NUO THERAPEUTICS, INC. The following discussion and analysis of the financial condition and results of
operations of
Special Note Regarding Forward Looking Statements
Some of the information in this Quarterly Report (including this section)
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate, or imply future
results, performance, or achievements, and may contain the words "anticipate,"
"believe," "estimate," "expect," "intend," "the facts suggest," "will," "will
be," "will continue," "will likely result," "could," "may" and words of similar
import. These statements reflect the Company's current view of future events and
are subject to certain risks and uncertainties as noted in this Quarterly Report
and in other reports filed by us with the
? the fact that our cash resources have now been depleted, with only
cash left at
additional financing (without which we face liquidation) and our ability to
obtain that financing, including in light of our outstanding convertible notes,
Series A preferred stock and the low share price and significant volatility
with respect to our common stock - if we were required to liquidate today, the
holders of our common stock would not receive any consideration for their
common stock; ? the significant likelihood that theCoverage and Analysis Group (CAG) of the
reopening the national coverage determination (NCD) for diabetic foot ulcers on
a timely basis, including in light of the
expressing significant reservations about the CED "study design and adherence
to that design,... the wide variation in clinical care patients in both
[treatment] groups…and the statistical analysis" and indicating that the NCD
would likely not be reopened until sometime in 2020; ? the lack of resources to adopt and execute an alternate study design and the
low likelihood of the Company's ability to attract additional third-party
capital for such purposes given the experience with CED to date and CMS'
inability or unwillingness to indicate what would constitute sufficient
evidence warranting a favorable coverage determination; ? significant uncertainty surrounding an agreed path forward for Aurix as an
accessible product option for physicians treating Medicare beneficiaries with
chronic wounds - in the absence of such a path, the Company will likely have to
cease operations; ? the fact that we have no significant assets left to monetize other than the Aurix System itself; ? our limited sources of working capital; ? whether CMS will increase the standard national payment rate for physicians for
the use of Aurix so that it will provide an adequate payment to physicians to
increase such use sufficiently; ? our history of losses and expectation that, even if we were to obtain
sufficient financing immediately to continue operating, we will incur losses in
the foreseeable future; ? our limited operating experience; ? acceptance of our products by the medical community and patients; ? our ability to obtain adequate reimbursement from third-party payors; ? whether the advisory opinion issued in response to a petition to theOffice of
Inspector General, or OIG, of the
DHHS, effectively permitting the petitioning hospital to reduce or waive
Medicare patients' 20% co-payment with respect to the Aurix CED program in
certain cases, will in fact cause other healthcare providers to make similar
waivers;
? whether CMS will continue to consider their treatment of the geometric mean
cost of the services underlying the Aurix System, or Aurix, to be comparable to
the geometric mean cost of Ambulatory Payment Classification ("APC 5054") in
the future; ? our ability to maintain classification of Aurix as APC 5054; ? whether CMS will continue to maintain the current national average
reimbursement rate of
ability to be reimbursed at a profitable national average rate per application
in the future; ? uncertainties surrounding the price at which our common stock will continue
trading on the OTC market (with such price having declined substantially)
and the limited trading volume or liquidity of our common stock; ? our reliance on several single source suppliers and our ability to source raw
materials at affordable costs;
? our ability to protect our intellectual property;
? our compliance with governmental regulations;
? our ability to contract with healthcare providers;
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? our ability to successfully sell and market the Aurix System; ? our ability to retain and attract key personnel; and ? our ability to successfully pursue strategic collaborations to help develop,
support or commercialize our products.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could differ materially from those anticipated in these forward-looking statements.
In addition to the risks identified under the heading "Risk Factors" in our Annual Report and the other filings referenced above, other sections of this report may include additional factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release any revisions to its forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
Business Overview
As disclosed below under "Liquidity and Capital Resources," we have depleted our cash resources and our ability to continue to operate is in immediate jeopardy.
We are a regenerative therapies company developing and marketing products for
chronic wound care primarily within the
Our current commercial offering consists of a point of care technology for the
safe and efficient separation of autologous (i.e., the patient's own) blood to
produce a platelet-based therapy for the chronic wound care market ("Aurix" or
the "Aurix System"). The
The Aurix System produces a platelet rich plasma, or PRP, gel at the point of care using the patient's own platelets and plasma. Aurix comprises a natural, endogenous complement of protein and non-protein signal molecules that contribute to effective healing. During treatment, the patient's platelets are activated and release hundreds of growth factor proteins and other signaling molecules that form a biologically active hematogel. Aurix delivers concentrations of the natural complement of cytokines, growth factors and chemokines that are known to regulate angiogenesis (i.e., the development of new blood vessels), cell growth and the formation of new tissue. Once applied to the prepared wound bed, the biologically active Aurix hematogel can restore the balance in the wound environment to transform a non-healing wound to a wound that heals naturally.
A 2012 Medicare National Coverage Determination, or NCD, from the
Since early 2015, we have been primarily pursuing enrollment of patients into
three clinical study protocols authorized and approved by CMS under CED. Under
these three protocols, Aurix can be used for venous, pressure and diabetic foot
ulcers for wound types of all severities and for patients with various and often
difficult comorbidities. The Company's collaboration with
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Although FDA cleared the Aurix System for marketing in 2007 under Section 510(k)
of the FDCA, CMS only established economically viable reimbursement for the
product beginning in 2016. For 2018, the CMS national average reimbursement rate
for the Aurix System is
Our Strategy
In light of our unsuccessful discussions with
On
At the meeting and based on a suggestion from CAG representatives in prior conversations, we presented preliminary statistical data from the three protocols with an emphasis on diabetic foot ulcers (DFUs) as that protocol had the largest enrollment. The preliminary analysis indicated that there was a statistically significant healing benefit for the treatment arm (Aurix plus Usual and Customary Care) versus Usual and Customary Care (UCC) alone. Uniquely for these CED protocols intended to represent real world clinical practice, UCC was defined to include essentially any wound care therapy which the treating clinician and patient determined was in the best interests of promoting a healing benefit for the wound.
After our
? An Intent to Treat population of 129 patients with DFUs were randomized to
either Aurix (n=66) or UCC (n=63) in 28 wound care centers.
? Given the intent to focus on standard clinical practice, the study included
more severe wounds and a range of difficult comorbidities that are normally
not allowed in traditional clinical trials conducted in wound care.
? 84% of wounds were classified as Wagner grade 2 or 3 (an additional 8% Wagner
grade 4) representing wound severity far more pronounced than seen in standard
wound care clinical studies.
? 48.5% (32) of Aurix treatment arm and 30.2% (19) of UCC only control
arm wounds healed within the study's 12-week treatment period (p=0.0304).
? In a smaller subgroup of 80 patients where Aurix was the only advanced wound
care therapy utilized; i.e., only standard of care dressings and ointments
with no usage of hyperbaric oxygen, negative pressure wound therapy, and/or
cellular/tissue products:
o 51% (26/51) of Aurix treatment arm wounds healed
o 27.6% (8/29) of UCC only control arm wounds healed.
? Smoking (52%) and peripheral arterial disease (43%) were the most prevalent
health risks and comorbidities present in the study population.
? There was no statistical association between these health risks/comorbidities
and the treatment and control arms that would confound interpretation of the
healing outcomes between the two arms.
We believe these data for DFUs as collected and analyzed under CED in combination with the other clinical evidence collected and published by the Company over the past several years provides sufficient evidence to warrant a re-opening of the NCD for DFUs and an ultimate determination that coverage of Aurix is appropriate and in the best interests of Medicare beneficiaries.
We met again with CAG representatives on
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On
On
We presently lack the resources to adopt and execute an alternate study design and are skeptical of the ability to attract additional third-party capital for such purposes given the experience with CED to date and CMS' inability or unwillingness to indicate what would constitute sufficient evidence warranting a favorable coverage determination. We are presently considering all possible options with regards to Aurix as a product and the Company's continued viability.
The expansion of Medicare reimbursement to patients outside of CED can be
achieved only after a successful NCD re-determination. There are no assurances
that broad access and reimbursement can be achieved. Because Medicare
beneficiaries represent the majority of chronic wound patients in
Even under any plausible scenario by which we can access sufficient short-term capital in a time frame necessary for us to avoid the complete cessation of normal business operations or liquidation in the immediate future, we will require significant additional capital to fully support an expanded commercialization initiative designed to increase market adoption and penetration of Aurix. See "- Liquidity and Capital Resources.
The Science Underlying Aurix/Platelet Rich Plasma
Normal Wound Healing
The science underlying wound healing is well-established. An immediate early event critical for wound healing is the influx of platelets to the wound site. Platelets bind to elements within damaged tissue such as collagen fragments and endogenous thrombin molecules and are activated to release a diversity of growth factors and other biomolecules from their alpha and dense granules (Reed 2000, Nieswandt, 2003). These biomolecules provide signals essential for biological responses regulating hemostasis and effective tissue regeneration.
Chronic Wounds
Dysregulation of numerous cellular and biological responses contribute to the chronic wound phenotype. Chronic wounds have reduced levels of growth factors and concomitant decreases in cellular proliferation (Mast 1996). There is increased cellular senescence (Telgenhoff 2005), and there generally is a lack of perfusion that can inhibit the delivery of nutrients and cells required for regeneration (Guo 2010). As the body attempts to stave off infection, elevated concentrations of free radicals accumulate in the chronic wound and further damage surrounding tissue (Moseley 2004, James 2003).
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Table of Contents Aurix Therapy
Aurix has been cleared by FDA as safe and effective with an indication for chronic wounds such as leg ulcers, pressure ulcers, and diabetic ulcers and other exuding wounds such as mechanically or surgically debrided wounds. The Aurix therapeutic is formed by mixing a sample of a patient's platelets and plasma with pharmaceutical grade thrombin and ascorbic acid. The thrombin activates platelets while ascorbic acid drives the synthesis of high tensile strength collagen, clears damaging free radicals and controls gel consistency. The topical dermal application of Aurix gel bypasses the lack of local perfusion to provide immediate signals for new tissue formation and ultimately healing.
The Efficacy of Aurix Relates to Biological Activity Released by Platelets
Regenerative Capacity
More than 300 proteins are released by human platelets in response to thrombin activation (Coppinger, 2004). Important examples include vascular endothelial cell growth factor (VEGF), platelet derived growth factor (PDGF), epidermal growth factor (EGF), fibroblast growth factor (FGF) and transforming growth factor-beta (TGF-B) (Eppley 2004, Everts 2006). These proteins are critical for organized wound healing, regulating responses such as vascularization, cell proliferation, cell differentiation, and deposition of new extracellular matrix (Goldman 2004). Platelets also release chemokines such as Interleukin-8 (IL-8), stromal cell derived factor-1 (SDF-1), and platelet factor-4 (PF-4) (Chatterjee 2011, Gear 2003) that control the mobilization and migration of stem cells and fibroblasts, (Werner 2003 and Gillitzer 2001) that contribute to tissue regeneration.
Anti-infective Activity
Populations of bioburden in chronic wounds vary over time and wounds invariably retain or become re-infected with some level of bacteria that is detrimental to healing (Howell-Jones 2005). In addition to regenerative capacity, platelets release anti-microbial peptides effective against a broad range of pathogens including Methicillin Resistant Staphylococcus Aureus (MRSA) (Moojen 2007, Jia 2010, Tang 2002, Bielecki 2007).
Clinical Efficacy
Multiple efficacy and effectiveness studies have been published in peer reviewed journals documenting the impact of using Aurix to treat chronic wounds. Key data beyond what is discussed above concerning the recently analyzed CED data in DFUs include:
? In a double blinded randomized controlled trial, 81% of the most common-sized
diabetic foot ulcers healed with Aurix compared with 42% of control wounds.
Mean time to healing was 6 weeks. (Driver V, Hanft J, Fylling, C et al.: A
Prospective, Randomized, Controlled Trial of Autologous Platelet-Rich Plasma
Gel for the Treatment of Diabetic Foot Ulcers. Ostomy Wound Management, 2006;
52(6): 68-87.)
? In 285 chronic wounds in 200 patients, 96.5% of the wounds had a positive
response within an average of 2.2 weeks with an average of 2.8 Aurix
treatments (de Leon J, Driver VR, Fylling CP, Carter MJ, Anderson C, Wilson J,
et al.: The Clinical Relevance of Treating Chronic Wounds With an Enhanced
Near-physiological Concentration of Platelet-Rich Plasma (PRP) Gel. Advances
in Skin and Wound Care, 2011; 24(8), 357-368.)
? In a retrospective, longitudinal study of 40 Wagner grade II through IV
diabetic foot ulcers, most with critical limb ischemia, wounds increased in
size in the approximate 100 days prior to the initiation of comprehensive
wound care treatment. Upon treatment with debridement, revascularization,
antibiotics and off-loading, the wounds continued to increase in size over a
subsequent 75-day period. Once they were then treated with Aurix, the wounds
immediately changed healing trajectory and 83% of the wounds healed with an
average of 6.1 Aurix treatments per wound (Sakata, J., Sasaki, S., Handa, K.,
et al. A Retrospective, Longitudinal Study to Evaluate Healing Lower
Extremity Wounds in Patients with Diabetes Mellitus and Ischemia Using
Standard Protocols of Care and Platelet-Rich Plasma Gel in a Japanese Wound
Care Program. Ostomy Wound Management, 2012; 58(4):36-49.)
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Table of Contents Results of Operations
Comparison of Three Months Ended
The amounts presented in this comparison section are rounded to the nearest thousand.
Revenue and Gross Profit
The following table presents the profitability of sales for the periods
presented:
Three Three
months ended months ended
September 30, September 30,
2019 2018
Product sales $ 58,000 $ 65,000
Royalties - 195,000
Total revenues 58,000 260,000
Product cost of sales 35,000 45,000
Total cost of sales 35,000 45,000
Gross profit $ 23,000 $ 215,000
Gross margin % 40 % 83 %
Revenues decreased by
Overall gross profit decreased
Operating Expenses
Total operating expenses decreased approximately
Sales and Marketing
Sales and marketing expenses decreased approximately
Research and Development
Research and development expenses decreased approximately
General and Administrative
General and administrative expenses decreased approximately
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Table of Contents Other Income (Expense)
Other expense, net decreased by approximately
Comparison of Nine Months Ended
The amounts presented in this comparison section are rounded to the nearest thousand.
Revenue and Gross Profit
The following table presents the profitability of sales for the periods
presented:
Nine Nine
months ended months ended
September 30, September 30,
2019 2018
Product sales $ 141,000 $ 270,000
Royalties - 288,000
Total revenues 141,000 558,000
Product cost of sales 97,000 132,000
Total cost of sales 97,000 132,000
Gross profit $ 44,000 $ 426,000
Gross margin % 31 % 76 %
Revenues decreased by
Overall gross profit decreased
Operating Expenses
Total operating expenses decreased approximately
Sales and Marketing
Sales and marketing expenses decreased approximately
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Table of Contents Research and Development
Research and development expenses decreased approximately
General and Administrative
General and administrative expenses decreased approximately
Other Income (Expense)
Other expense, net decreased by approximately
Liquidity and Capital Resources
We have depleted our cash resources and our ability to continue to operate is in
immediate jeopardy. At
We have a history of losses and are not currently profitable. Our ongoing
operating revenues have continued to decline significantly since 2016. For the
nine months ended
During the year ended
On
Convertible Note Issuance and Amendments
On
The 2018 Convertible Notes had an original maturity nine months from the date of
issuance (
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Under the original terms of the notes, the Company may prepay the notes, in
whole or in part, for 130% of outstanding principal and interest ending on the
date that is 90 days following the date of issuance, and for 145% of outstanding
principal and interest at any time commencing on the date that is 91 days
following the date of issuance and ending on the date that is 180 days following
the date of issuance, to the extent that it is not then in default under the
notes. Under the original terms of the notes, beginning on the date that is 181
days following the date of issuance, the Company may no longer prepay the notes.
Under the original terms of the notes, after six months from the date of
issuance, the
On
The Company is required to maintain authorized and unissued shares of its common stock equal to seven times the number issuable upon conversion of the notes. Each note contains potential additional discounts to the conversion price upon the occurrence of an event of default or specified other events related to the trading status of the Company's common stock (which would result in a higher number of shares being issued if converted).
The notes include certain event of default provisions, a default interest rate of 24% per year and certain penalties for specified breaches that would be added to the principal amount of such note. Upon the occurrence of an event of default, the Investors may require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. The notes also restrict the Company's ability to make distributions to its shareholders, repurchase its shares, borrow funds, or sell its assets (with limited exceptions).
The warrants are exercisable at any time, at an exercise price per share equal
to
The transaction documents also include most favored nations provisions and limitations on the Company's ability to offer additional securities (unless the use of proceeds is to repay the notes).
Senior Secured Note Issuance
On
In conjunction with the note issuance, the Company granted a first-priority
security interest in all the assets of the Company but fundamentally consisting
of the Aurix asset including all regulatory files and approvals and relevant
intellectual property. The purchase agreements contain certain representations,
warranties and covenants by, among and for the benefit of the respective
parties. The purchase agreements also provide for customary indemnification of
the
The notes have a maturity date of
The use of proceeds from the Notes beyond the initial
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Fifth Amendment to 2018 Convertible Notes
On
Current Liquidity Situation
Our continuing losses and depleted cash raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds immediately in order to continue to conduct business operations. If we are unable within the next 90 days to raise substantial additional funds, we will likely be forced to permanently cease operations and liquidate our assets. If we were required to liquidate today, the holders of our common stock would not receive any consideration for their common stock as a result of the outstanding 2018 Convertible Notes, the Senior Notes, and the liquidation preference of the holder of our Series A Preferred Stock.
Any equity financings, to the extent permitted under the terms of the 2018 Convertible Notes and the Certificate of Designations for our Series A Preferred Stock, may cause further substantial dilution to our stockholders and could involve the issuance of securities with rights senior to the common stock. Any allowed debt financings (which are restricted under the terms of the 2018 Convertible Notes and the Certificate of Designations for our Series A Preferred Stock) may require us to comply with onerous financial covenants and restrict our business operations. The 2018 Convertible Notes, for example, contain severely restrictive covenants and default provisions. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed equity or debt offering, state of the credit markets at the time of any proposed loan financing, market reception of the Company and perceived likelihood of success of our business model, and on the relevant transaction terms, among other things. We may not be able to obtain additional capital as required to finance our efforts, through equity or debt financings or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.
If adequate capital cannot be obtained on a timely basis and on satisfactory terms, it would continue to have a material adverse effect on our ability to reinitiate business operations, and our revenues and operations and the value of our common stock would continue to be materially negatively impacted and we may be forced to permanently cease our operations.
Our business is subject to certain risks and uncertainties including those
described in "Item 1.A Risk Factors" in our Annual Report on Form 10-K for the
year ended
Cash Flows
Net cash provided by (used in) operating, investing, and financing activities for the periods presented were as follows:
Nine months Nine months
ended ended
September 30 , September 30,
2019 2018
Cash flows used in operating activities
- $ 2,000
Cash flow provided by financing activities $ - $ 816,000
Operating Activities
Cash used in operating activities for the nine months ended
Cash used in operating activities for the nine months ended
Investing Activities Investing Activities
We did not have any material investing activities for the nine months ended
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Table of Contents Financing Activities
We did not have any financing activities for the nine months ended
Cash provided by financing activities for the nine months ended
Inflation
The Company believes that the rates of inflation in recent years have not had a significant impact on its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Critical Accounting Policies
A "critical accounting policy" is one that is both important to the portrayal of our financial condition and results of operations and that requires management's most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. We have identified the following accounting policies as critical to the successor company.
Use of Estimates
The preparation of financial statements in conformity with
Revenue Recognition
The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
We provide for the sale of our products, including disposable processing sets and supplies to customers. Revenue from the sale of products is recognized upon shipment of products to the customers. We do not maintain a reserve for returned products as in the past those returns have not been material and are not expected to be material in the future.
Percentage-based fees on licensee sales of covered products are generally recorded as products are sold by licensees and are reflected as royalties in the condensed consolidated statements of operations. Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.
We have evaluated all other issued and unadopted Accounting Standards Updates and believe the adoption of these standards will not have a material impact on our results of operations, financial position, or cash flows.
Adopted Accounting Guidance
For a discussion of significant accounting guidance recently adopted, see Note 2 of the Notes to Unaudited Consolidated Financial Statements included elsewhere herein.
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