Nuo Therapeutics, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

Table of Contents

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

 

FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended March 31, 2019

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number 001-32518

 

 

 Nuo Therapeutics, Inc.

 

(Exact Name of Registrant as Specified in its Charter)

 

Delaware	23-3011702
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 

209 Perry Parkway, Suite 7
Gaithersburg, MD 20877

(Address of Principal Executive Offices) (Zip Code)

 

(240) 499-2680

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of May 15, 2019, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 23,722,400.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

 

 

 

NUO THERAPEUTICS, INC.
 
TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits	24
Signatures	25
Exhibit Index

 

 

 

		March 31, 2019				December 31, 2018
ASSETS
Current assets
Cash and cash equivalents		$	185,314			$	636,927
Accounts receivable, net			46,959				22,170
Inventory, net			17,310				25,348
Prepaid expenses and other current assets			128,213				182,243
Total current assets			377,796				866,688
Property and equipment, net			80,274				105,479
Deferred costs and other assets			3,330				3,330
Total assets		$	461,400			$	975,497
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable		$	531,019			$	437,325
Accrued expenses and liabilities			274,930				285,199
Accrued interest payable			22,594				12,166
Convertible notes, net			330,969				309,010
Derivative liabilities			13,784				13,784
Total liabilities			1,173,296				1,057,484
Commitments and contingencies (Note 8)
Stockholders' deficit
Preferred stock; $0.0001 par value, 1,000,000 authorized, 29,038 issued and outstanding; liquidation value of $29,038,000			3				3
Common stock; $0.0001 par value, 100,000,000 shares authorized, 23,722,400 shares issued and outstanding			2,372				2,372
Additional paid-in capital			22,182,273				22,132,273
Accumulated deficit			(22,896,544	)			(22,216,635	)
Total stockholders' deficit			(711,896	)			(81,987	)
Total liabilities and stockholders' deficit		$	461,400			$	975,497

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		Three Months ended March 31, 2019				Three Months ended March 31, 2018
Revenue
Product sales		$	39,229			$	124,910
Royalties			-				35,033
Total revenue			39,229				159,943
Costs of revenue
Costs of sales			28,699				49,004
Total costs of revenue			28,699				49,004
Gross profit			10,530				110,939
Operating expenses
Sales and marketing			19,728				61,123
Research and development			94,348				258,035
General and administrative			508,287				459,507
Total operating expenses			622,363				778,665
Loss from operations			(611,833	)			(667,726	)
Other income (expense)
Interest, net			(68,076	)			44
Other			-				(2,565	)
Total other income (expense)			(68,076	)			(2,521	)
Net loss		$	(679,909	)		$	(670,247	)
Loss per common share
Basic		$	(0.03	)		$	(0.03	)
Diluted		$	(0.03	)		$	(0.03	)
Weighted average common shares outstanding
Basic			23,722,400				22,722,400
Diluted			23,722,400				22,722,400

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		For the Three Months Ended March 31,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(679,909	)		$	(670,247	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			25,205				26,084
Stock-based compensation			-				2,983
Bad debt recovery			-				(239,660	)
Increase in allowance for inventory obsolescence			-				949
Loss on the disposal of fixed assets			-				3,928
Amortization of debt discount			21,959				-
Changes in operating assets and liabilities:
Accounts and other receivables			(24,789	)			12,386
Inventory			8,038				(2,557	)
Prepaid expenses and other current assets			54,030				103,580
Accounts payable			93,694				156,033
Accrued expenses and liabilities			39,731				61,384
Accrued interest			10,428				-
Other liabilities			-				(1,443	)
Net cash used in operating activities			(451,613	)			(546,580	)
Net decrease in cash, cash equivalents and restricted cash			(451,613	)			(546,580	)
Cash, cash equivalents and restricted cash at beginning of period			636,927				693,515
Cash, cash equivalents and restricted cash at end of period		$	185,314			$	146,935
Supplemental cash flow information
Interest expense paid in cash		$	-			$	-
Income taxes paid in cash		$	-			$	-
Non-cash investing and financing activities
Issuance of options to settle accrued compensation liabilities		$	50,000			$	-

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Note 1 – Description of Business

 

Description of Business

Nuo Therapeutics, Inc. (“Nuo Therapeutics,” the “Company,” “we,” “us,” or “our”) is a biomedical company marketing its products primarily within the U.S. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous (from self) biological therapies for tissue repair and regeneration is part of a transformative clinical strategy designed to improve long term recovery in complex chronic conditions with significant unmet medical needs.

 

Currently, our commercial offering consists solely of the Aurix point of care technology for the safe and efficient separation of autologous blood to produce a platelet-based therapy for the chronic wound care market. Prior to May 5, 2016 (the “Effective Date”), the effective date of the Company’s emergence from bankruptcy under a confirmed Plan of Reorganization (See Note 6), we had two distinct platelet rich plasma (“PRP”) devices: the Aurix® System for wound care, and the Angel® concentrated Platelet Rich Plasma (“cPRP”) System for orthopedics markets. Prior to the Effective Date, Arthrex, Inc. (“Arthrex”) was our exclusive distributor for Angel. Pursuant to the Plan of Reorganization, on May 5, 2016, the Company assigned its rights, title and interest in and to the existing license agreement with Arthrex to Deerfield Management Company, L.P. and its affiliates (“Deerfield”), as well as rights to collect royalty payments thereunder.

 

 

Note 2 – Liquidity and Summary of Significant Accounting Principles

 

Liquidity

Since our inception, we have financed our operations by raising debt, issuing equity and equity-linked instruments, and executing licensing arrangements, and to a lesser extent by generating royalties and product revenues.  We have incurred, and continue to incur, recurring losses and negative cash flows.  As of March 31, 2019, we have negative working capital and a shareholder deficit.  At March 31, 2019, we had cash and cash equivalents on hand of approximately $0.2 million, and $0.35 million of face value convertible notes payable.

 

During the year ended December 31, 2018, the Company was able to monetize several of its remaining assets, including through agreements with Rohto Pharmaceuticals and STEMCELL Technologies.  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. 

 

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet our obligations as they become due.

 

We believe based on the operating cash requirements and capital expenditures expected for the next twelve months that our current resources and projected revenue from sales of Aurix are insufficient to support our operations beyond 30 days of this filing.  As such, we believe that substantial doubt about our ability to continue as a going concern exists.

 

Even assuming we succeed in raising sufficient additional funds in the near future to avoid a cessation of business operations, we require additional capital and will seek to continue financing our operations with external capital for the foreseeable future.   Any equity financings may cause further substantial dilution to our stockholders and could involve the issuance of securities with rights senior to the common stock. Any allowed debt financings (which are severely restricted under the terms of the convertible notes and the Certificate of Designations for our Series A Preferred Stock) may require us to comply with additional onerous financial covenants and restrict our business operations. Our ability to complete additional financings is dependent on, among other things, market reception of the Company and perceived likelihood of success of our business model, 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, 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, other transactions 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 we are unable to secure sufficient capital to fund our operating activities or we are unable to increase revenues significantly, we may be forced to further 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.   Moreover, if we are unable within the next 30 days to secure sufficient capital to fund our ongoing operating activities, we will likely be required to cease operations. 

 

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The consolidated balance sheet at December 31, 2018, has been derived from audited financial statements of the Company as of that date. The interim unaudited consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

  

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned and controlled subsidiary, Aldagen, Inc. (“Aldagen”). All significant inter-company accounts and transactions are eliminated in consolidation.

 

Use of Estimates

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

 

Credit Concentration

We generate accounts receivable from the sale of our product. Customer receivable balances in excess of 10% of total receivables at March 31, 2019 and December 31, 2018 were as follows:

 

 

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

 

 

 

Historically, we have used single suppliers for several components of the Aurix product line. We outsource the manufacturing of various product components to contract manufacturers. While we believe these manufacturers demonstrate competency, reliability and stability, there is no assurance that one or more of them will not experience an interruption or inability to provide us with the products needed to satisfy customer demand. Additionally, while most of the components of Aurix are generally readily available on the open market, a reagent, bovine thrombin, is available exclusively through Pfizer, with whom we have an established vendor relationship.

 

Cash Equivalents

We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents in the form of money market deposit accounts and qualifying money market funds and checking accounts with financial institutions that we believe are credit worthy.

 

Accounts Receivables, net

We generate accounts receivables from the sale of our products. We provide for an allowance against receivables for estimated losses that may result from a customer’s inability or unwillingness to pay. The allowance for doubtful accounts is estimated primarily based upon historical write-off percentages, known problem accounts, and current economic conditions. Accounts are written off against the allowance for doubtful accounts when we determine that amounts are not collectable. Recoveries of previously written-off accounts are recorded when collected. At March 31, 2019 and December 31, 2018, we maintained an allowance for doubtful accounts of approximately $2,000. Effective with an executed settlement agreement as of March 29, 2018, we recognized a bad debt recovery of approximately $240,000 for a prior value added tax receivable in the three months ended March 31, 2018.

 

Inventory, net

Our inventory is produced by third-party manufacturers and consists of raw materials and finished goods. Inventory cost is determined on a first-in, first-out basis and is stated at the lower of cost or net realizable value. We maintain an inventory of kits, reagents, and other disposables that have shelf-lives that generally range from 18 months to two years.

 

As of March 31, 2019, our inventory consisted of approximately $9,000 of finished goods and $15,000 of raw materials. As of December 31, 2018, our inventory consisted of approximately $15,000 of finished goods and $17,000 of raw materials.

 

We provide for an allowance against inventory for estimated losses that may result in excess and obsolete inventory (i.e., from the expiration of products). Our allowance for expired inventory is estimated based upon the inventory’s remaining shelf-life and our anticipated ability to sell such inventory, which is estimated using historical usage and future forecasts, within its remaining shelf life. At March 31, 2019 and December 31, 2018, the Company maintained an allowance for expired and excess and obsolete inventory of approximately $7,000. Expired products are segregated and used for demonstration purposes only; the Company records the associated expense for this reserve to cost of sales in the consolidated statements of operations.

  

Property and Equipment, net

Property and equipment is stated at cost less accumulated depreciation and amortization.  Assets are depreciated, using the straight-line method, over its estimated useful life ranging from one to six years.  Leasehold improvements are amortized, using the straight-line method, over the lesser of the expected lease term or its estimated useful life ranging from one to three years. Amortization of leasehold improvements is included in depreciation expense. Maintenance and repairs are charged to operations as incurred. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in other income (expense).

 

Centrifuges may be sold or placed at no charge with customers. Depreciation expense for centrifuges that are available for sale or placed at no charge with customers are charged to cost of sales. Depreciation expense for centrifuges used for sales and marketing and other internal purposes are charged to general and administrative expenses.

 

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which we can identify assets. If such assets are considered to be impaired, impairment is recognized as the amount by which the carrying amount of assets exceeds the fair value of the assets. 

 

Leases

At the inception of a contract, the Company determines if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  Rent expense is recognized on a straight-line basis over the lease term.

 

The Company has made certain accounting policy elections whereby the Company (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less) and (ii) combines lease and non-lease elements of its operating leases. 

 

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 consolidated statements of operations. Direct costs associated with product sales and royalty revenues are recorded at the time that revenue is recognized.

 

Segments and Geographic Information

Approximately 0% and 30% of our total revenue was generated outside of the United States for the three months ended March 31, 2019 and 2018, respectively. All revenue generated outside the United States was attributable to royalty revenue.

 

Stock-Based Compensation

The fair value of employee stock options is measured at the date of grant. Expected volatilities for the 2016 Omnibus Plan options are based on the equally weighted average historical volatility from five comparable public companies with an expected term consistent with ours. Expected years until exercise represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated that the dividend rate on its common stock will be zero.

 

Stock-based compensation for awards granted to non-employees is periodically re-measured as the underlying awards vest. The Company recognizes an expense for such awards throughout the performance period as the services are provided by the non-employees, based on the fair value of these options and warrants at each reporting period. The fair value of stock options and compensatory warrants issued to service providers utilizes the same methodology with the exception of the expected term. For awards to non-employees, the Company estimates that the options or warrants will be held for the full term.

 

Excess tax benefits and tax deficiencies related to stock-based compensation awards are recognized as income tax expenses or benefits in the income statement, and excess tax benefits are classified along with other income tax cash flows in the operating activities section of the condensed consolidated statement of cash flows. Additionally, the Company elected to account for forfeitures of stock-based awards as they occur, as opposed to estimating those prior to their occurrence.

 

Income Taxes

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

 

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items in 2019 and 2018.

 

Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding (including contingently issuable shares when the contingencies have been resolved) during the period.

 

For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive. For periods of net income, and when the effects are not anti-dilutive, diluted earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares outstanding (including contingently issuable shares when the contingencies have been resolved) plus the impact of all potential dilutive common shares, consisting primarily of common stock options and stock purchase warrants using the treasury stock method, and convertible debt using the if-converted method. 

 

 

All of the Company’s outstanding stock options and warrants were considered anti-dilutive for the three months ended March 31, 2019 and 2018. The total number of anti-dilutive shares underlying common stock options and warrants exercisable for common stock, which have been excluded from the computation of diluted loss per share for the periods presented, was as follows:

 

 

 

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018. The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company adopted this guidance effective January 1, 2019 using the following practical expedients: 

 

●

the Company did not reassess if any expired or existing contracts are or contain leases

●

the Company did not reassess the classification of any expired or existing leases.

 

Additionally, the Company made ongoing accounting policy elections whereby the Company (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less) and (ii) combines lease and non-lease elements of its operating leases. 

 

Upon adoption of the new guidance on January 1, 2019, there was no impact on the Company’s financial statements.

 

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

 

Subsequent Events

The Company’s management reviewed all material events through the date the consolidated financial statements were issued for subsequent event disclosure consideration.

 

 

Note 3 – Distribution, Licensing and Collaboration Arrangements

 

Collaboration Agreement with Restorix Health

 

On March 22, 2016, we entered into a Collaboration Agreement with Restorix Health (“Restorix”), pursuant to which we agreed to provide Restorix with certain limited geographic exclusivity benefits over a defined period of time for the usage of the Aurix System in up to 30 of the approximately 125 hospital outpatient wound care clinics with which Restorix has a management contract (the “RXH Partner Hospitals”), in exchange for Restorix making minimum commitments of patients enrolled in three prospective clinical research studies primarily consisting of patient data collection (the “Protocols”) necessary to maintain exclusivity under the Collaboration Agreement. The initial term of the Collaboration Agreement expired in March 2018 and has not been extended by the parties. 

 

 

Boyalife Distribution Agreement

 

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

 

 

 

Note 4 – Receivables

 

Accounts receivable, net consisted of the following:

 

 

The allowance for doubtful accounts at March 31, 2019 and December 31, 2018 of approximately $2,000 reflects the estimated reserve for trade receivables.

 

 

 

Note 5 – Property and Equipment

 

Property and equipment, net consisted of the following:

 

 

Depreciation expense of property and equipment was approximately $25,000 and $26,000 for the three months ended March 31, 2019 and 2018, respectively.

 

 

 

Note 6 – Convertible Notes and Stock Purchase Warrants

 

On September 17, 2018, the Company entered into securities purchase agreements with Auctus Fund, LLC (“Auctus”) and EMA Financial, LLC (“EMA” and, collectively with Auctus, the “Investors”) for the issuance and sale to the Investors of 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). 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 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 Investors by the Company.

 

The notes mature nine months from the date of issuance (June 17, 2019) and, in addition to any original issue discount, accrue interest at a rate of 12% per year. 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, but only if the Company 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. The maturity date of the note issued to EMA may be extended up to one year beyond the original maturity date at the option of EMA.

 

Under the original terms of the notes, after six months from the date of issuance, the Investors may convert the notes, at any time, in whole or in part, into shares of the Company’s common stock, at a conversion price corresponding to a 40% discount to the average of the two lowest trading prices of the common stock during the 25 trading days prior to the conversion, subject to certain adjustments and price-protection provisions contained in the notes, including full-ratchet anti-dilution protection in the case of dilutive issuances of securities that do not meet the requirements of “exempt issuances” as defined in the notes. 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 issued upon conversion). 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 the relevant note. Upon the occurrence of an event of default, an Investor may require the Company to redeem their note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. The notes also restrict the Company’s ability to make distributions to its shareholders, repurchase its shares, borrow funds, or sell its assets (with limited exceptions).

 

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

 

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

 

The warrants are treated as equity and the fair market value at issuance of approximately $18,000 was recorded as a credit to additional paid-in-capital based on the relative fair values of the debt and warrant at issuance.  The notes were evaluated and found to have a bifurcated embedded conversion option requiring the variable conversion option to be recorded at fair market value at issuance and each quarterly reporting period.  The embedded conversion option at issuance was valued at $13,784 using a Monte Carlo analysis with the following assumptions: 2.46% risk free interest rate, 364% volatility over a nine-month period, 0.75 year term, a dividend yield of 0%, the 40% discount to market price conversion price formula, and a 35% discount for lack of marketability.  Debt discount is being amortized as interest expense via the straight-line method which closely approximates the effective interest method given the short nine-month term of the notes.

 

On March 19, 2019 and again on May 3, 2019, the Company entered into amendments to the convertible notes. The amendments extended the date when the Company may prepay the notes and deferred the date upon which the Investors can initiate conversion of the notes into common shares of the Company pursuant to the notes’ terms initially until April 30, 3019 and then until May 31, 2019.  The Company paid the Investors amendment fees totaling $52,000 representing approximately 15% of the face value of the convertible notes.

 

Interest expense, net was $68,076 for the three months ended March 31, 2019 including $21,959 for amortization of debt discount and $35,000 for fees associated with amendments to the convertible notes. As of March 31, 2018, and during the three months then ended, the Company had no debt outstanding and there was no material. interest expense, net for the three months ended March 31, 2018.

 

 

 

Note 7 – Equity and Stock-Based Compensation

 

Under the Second Amended and Restated Certificate of Incorporation, it has the authority to issue a total of 101,000,000 shares of capital stock, consisting of 100,000,000 shares of common stock and 1,000,000 shares of preferred stock, par value $0.0001 per share, which will have such rights, powers and preferences as the Board of Directors of the Company shall determine.

 

Series A Preferred Stock

 

On May 5, 2016, the Company filed a Certificate of Designations of Series A Preferred Stock with the Delaware Secretary of State, designating 29,038 shares of the Company’s undesignated preferred stock, par value $0.0001 per share, as Series A Preferred Stock. On May 5, 2016, the Company issued 29,038 shares of Series A Preferred Stock to the Deerfield Lenders in accordance with the Plan pursuant to the exemption from the registration requirements of the Securities Act provided by Section 1145 of the Bankruptcy Code. The Deerfield Lenders did not receive any shares of common stock or other equity interests in the Company.

 

 

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

 

Common Stock

 

On May 28, 2018, the Company sold 1,000,000 common shares for $500,000 to Rohto. See Note 6 – Convertible Notes and Stock Purchase Warrants for information on the issuance of notes convertible into common stock in September 2018.

 

Stock Purchase Warrants

 

As part of the Plan of Reorganization, the Company also issued warrants to purchase 6,180,000 shares of unregistered common stock to certain investors participating in the recapitalization of the Company. The warrants terminate on May 5, 2021 and are currently exercisable at exercise prices ranging from $0.50 per share to $0.75 per share. The number of shares of common stock underlying a warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations. The warrants are classified in equity. 

 

See Note 6 – Convertible Notes and Stock Purchase Warrants for information on the issuance of warrants to purchase an aggregate of 466,666 shares of unregistered common stock to the convertible note investors in September 2018.

 

Stock-Based Compensation

 

In July 2016, the Board of Directors approved the Company’s 2016 Omnibus Incentive Plan (the “2016 Omnibus Plan”), and on August 4, 2016, the Board amended such plan to include an evergreen provision, intended to increase the maximum number of shares issuable under the Omnibus Plan on the first day of each fiscal year (starting on January 1, 2017) by an amount equal to six percent (6%) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases may not exceed 1,000,000 shares. As of November 21, 2016, holders of a majority of our capital stock executed a written consent adopting and approving the 2016 Omnibus Plan, as amended and restated, which provides for the Company to grant equity and cash incentive awards to officers, directors and employees of, and consultants to, the Company and its subsidiaries. We were authorized to issue up to 1,786,524 shares of common stock under the 2016 Omnibus Plan as of March 31, 2019. 

 

A summary of stock option activity under the 2016 Omnibus Plan during the three months ended March 31, 2019 is presented below: 

 

 

 

There were 125,000 stock options granted under the 2016 Omnibus Plan during the three months ended March 31, 2019 to settle accrued compensation liabilities with the Company’s senior management. The fair value of these stock options granted and immediately vested during the three ended March 31, 2019 was approximately $2,600. As the options issued were to related parties, the $50,000 of settled liabilities was credited to additional paid-in-capital. No stock options were exercised during the three months ended March 31, 2019. As of March 31, 2019, there was no unrecognized compensation cost related to non-vested stock options.

 

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

 

 

 

Note 8 – Commitments and Contingencies

 

As of the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with certain accredited investors who acquired common shares in accordance with the Plan of Reorganization (the “Recapitalization Investors”).  The Registration Rights Agreement provides certain resale registration rights to the Recapitalization Investors with respect to the common shares they received.  Pursuant to the Registration Rights Agreement, the Company filed, and has to update periodically, a registration statement with the U.S. Securities and Exchange Commission that covers the resale of all shares of common stock issued to the Investors on the Effective Date until such time as such shares have been sold or may be sold without registration or restriction pursuant to Rule 144 under the Securities Act, subject to the Company's ability to suspend sales under the registration statement in certain circumstances. As the Company does not qualify for forward incorporation by reference, the Company has caused the suspension of sales under the registration statement pending the filing and effectiveness of a post-effective amendment containing updated financial information.

 

Our primary office and warehouse facilities are located in Gaithersburg, Maryland, and comprise approximately 12,000 square feet. The facilities fall under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $19,300 in total per month and expiring in September 2019. Effective August 1, 2018, we executed a first amendment to the more significant of the lease agreements permitting the deferral of a portion of the monthly rent until the final three months of the lease period and totaling approximately $100,000.

 

The landlord of our principal executive offices located in Gaithersburg, Maryland has filed, with the District Court of Maryland for Montgomery County, a complaint for repossession of rented property and for a judgment of payment of unpaid rent and other amounts due alleged to aggregate approximately $46,000 including attorney's fees.  The landlord has filed for an eviction notice which has not yet been posted and is subject to the landlord’s enforcement.

 

 

 

 

 

 

 

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