company’s Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and elsewhere in this filing, there have been no unregistered sales of securities during the fiscal periods ended December 31, 2019, 2020, or 2021.
ITEM 6. Selected Financial Data
Not applicable.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. The discussion in this section regarding the Company’s business and operations includes “forward-looking statements”. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report.
Overview
Nuo is a regenerative therapies company developing and marketing products primarily within the U.S. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (i.e., from self or the patient’s own) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long term recovery in complex chronic conditions with significant unmet medical needs.
Our only current commercial offering consists of a point of care technology for the safe and effective separation of autologous blood to produce a platelet-based therapy for the chronic wound care market (the "Aurix System"). The Company ceased normal operating activities effective May 1, 2019 as it awaited developments concerning Medicare coverage of the Aurix System under its National Coverage Decision (“NCD”) reconsideration request. Product sales are anticipated to be reinitiated by May 2022 after the favorable NCD determination was issued in April 2021, the Aurix System supply chain was re-established and equity capital was accessed in December 2021 via the early exercise of warrants under a warrant modification agreement.
The revenue amounts presented in these comparison sections are rounded to the nearest thousand.
Comparison of the Years Ended December 31, 2021 and 2020
Revenue and Gross Profit
There were no revenues in the years ended December 31, 2021 and December 31, 2020 as the Company ceased ongoing operational activities effective May 1, 2019 and no longer treated subjects under the previous CED program with related product sales while selling its remaining Aurix inventory over the remainder of 2019.
Operating Expenses
Year Ended December 31 Variance
Sales and marketing $ - $ - $ - NA
Research and development - - - NA
Total operating expenses decreased approximately $287,000 in the year ended December 31, 2021 as compared to the year ended December 31, 2020 as the Company continued throughout the year in a non-operational state until late in the fourth quarter 2021 when we began to reinitiate some activities in advance of an expectation of a return to availability of the Aurix System by May 2022. A discussion of the various components of operating expenses follows below.
Sales and Marketing and Research and Development
Expenses in both categories remained at zero in the year ended December 31, 2021 as a result of the cessation of normal operational activities effective May 1, 2019.
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General and Administrative
Interest Expense, net
Interest expense was zero for the year ended December 31, 2021 as the Company had no debt outstanding during the year due to the conversion of the senior secured notes in October 2020.
Other income (expense)
Other income (expense) was zero for the year ended December 31, 2021 and decreased approximately $336,000 as a result of the two gains on debt extinguishments recognized in the year ended December 31, 2020.
Comparison of the Years Ended December 31, 2020 and 2019
Revenue and Gross Profit
The following table presents the profitability of sales for the periods presented:
Product cost of sales - 115,000
Gross profit (loss) $ - $ 31,000
Gross margin % NA % 21 %
Revenues and gross margin both declined to zero in the year ended December 31, 2020 compared to the prior year ended December 31, 2019 as product revenues ceased in 2019 due to the non-operational status of the Company effective April 2019 and the conclusion of treating subjects in the CED studies.
Operating Expenses
Year Ended December 31 Variance
Total operating expenses decreased approximately $623,000 in the year ended December 31, 2020 as compared to the year ended December 31, 2019 due primarily to the Company’s decision to cease normal operational activities effective May 1, 2019. A discussion of the various components of operating expenses follows below.
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Sales and Marketing and Research and Development
Expenses in both categories decreased to zero in the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of the cessation of normal operational activities effective May 1, 2019.
General and Administrative
General and administrative expenses decreased approximately $411,000 (52%) to approximately $378,000 in the year ended December 31, 2020 as compared to the year ended December 31, 2019. General and administrative expenses in 2020 beyond nominal cash costs to sustain minimum corporate viability was composed primarily of approximately $334,000 of non-cash compensation expense recognized in the fourth quarter 2020. The non-cash compensation expense represents the fair value of shares of common stock and warrants issued to three individuals comprising senior management, Company director, and third party counsel as compensation for past services rendered in connection with continued efforts of the Company since its cessation of regular operational status in May 2019, continued engagement with staff of CMS and various consultants concerning reimbursement coverage for Aurix under the long-standing national non-coverage decision, and various other activities and efforts to sustain the Company as a viable entity. The common stock and warrants were fully expensed on the date of issuance at their respective fair values of approximately $123,000 for the shares and approximately $211,000 for the warrants.
Interest Expense, net
Interest expense decreased approximately $173,000 to approximately $48,000 for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The decrease was primarily due to the completed settlement of the convertible notes in February 2020 which in the year ended December 31, 2019 had incurred interest expense charges totaling approximately $170,000 for debt discount amortization, note amendment fees paid in cash, and increases in the principal balance of the notes in conjunction with the amendments. During 2020, interest expense was primarily recognized on the senior notes prior to their conversion into shares of common stock in October 2020.
Other income (expense)
Other income for the year ended December 31, 2020 consisted of the separate gains on debt extinguishment of approximately $246,000 and $90,000 in the first and fourth quarters of 2020, respectively. The first quarter 2020 gain resulted from the concluded settlement of the 2018 Convertible Notes and the fourth quarter gain represents the calculated difference between the $305,000 carrying value of the 2019 senior secured notes and the fair value of the reacquistion price of the assets transferred and equity securities issued.
Comparison of the Years Ended December 31, 2019 and 2018
Revenue and Gross Profit
The following table presents the profitability of sales for the periods presented:
Gross margin % 21 % 88 %
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Revenues decreased $1,255,000 (89%) to $146,000, comparing the year ended December 31, 2019 to the year ended December 31, 2018. This was primarily due to (i) $750,000 in licensing revenue recognized in 2018 attributable to the two Rohto transactions (ii) $288,000 of royalty revenues in 2018 attributable to the one-time royalty monetization payment on Aldeflour revenues and (iii) a decrease in Aurix product sales of $197,000 resulting from the 2019 cessation of CED study activity including the related product sales for patients treated.
Overall gross profit decreased $1,178,000 to a gross profit of $31,000 while overall gross margin increased to 21% from 88%, comparing the year ended December 31, 2019 to the year ended December 31, 2018. The decrease in gross profit was primarily attributable to (i) $750,000 of Rohto related licensing revenue and $288,000 royalty monetization payment with no associated costs and (ii) a $139,000 decrease in gross profit on product sales. The decrease in gross margin on product sales only from 51% in 2018 to 21% in 2019 was primarily due to decreased absorption of depreciation expense charged to cost of product sales on a reduced amount of product sales.
Operating Expenses
Year Ended December 31 Variance
Total operating expenses decreased approximately $1,712,000 (63%) to approximately $1,001,000 comparing the year ended December 31, 2019 to the year ended December 31, 2018. The decrease was primarily due to approximately $1.2 and $0.4 million decreases in general and administrative and research and development expenses, respectively. A discussion of the various components of operating expenses follows below.
Sales and Marketing
Sales and marketing expenses decreased approximately $84,000 (73%) to approximately $30,000 comparing the year ended December 31, 2019 to the year ended December 31, 2018. The decrease was primarily due to the elimination of the remaining direct sales personnel during the first quarter 2018.
Research and Development
Research and development expenses decreased approximately $395,000 (69%) to approximately $181,000 comparing the year ended December 31, 2019 to the year ended December 31, 2018. The decrease was primarily due to (i) reduced headcount in the Clinical Affairs area and corresponding lower compensation expenses, and (ii) decreased clinical affairs costs reduced CED activity.
General and Administrative
General and administrative expenses decreased approximately $1,232,000 (61%) to approximately $789,000 comparing the year ended December 31, 2019 to the year ended December 31, 2018. The decrease was primarily due (i) a decrease of approximately $1.5 million in gross general and administrative expenses offset by a $240,000 bad debt recovery in 2018. The gross G&A decrease of approximately $1.5 million was realized in the amounts of approximately $0.4 million and $1.1 million during the first and second halves of 2019, respectively. General and administrative expenses were modestly negative during the second half of 2019 due to nominal costs resulting from the effective ceasing of normal business operations during the period which were more than fully offset by expense credits for revised accounts payable balances. By expense type, the aggregate $1.5 million expense decrease was comprised primarily of decreases in (i) compensation and benefits costs of approximately $800,000 resulting from the May 1, 2019 furlough of company employees, (ii) rental expense of approximately $150,000, (iii) board fees of approximately $120,000, (iv) insurance costs of approximately $100,000, and (v) aggregate costs of approximately $300,000 in various other expense categories including investor services, IT services, office expenses, and dues and fees.
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Interest Expense, net
Interest expense, net increased approximately $183,000 to approximately $221,000 comparing the year ended December 31, 2019 to the year ended December 31, 2018. The increase was primarily due to (i) increased increase expense of approximately $37,000 on the convertible notes for the full year 2019 and the senior secured notes which were funded in late 2019, (ii) $69,000 of cash fees for convertible note amendments treated as interest expense, (iii) $60,000 aggregate increase in the convertible note balances resulting from the note amendments which were also treated as interest expense, and (iv) approximately $15,000 increase in debt discount amortization in the 2019 period as compared to 2018.
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue and Gross Profit
There were no revenues in any period during the years ended December 31, 2021 and December 31, 2020 as the Company ceased ongoing operational activities in April 2019 and no longer treated subjects under the previous CED program with related product sales.
Operating Expenses
Three Months Ending March Variance
Sales and marketing $ - $ - $ - NA
Research and development - - - NA
Comparison of the Three and Six Months Ended March 31, 2021 and 2020
Revenue and Gross Profit
There were no revenues in any period during the years ended December 31, 2021 and December 31, 2020 as the Company ceased ongoing operational activities in April 2019 and no longer treated subjects under the previous CED program with related product sales.
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Operating Expenses
Three Months Ending June Variance Six Months Ending June Variance
Sales and marketing $ - $ - $ - NA $ - $ - $ - NA
Research and development - - - NA - - - NA
Comparison of the Three and Nine Months Ended March 31, 2021 and 2020
Revenue and Gross Profit
There were no revenues in any period during the years ended December 31, 2021 and December 31, 2020 as the Company ceased ongoing operational activities in April 2019 and no longer treated subjects under the previous CED program with related product sales.
Operating Expenses
Three Months Ending September Variance Nine Months Ending September Variance
Sales and marketing $ - $ - $ - NA $ - $ - $ - NA
Research and development - - - NA - - - NA
Comparison of the Three Months Ended March 31, 2020 and 2019
Revenue and Gross Profit
Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
Product sales $ - $ 39,000
Product cost of sales - 28,000
Total cost of sales - 28,000
Gross profit (loss) $ - $ 11,000
Gross margin % NA % 28 %
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Revenue and gross profit decreased to zero in the three months ended March 31, 2020 compared to the prior year period as the Company ceased normal operational activities effective May 1, 2019 and proceeded to sell its remaining product inventory over the remainder of 2019.
Operating Expenses
Three Months Ending March Variance
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Revenue and Gross Profit
Three and Six Months Ended June 30, 2020 Three Months Ended June 30, 2019
Product sales $ - $ 44,000
Product cost of sales - 33,000
Total cost of sales - 28,000
Gross profit (loss) $ - $ 11,000
Gross margin % NA % 25 %
Revenue and gross profit decreased to zero in the three and six months ended June 30, 2020 compared to the prior year periods as the Company ceased normal operational activities effective May 1, 2019 and proceeded to sell its remaining product inventory over the remainder of 2019.
Operating Expenses
Three Months Ending June Variance Six Months Ending June Variance
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Comparison of the Three and Nine Months Ended September 30, 2020 and 2019
Revenue and Gross Profit
Product sales $ - $ 58,000
Product cost of sales - 35,000
Total cost of sales - 35,000
Gross profit (loss) $ - $ 23,000
Gross margin % NA % 40 %
Revenue and gross profit decreased to zero in the three and nine months ended September 30, 2020 compared to the prior year periods as the Company ceased normal operational activities effective May 1, 2019 and proceeded to sell its remaining product inventory over the remainder of 2019.
Operating Expenses
Three Months Ending September Variance Nine Months Ending September Variance
Sales and marketing $ - $ - $ - NA $ - $ - $ - NA
Liquidity and Capital Resources
Overview
As of December 31, 2021, we had cash and cash equivalents of approximately $1.4 million resulting from the Warrant Modification Agreement and Early Exercisedescribed below, total current assets of approximately $1.5 million and total current liabilities of approximately $0.7 million. As of March 31, 2022, we had cash and cash equivalents of approximately $0.6 million. As an operational business, we have a history of losses and are not currently profitable. For the years ended December 31, 2021, 2020, and 2019, we incurred net losses of approximately $0.1 million, $0.1 million, and $1.2 million, respectively. As a consequence of deemed dividends (contributions) in 2020 and 2021, we had net income available for common stockholders of approximately $7.7 million in 2020 and a net loss available for common stockholders of approximately $0.9 million in 2021. As of December 31, 2021, our accumulated deficit was approximately $23.6 million and our stockholders’ equity was approximately $0.8 million.
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Our continuing losses and limited cash resources raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds in order to continue to conduct our business. If we are unable to secure sufficient capital to fund our operating activities, we may be forced to delay further the completion of, or significantly reduce the scope of, our current business plan, delay the pursuit of commercial insurance reimbursement for our wound treatment technologies, and postpone the hiring of new personnel. It is uncertain whether we will be able to obtain such financing on satisfactory terms or at all.
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.
Financing and Related Developments in 2018, 2019, 2020, and 2021
Spring 2019 Cessation of Normal Operating Activities
In April 2019, the Company made the decision to cease normal operational activities and we furloughed the Company’s remaining employees effective May 1, 2019. This decision was necessitated by the depletion of the Company’s resources during the conduct of the CED studies being undertaken to pursue Medicare reimbursement coverage for the Aurix System. In the spring of 2019, we had collected clinical outcomes and analyzed the data from the subjects involved in the CED studies and were engaged in discussions with CMS concerning the adequacy of the results and a NCD reconsideration request.
2018 Monetization Transactions
During the year ended December 31, 2018, the Company was able to monetize several of its remaining assets, including through agreements with Rohto, as described in "Business - Aurix Licensing and Collaboration Agreement," and with STEMCELL, as described in "Business - Patents, Licenses, and Property Rights." 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 and is facing immediate cessation of operations and liquidation.
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 Notes 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 “Investors”). Pursuant to separate securities purchase agreements, the Company issued and sold to the 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 Investors. Pursuant to the purchase agreements, the Company also issued to each 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 matured nine months from the date of issuance (June 17, 2019) and, in addition to any original issue discount, accrued interest at a rate of 12% per year. The maturity date of the note issued to EMA was extendable up to one year beyond the original maturity date at the option of EMA.
Under the original terms of the notes, the Company could 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 was 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 could no longer prepay the notes. Under the original terms of the notes, after six months from the date of issuance, the Investors could 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.
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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 could prepay the notes and deferred the date upon which the Convertible Note Investors could 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 or $30,000. The maturity date of the Auctus note was also extended until September 17, 2019.
On December 10, 2019, the Company entered into fifth and final amendments to the 2018 Convertible Notes pursuant to which the Company’s obligations under such notes were to 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 and issued the common shares as of February 5, 2020 in final settlement of the 2018 Convertible Notes.
The Company was 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 contained 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 included 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 could 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 restricted 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 included most favored nations provisions and limitations on the Company’s ability to offer additional securities (unless the use of proceeds was 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 System asset including all regulatory files and approvals and relevant intellectual property. The purchase agreements contained certain representations, warranties and covenants by, among and for the benefit of the respective parties. The purchase agreements also provided for customary indemnification of the Senior Note Investors by the Company.
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The notes had a maturity date of June 30, 2020 and accrued interest at a rate of 12% per year. The Company could prepay the Senior Notes, in whole or in part, at any time. The warrants were 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 had 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 were considered retired and no longer in effect.
Series A Preferred Stock Exchange Agreement
By letter dated September 1, 2020, the Senior Note Investors notified the Company of its default under the Senior Notes and submitted a forbearance and recapitalization proposal to the Company.
By letter dated September 10, 2020, the Senior Note Investors notified the Company pursuant to Del. UCC Sections 9-620 and 9-621 of their unconditional alternative proposals to accept from the Company, on October 1, 2020, a transfer of all collateral securing the Senior Notes in full satisfaction of the indebtedness due under the related loan documents. On September 21, 2020, the Senior Note Investors proposed to the Company an alternative restructuring proposal, which formed the basis for the Recapitalization Agreement described below.
On October 5, 2020 (the “Effective Date”), the Company entered into a Recapitalization Agreement (the “Recap Agreement) with Deerfield Private Design Fund II, L.P. (“DPDF”) and Deerfield PDI Financing II, L.P. (“DPF” and, together with DPDF, the “Deerfield Investors”) and the Noteholders, whereby the shares of Series A preferred stock held by the Deerfield Investors were exchanged for 2,700,000 shares of common stock (the “Exchange Shares”) of the Company. The Senior Note Investors agreed to the conversion of the $305,000 principal balance of the Notes plus accrued interest through September 30, 2020 of approximately $30,400 into an aggregate 838,487 shares of common stock (the “Conversion Shares”) of the Company at a conversion price of $0.40 per share, plus the purchase, for cash, of 487,500 shares of common stock (the “Purchase Shares”) at $0.40 per share, or $195,000 in total. On the Effective Date, all shares of Series A preferred stock and Senior Notes were cancelled in full. Lawrence S. Atinsky, the Deerfield Investors’ representative on the Company’s board, resigned as of the Effective Date, and the number of Company directors was reduced to four. Outstanding options to purchase common stock held by Mr. Atinsky as of the Effective Date were canceled.
Pursuant to the Agreement, the Company also issued to the Senior Note Investors warrants to purchase an aggregate of 3,977,961 shares of the Company’s common stock, subject to adjustment as referenced below. The warrants were 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 had five-year terms. The warrants to purchase 457,500 shares of common stock issued to the Noteholders upon the original 2019 issuance of the Notes were canceled.
Series A Preferred Stock
Under our 2016 Plan of Reorganization, the Company issued 29,038 shares of Series A Preferred Stock to the Deerfield lenders. The Series A Preferred Stock had no stated maturity date, was not convertible or redeemable and carried a liquidation preference of $29,038,000, which was required to be paid to holders of such Series A Preferred Stock before any payments were made with respect to shares of common stock (and other capital stock that was 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 was outstanding, the holders of Series A Preferred Stock had the right to nominate and elect one member of the Board of Directors. Lawrence S. Atinsky served on our Board as the designee of the holders of Series A Preferred Stock, which are all currently affiliates of Deerfield Management Company, L.P., of which Mr. Atinsky is a Partner. The Series A Preferred Stock had voting rights, voting with the common stock as a single class, representing approximately one percent (1%) of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock had the right to approve certain transactions. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limited the Company’s ability to (i) issue securities that were 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 were junior to the Series A Preferred Stock and that provided 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.
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As described above, the Series A Preferred Stock was extinguished in conjunction with the Recap Agreement effective October 5, 2020.
Warrant Modification Agreement and Early Warrant Exercise
Effective as of December 1, 2021, the Company entered into a Warrant Modification Agreement (the “WMA”) with the holders of an aggregate 6,865,461 Warrants (the “Warrant Investors”) whereby the Warrants were modified to adjust the warrant exercise price from $0.40 per share to $0.20 per share provided the Investor exercised the warrant prior to January 31, 2022. All Warrants not exercised prior to January 31, 2022 were to be forfeited and deemed expired or otherwise cancelled.
As of December 31, 2021, all Warrants had been exercised for total consideration of $1,373,092 and the resulting issuance of 6,865,461 shares of common stock.
Cash Flows
Net cash provided by (used in) operating, investing, and financing activities for the periods presented were as follows (in millions):
Cash flows used in operating activities $ (0.1 ) $ (0.1 ) $ (0.9 )
Cash flows provided by (used in) investing activities $ - $ - $ -
Cash flow provided by financing activities $ 1.4 $ 0.2 $ 0.3
Operating Activities
Cash used in operating activities for the year ended December 31, 2021 of $0.1 million primarily reflects our net loss of $0.1 million.
Cash used in operating activities for the year ended December 31, 2020 of $0.1 million primarily reflects our net loss of $0.1 million adjusted by (i) approximately $0.3 million of equity based compensation expense which was fully offset by approximately $0.3 million gain on the extinguishment of debt.
Cash used in operating activities for the year ended December 31, 2019 of $0.9 million primarily reflects our net loss of $1.2 million adjusted by (i) approximately $0.1 million of depreciation expense, and (ii) approximately $0.1 million of debt discount amortization.
Investing Activities
We had no material investing activities in the years ended December 31, 2021, 2020, and 2019.
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Financing Activities
Cash provided by financing activities for the year ended December 31, 2021 of $1.4 million represents proceeds from the early exercise of warrants in December 2021.
Cash provided by financing activities for the year ended December 31, 2020 of $0.2 million of net proceeds represents the purchase of shares of common stock for proceeds of $195,000 in October 2020 in conjunction with the Series A Preferred Stock exchange agreement.
Cash provided by financing activities for the year ended December 31, 2019 of $0.3 million of net proceeds represents the proceeds from the issuance of senior secured notes in November and December 2019.
Inflation
The Company believes that the rates of inflation in recent years have not had a significant impact on its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. A summary of our significant accounting policies is included in Note 3 to the accompanying consolidated financial statements.
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and that requires management’s most difficult, subjective, or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. We have identified the following accounting policies as critical:
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 stock-based compensation, the fair value of common stock and equity-linked and derivative financial instruments, recoverability and depreciable lives of long-lived assets, deferred taxes and associated valuation allowance, the valuation and classification of debt instruments, and allowances for inventory obsolescence and doubtful accounts. Actual results could differ from those estimates.
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Basic and Diluted Earnings (Loss) per Share
In periods of net loss, basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential dilutive common shares is anti-dilutive.
For periods of net income, diluted earnings per share is computed using the more dilutive of the “treasury method” or “two class method.” Dilutive earnings per share under the “treasury method” is calculated by dividing net income available to common stockholders by the weighted- average number of shares outstanding plus the dilutive impact of all potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method, and convertible notes using the if-converted method. Because none of the Company’s equity-linked financial instruments contain non-forfeitable rights to dividends, the “two class” method results in the same diluted earnings per share as the “treasury method.”
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:
An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.
Recent Accounting Pronouncements Not Yet Adopted
The Company does not believe that any recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
ITEM 8. Financial Statements and Supplementary Data
The information required pursuant to this Item 8 is incorporated by reference herein to our consolidated financial statements beginning on page F-1 of this Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the periods covered by this Form 10-K. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures as of the end of the periods covered by this Form 10-K, we concluded that, as of such dates, our disclosure controls and procedures were not effective due to the existence of the material weaknesses in the Company’s internal control over financial reporting described below under “Material Weaknesses” and “Remediation Plan.”
Notwithstanding the conclusion that our disclosure controls and procedures as of the end of the periods covered by this Form 10-K were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with GAAP.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Our management conducted an assessment of our internal control over financial reporting as set forth in Item 308(a) of Regulation S-K promulgated under the Exchange Act and Section 404 of the Sarbanes-Oxley Act as of the end of the end of the periods covered by this Form 10-K. Based on this assessment, our management concluded that our internal control over financial reporting was ineffective due to the material weakness in our internal control over financial reporting described below under “Material Weaknesses” and “Remediation Plan.”
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of this Form 10-K and the consolidated financial statements and related disclosures herein, management identified the following material weaknesses.
Beginning in mid-2019, we ceased ongoing operational activities and terminated all our financial accounting and reporting resources as we worked to reach a favorable outcome to Medicare reimbursement coverage for the Aurix System. While we re-started operations in late 2021, as of December 31, 2021, and through the date this Annual Report was filed, the Company had not hired and did not maintain a sufficient complement of accounting and financial reporting resources. The lack of sufficient accounting and financial reporting resources also prevented the Company from maintaining appropriately designed, and monitoring the effectiveness of, internal control over financial reporting.
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As a result of these material weaknesses in internal control over financial reporting, the Company was unable to prepare and file its consolidated financial statements as of and for the years ended December 31, 2020, and 2019, and as of and for the quarters ended March 30, 2021 and 2020, June 30, 2021 and 2020, and September 30, 2021 and 2020 within the timelines prescribed by the SEC. As such, the Company did not maintain adequate disclosure controls and internal control over financial reporting necessary to provide for the timely reporting of accurate financial information.
Remediation Plan
As additional financial resources are obtained, management, under the oversight of the Audit Committee of the Board of Directors, will begin to implement measures designed to improve our internal control over financial reporting to remediate the identified material weaknesses, namely, to identify and engage a sufficient complement of accounting and financial reporting resources and to periodically assess the design and operating effectiveness of our internal controls. The Company engaged outside consultants to assist with various accounting and financial reporting matters in the first quarter of 2022 and has begun assessing the need for hiring of internal accounting and financial reporting resources.
While we believe that these efforts will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We cannot assure you that the measures we have taken to date, or that we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting that occurred during the quarters ended December 31, 2019 through December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
On March 4, 2022, the Board of Directors of the Company granted options to purchase a total of 206,666 shares of common stock to its executive officers and directors as follows:
Each of the options was granted under the Company’s 2016 Omnibus Incentive Compensation Plan, as amended, has an exercise price of $0.50 per share, a ten-year term and vested immediately. The options were granted in satisfaction of approximately $55,000 of deferred salary (with respect to Mr. Jorden and Dr. Clausen) and approximately $48,333 of deferred Board compensation (with respect to the non-management directors).
Also on March 4, 2022, the Board of Directors of the Company granted incentive options to purchase common stock to its executive officers and directors as follows:
Each of the options was granted under the Company’s 2016 Omnibus Incentive Compensation Plan, as amended, has an exercise price of $0.75 per share, a ten-year term and vested immediately. In addition, the Board of Directors resolved to issue options to purchase 275,000 shares of common stock to Peter A. Clausen at an exercise price of $0.75 per share, a ten-year term and with 1/3rd to vest immediately and the remainder vesting quarterly over three years; however, the issuance of options to Dr. Clausen is subject to approval by stockholders of an increase in the number of shares authorized under the Company’s 2016 Omnibus Incentive Compensation Plan, as amended.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Set forth below is information regarding the directors and executive officers of the Company since 2019 and currently. Officers are appointed by, and serve at the pleasure of, the Board of Directors.
Name Age Position
David E. Jorden 59 Chief Executive and Chief Financial Officer; Director