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
were reinitiated in mid-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, 2022 and 2021
Revenue and Gross Profit
Product revenues for the year ended December 31, 2022 totaled approximately
$112,000 with approximately $93,000 of associated gross profit and a resulting
gross margin of approximately 83%. Re-initiation of commercial activity for the
Aurix product began in May 2022 as saleable product inventory became available
at the Company's warehouse/distribution facility. There were no revenues in the
year ended December 31, 2021.
Operating Expenses
Total operating expenses increased approximately by $3,323,000 to approximately
$3,414,000 comparing the year ended December 31, 2022 to the prior full year
2021 period. The increase from the nominal expense level in the prior year
was due to expenses associated with the business returning to commercial status
as an operating business in 2022 including renewed commercial sales activities
that began in May 2022. Expenses for the year ended December 31,
2022 were primarily composed of (i) approximately $1,700,000 of compensation and
benefits expense, (ii) approximately $729,000 of external consulting costs and
professional fees including accounting and audit, legal fees, and quality
management system consulting costs and (iii) approximately $616,000 of various
other operating expenses including sales infrastructure, marketing costs,
external distributor commissions, and sales/reimbursement consulting expenses of
approximately $255,000, insurance expense of approximately $134,000, operating
lease costs of approximately $128,000, and travel related expenses of
approximately $99,000.
Interest Expense, net
Interest expense, net for the year ended December 31, 2022 of approximately
$2,000 represents interest expense from the financing of insurance premiums.
Other Income (Expense)
Other income for the year ended December 31, 2022 primarily represents the gain
of approximately $146,000 realized from the negotiated settlement of
legacy accounts payable with third-party vendors including the full release of
any ongoing payment liability.
Liquidity and Capital Resources
Overview
As of December 31, 2022, we had cash and cash equivalents of approximately $2.1
million, total current assets of approximately $2.6 million and total current
liabilities 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, 2022 and 2021, we incurred net losses of approximately $3.2 million and $0.1
million, respectively. As a consequence of a deemed dividend (contribution) in
2021, we had a net loss available for common stockholders of approximately $0.9
million in 2021. As of December 31, 2022, our accumulated deficit was
approximately $26.8 million and our stockholders' equity was approximately $2.2
million.
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We sold 3,957,757 shares of common stock to certain accredited investors
pursuant to Security Purchase Agreements in two private placements which closed
on April 29 and May 18, 2022 for proceeds of $3,957,757.
On August 24, 2022, we entered into a Common Stock and Warrant Purchase
Agreement with Pacific Medical, Inc. ("Pacific Med") for the sale and issuance
of shares of common stock and warrants to purchase shares of common stock.
Pursuant to the Common Stock and Warrant Purchase Agreement, Pacific Med
purchased 500,000 shares of the Company's common stock for $500,000 in September
2022. As part of the Common Stock and Warrant Purchase Agreement, we agreed to
grant to Pacific Med the right to participate in any future financing through
December 31, 2023 (the "Participation Rights") in connection with a listing of
our common stock on a national securities exchange. The Participation Rights
entitle Pacific Med to purchase up to 500,000 shares of common stock upon
substantially the same terms, conditions, and price provided for in such
financing. If such a financing does not occur by December 31, 2023, the Common
Stock and Warrant Purchase Agreement provides that we will issue Pacific Med a
warrant with a January 1, 2024 issuance date and exercisable until June 30, 2024
to purchase up to 500,000 shares of common stock at a price equal to the lower
of $2.00 per share or the 20-day volume weighted average closing price per share
ending December 31, 2023.
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. 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 financing 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.
We maintain our cash deposits primarily in financial institutions, which may at
times exceed amounts covered by insurance provided by the U.S. Federal Deposit
Insurance Corporation ("FDIC"). We have not experienced any losses related to
amounts in excess of FDIC limits.
Financing and Related Developments During the Years 2019 through 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.
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.
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.
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.
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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
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.
Pursuant to the Recap 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.
Warrant Modification Agreement and Early Warrant Exercise
Effective as of December 1, 2021, the Company entered into a Warrant
Modification Agreement 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:
Year Ended Year Ended
December 31, December 31,
2022 2021
Cash flows used in operating activities $ (3,706,126 ) $ (119,955 )
Cash flows used in investing activities $ (59,992 ) $
-
Cash flow provided by financing activities $ 4,457,757 $ 1,373,092
Operating Activities
Cash used in operating activities for the year ended December 31, 2022 of
approximately $3.7 million primarily reflects our net loss of approximately
$3.2 million adjusted by i) a non-cash gain of approximately $0.1 million from
the negotiated settlement of legacy accounts payable obligations, ii)
approximately $0.1 million in total amortization of right of use assets,
property and equipment depreciation, and stock-based compensation and
iii) approximately $0.5 million net change in operating assets and liabilities.
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.
Investing Activities
We had limited investing activities for the year ended December 31, 2022
totaling approximately $60,000. We had no investing activities for the year
ended December 31, 2021.
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Financing Activities
Cash flows from financing activities for the year ended December 31, 2022
reflects (i) approximately $4.0 million of proceeds raised from the sale of
3,957,757 shares of common stock in two private placements closed in April and
May 2022 and (ii) $0.5 million of proceeds from the Common Stock and Warrant
Purchase Agreement with Pacific Medical, Inc. in September 2022.
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.
Inflation
The Company does not believe that inflation has had a material effect 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,
recoverability and depreciable lives of long-lived assets, deferred taxes and
associated valuation allowance, and allowances for inventory obsolescence and
doubtful accounts. Actual results could differ from those estimates.
Revenue Recognition
We analyze our revenue arrangements to determine the appropriate revenue
recognition using the following steps: (i) identification of contracts with
customers; (ii) identification of distinct performance obligations in the
contract; (iii) determination of contract transaction price; (iv) allocation of
contract transaction price to the performance obligations; and (v) determination
of revenue recognition based on timing of satisfaction of the performance
obligation. We recognizes revenues upon the satisfaction of its performance
obligations (upon transfer of control of promised goods or services to
customers) in an amount that reflects the consideration to which it expects to
be entitled in exchange for those goods or services.
We provide for the sale of our products, including disposable processing sets
and supplies to customers. Revenue from the sale of products is recognized upon
shipment of products to the customers. We do not maintain a reserve for returned
products, as in the past those returns have not been material and are not
expected to be material in the future.
Stock-Based Compensation
We recognize expense in the consolidated statements of operations for the fair
value of all stock-based compensation to key employees, nonemployee directors
and advisors, generally in the form of stock options and stock awards.
We use the Black-Scholes option valuation model to estimate the fair value of
stock options on the grant date. Compensation cost is amortized on a
straight-line basis over the vesting period for each respective award.
We account for any forfeitures as they occur.
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:
? Level 1, defined as observable inputs such as quoted prices in active markets
for identical assets;
? Level 2, defined as observable inputs other than Level 1 prices such as quoted
prices for similar assets; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities; and
? Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
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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.
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