NUO THERAPEUTICS, INC. 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 theU.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 effectiveMay 1, 2019 as it awaited developments concerning Medicare coverage of the Aurix System under its National Coverage Decision ("NCD") reconsideration request. Product sales are anticipated to be reinitiated byMay 2022 after the favorable NCD determination was issued inApril 2021 , the Aurix System supply chain was re-established and equity capital was accessed inDecember 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
Revenue and Gross Profit There were no revenues in the years endedDecember 31, 2021 andDecember 31, 2020 as the Company ceased ongoing operational activities effectiveMay 1, 2019 and no longer treated subjects under the previous CED program with related product sales while selling its remaining Aurix inventory over the remainder of 2019. Operating Expenses Year Ended December 31 Variance 2021 2020 $ % Sales and marketing $ - $ - $ - NA Research and development - - - NA
General and administrative 90,668 378,060 (287,392 )
(76 ) Total operating expenses$ 90,668 $ 378,060 $ (287,392 ) (76 ) Total operating expenses decreased approximately$287,000 in the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 as the Company continued throughout the year in a non-operational state until late in the fourth quarter 2021 when we began to reinitiate some activities in advance of an expectation of a return to availability of the Aurix System byMay 2022 . A discussion of the various components of operating expenses follows below.
Sales and Marketing and Research and Development
Expenses in both categories remained at zero in the year ended
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Table of Contents General and Administrative Interest Expense, net
Interest expense was zero for the year ended
Other income (expense)
Other income (expense) was zero for the year ended
Comparison of the Years Ended
Revenue and Gross Profit
The following table presents the profitability of sales for the periods
presented:
Year Ended Year Ended
December 31, December 31,
2020 2019
Product sales $ - $ 146,000
Total revenues - 146,000
Product cost of sales - 115,000
Total cost of sales - 115,000
Gross profit (loss) $ - $ 31,000
Gross margin % NA % 21 %
Revenues and gross margin both declined to zero in the year ended December 31,
2020 compared to the prior year ended December 31, 2019 as product revenues
ceased in 2019 due to the non-operational status of the Company effective April
2019 and the conclusion of treating subjects in the CED studies.
Operating Expenses
Year Ended December 31 Variance
2020 2019 $ %
Sales and marketing $ - $ 30,457 $ (30,457 ) NA
Research and development - 181,185 (181,185 ) NA
General and administrative 378,060 789,119 (411,059 ) (52 )
Total operating expenses $ 378,060 $ 1,000,761 $ (622,701 ) (62 )
Total operating expenses decreased approximately $623,000 in the year ended
December 31, 2020 as compared to the year ended December 31, 2019 due primarily
to the Company's decision to cease normal operational activities effective May
1, 2019 . A discussion of the various components of operating expenses follows
below.
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Sales and Marketing and Research and Development
Expenses in both categories decreased to zero in the year ended
General and Administrative General and administrative expenses decreased approximately$411,000 (52%) to approximately$378,000 in the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . General and administrative expenses in 2020 beyond nominal cash costs to sustain minimum corporate viability was composed primarily of approximately$334,000 of non-cash compensation expense recognized in the fourth quarter 2020. The non-cash compensation expense represents the fair value of shares of common stock and warrants issued to three individuals comprising senior management, Company director, and third party counsel as compensation for past services rendered in connection with continued efforts of the Company since its cessation of regular operational status inMay 2019 , continued engagement with staff of CMS and various consultants concerning reimbursement coverage for Aurix under the long-standing national non-coverage decision, and various other activities and efforts to sustain the Company as a viable entity. The common stock and warrants were fully expensed on the date of issuance at their respective fair values of approximately$123,000 for the shares and approximately$211,000 for the warrants. Interest Expense, net Interest expense decreased approximately$173,000 to approximately$48,000 for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease was primarily due to the completed settlement of the convertible notes inFebruary 2020 which in the year endedDecember 31, 2019 had incurred interest expense charges totaling approximately$170,000 for debt discount amortization, note amendment fees paid in cash, and increases in the principal balance of the notes in conjunction with the amendments. During 2020, interest expense was primarily recognized on the senior notes prior to their conversion into shares of common stock inOctober 2020 . Other income (expense) Other income for the year endedDecember 31, 2020 consisted of the separate gains on debt extinguishment of approximately$246,000 and$90,000 in the first and fourth quarters of 2020, respectively. The first quarter 2020 gain resulted from the concluded settlement of the 2018 Convertible Notes and the fourth quarter gain represents the calculated difference between the$305,000 carrying value of the 2019 senior secured notes and the fair value of the reacquistion price of the assets transferred and equity securities issued.
Comparison of the Years Ended
Revenue and Gross Profit
The following table presents the profitability of sales for the periods
presented:
Year Ended Year Ended
December 31, December 31,
2019 2018
Product sales $ 146,000 $ 333,000
License revenue - 750,000
Royalties - 288,000
Total revenues 146,000 1,371,000
Product cost of sales 115,000 163,000
Total cost of sales 115,000 163,000
Gross profit (loss) $ 31,000 $ 1,208,000
Gross margin % 21 % 88 %
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Revenues decreased$1,255,000 (89%) to$146,000 , comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . This was primarily due to (i)$750,000 in licensing revenue recognized in 2018 attributable to the two Rohto transactions (ii)$288,000 of royalty revenues in 2018 attributable to the one-time royalty monetization payment on Aldeflour revenues and (iii) a decrease in Aurix product sales of$197,000 resulting from the 2019 cessation of CED study activity including the related product sales for patients treated. Overall gross profit decreased$1,178,000 to a gross profit of$31,000 while overall gross margin increased to 21% from 88%, comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The decrease in gross profit was primarily attributable to (i)$750,000 of Rohto related licensing revenue and$288,000 royalty monetization payment with no associated costs and (ii) a$139,000 decrease in gross profit on product sales. The decrease in gross margin on product sales only from 51% in 2018 to 21% in 2019 was primarily due to decreased absorption of depreciation expense charged to cost of product sales on a reduced amount of product sales. Operating Expenses Year Ended December 31 Variance 2019 2018 $ % Sales and marketing$ 30,457 $ 114,875 $ (84,418 ) (73 ) Research and development 181,185 576,192 (395,007 ) (69 ) General and administrative 789,119 2,021,237 (1,232,118 ) (61 ) Total operating expenses$ 1,000,761 $ 2,712,304 $ (1,711,543 ) (63 ) Total operating expenses decreased approximately$1,712,000 (63%) to approximately$1,001,000 comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The decrease was primarily due to approximately$1.2 and$0.4 million decreases in general and administrative and research and development expenses, respectively. A discussion of the various components of operating expenses follows below. Sales and Marketing Sales and marketing expenses decreased approximately$84,000 (73%) to approximately$30,000 comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The decrease was primarily due to the elimination of the remaining direct sales personnel during the first quarter 2018. Research and Development Research and development expenses decreased approximately$395,000 (69%) to approximately$181,000 comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The decrease was primarily due to (i) reduced headcount in the Clinical Affairs area and corresponding lower compensation expenses, and (ii) decreased clinical affairs costs reduced CED activity. General and Administrative General and administrative expenses decreased approximately$1,232,000 (61%) to approximately$789,000 comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The decrease was primarily due (i) a decrease of approximately$1.5 million in gross general and administrative expenses offset by a$240,000 bad debt recovery in 2018. The gross G&A decrease of approximately$1.5 million was realized in the amounts of approximately$0.4 million and$1.1 million during the first and second halves of 2019, respectively. General and administrative expenses were modestly negative during the second half of 2019 due to nominal costs resulting from the effective ceasing of normal business operations during the period which were more than fully offset by expense credits for revised accounts payable balances. By expense type, the aggregate$1.5 million expense decrease was comprised primarily of decreases in (i) compensation and benefits costs of approximately$800,000 resulting from theMay 1, 2019 furlough of company employees, (ii) rental expense of approximately$150,000 , (iii) board fees of approximately$120,000 , (iv) insurance costs of approximately$100,000 , and (v) aggregate costs of approximately$300,000 in various other expense categories including investor services, IT services, office expenses, and dues and fees. 24
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Table of Contents Interest Expense, net Interest expense, net increased approximately$183,000 to approximately$221,000 comparing the year endedDecember 31, 2019 to the year endedDecember 31, 2018 . The increase was primarily due to (i) increased increase expense of approximately$37,000 on the convertible notes for the full year 2019 and the senior secured notes which were funded in late 2019, (ii)$69,000 of cash fees for convertible note amendments treated as interest expense, (iii)$60,000 aggregate increase in the convertible note balances resulting from the note amendments which were also treated as interest expense, and (iv) approximately$15,000 increase in debt discount amortization in the 2019 period as compared to 2018.
Comparison of the Three Months Ended
Revenue and Gross Profit There were no revenues in any period during the years endedDecember 31, 2021 andDecember 31, 2020 as the Company ceased ongoing operational activities inApril 2019 and no longer treated subjects under the previous CED program with related product sales. Operating Expenses Three Months Ending March Variance 2021 2020 $ % Sales and marketing $ - $ - $ - NA Research and development - - -
NA
General and administrative 5,721 42,378 (36,657 ) (87 ) Total operating expenses$ 5,721 $ 42,378 $ (36,657 ) (87 )
Comparison of the Three and Six Months Ended
Revenue and Gross Profit
There were no revenues in any period during the years endedDecember 31, 2021 andDecember 31, 2020 as the Company ceased ongoing operational activities inApril 2019 and no longer treated subjects under the previous CED program with related product sales. 25
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Operating Expenses
Three Months Ending June Variance Six Months Ending June Variance
2021 2020 $ % 2021 2020 $ %
Sales and
marketing $ - $ - $ - NA $ - $ - $ - NA
Research and
development - - - NA - - - NA
General and
administrative 6,546 5,793 753 13 12,267 48,171 (35,904 ) (75 )
Total operating
expenses $ 6,546 $ 5,793 $ 753 13 $ 12,267 $ 48,171 $ (35,904 ) (75 )
Comparison of the Three and Nine Months Ended
Revenue and Gross Profit
There were no revenues in any period during the years endedDecember 31, 2021 andDecember 31, 2020 as the Company ceased ongoing operational activities inApril 2019 and no longer treated subjects under the previous CED program with related product sales. Operating Expenses Three Months Ending September Variance Nine Months Ending September Variance 2021 2020 $ % 2021 2020 $ % Sales and marketing $ - $ - $ - NA $ - $ - $ - NA Research and development - - - NA - - - NA General and administrative 6,751 6,254 497 8 19,018 54,425 (35,407 ) (65 ) Total operating expenses$ 6,751 $ 6,254 $ 497 8$ 19,018 $ 54,425 $ (35,407 ) (65 )
Comparison of the Three Months Ended
Revenue and Gross Profit
Three Months Ended Three Months Ended
March 31, March 31,
2020 2019
Product sales $ - $ 39,000
Total revenues - 39,000
Product cost of sales - 28,000
Total cost of sales - 28,000
Gross profit (loss) $ - $ 11,000
Gross margin % NA % 28 %
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Revenue and gross profit decreased to zero in the three months endedMarch 31, 2020 compared to the prior year period as the Company ceased normal operational activities effectiveMay 1, 2019 and proceeded to sell its remaining product inventory over the remainder of 2019. Operating Expenses Three Months Ending March Variance 2020 2019 $ % Sales and marketing $ -$ 19,728 $ (19,728 ) NA Research and development - 94,348 (94,348 ) NA General and administrative 42,378 508,287 (465,909 ) (92 ) Total operating expenses$ 42,378 $ 622,363 $ (579,985 ) (93 )
Comparison of the Three and Six Months Ended
Revenue and Gross Profit
Three and Six Three Months
Months Ended Ended
June 30, June 30,
2020 2019
Product sales $ - $ 44,000
Total revenues - 39,000
Product cost of sales - 33,000
Total cost of sales - 28,000
Gross profit (loss) $ - $ 11,000
Gross margin % NA % 25 %
Revenue and gross profit decreased to zero in the three and six months ended
June 30, 2020 compared to the prior year periods as the Company ceased normal
operational activities effective May 1, 2019 and proceeded to sell its remaining
product inventory over the remainder of 2019.
Operating Expenses
Three Months Ending June Variance Six Months Ending June Variance
2020 2019 $ % 2020 2019 $ %
Sales and
marketing $ - $ 10,729 $ (10,729 ) NA $ - $ 30,457 $ (30,457 ) NA
Research and
development - 84,137 (84,137 ) NA - 178,485 (178,485 ) NA
General and
administrative 5,793 308,114 (302,321 ) (98 ) 48,171 816,401 (768,230 ) (94 )
Total operating
expenses $ 5,793 $ 402,980 $ (397,187 ) (99 ) $ 48,171 $ 1,025,343 $ (977,172 ) (95 )
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Comparison of the Three and Nine Months Ended
Revenue and Gross Profit
Three and Nine Three Months
Months Ended Ended
September 30, September 30,
2020 2019
Product sales $ - $ 58,000
Total revenues - 58,000
Product cost of sales - 35,000
Total cost of sales - 35,000
Gross profit (loss) $ - $ 23,000
Gross margin % NA % 40 %
Revenue and gross profit decreased to zero in the three and nine months ended
September 30, 2020 compared to the prior year periods as the Company ceased
normal operational activities effective May 1, 2019 and proceeded to sell its
remaining product inventory over the remainder of 2019.
Operating Expenses
Three Months Ending September Variance Nine Months Ending September Variance
2020 2019 $ % 2020 2019 $ %
Sales and
marketing $ - $ - $ - NA $ - $ - $ - NA
Research and
development - 2,700 (2,700 ) NA - 181,185 (181,185 ) NA
General and
administrative 6,254 59,166 (52,912 ) (89 ) 54,425 875,567 (821,142 ) (94 )
Total operating
expenses $ 6,254 $ 61,866 $ (55,612 ) (90 ) $ 54,425 $ 1,056,752 $ (1,002,327 ) (95 )
Liquidity and Capital Resources
Overview As ofDecember 31, 2021 , we had cash and cash equivalents of approximately$1.4 million resulting from the Warrant Modification Agreement and Early Exercise described below, total current assets of approximately$1.5 million and total current liabilities of approximately$0.7 million . As ofMarch 31, 2022 , we had cash and cash equivalents of approximately$0.6 million . As an operational business, we have a history of losses and are not currently profitable. For the years endedDecember 31, 2021 , 2020, and 2019, we incurred net losses of approximately$0.1 million ,$0.1 million , and$1.2 million , respectively. As a consequence of deemed dividends (contributions) in 2020 and 2021, we had net income available for common stockholders of approximately$7.7 million in 2020 and a net loss available for common stockholders of approximately$0.9 million in 2021. As ofDecember 31, 2021 , our accumulated deficit was approximately$23.6 million and our stockholders' equity was approximately$0.8 million . 28
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Our continuing losses and limited cash resources raise substantial doubt about our ability to continue as a going concern, and we need to raise substantial additional funds in order to continue to conduct our business. If we are unable to secure sufficient capital to fund our operating activities, we may be forced to delay further the completion of, or significantly reduce the scope of, our current business plan, delay the pursuit of commercial insurance reimbursement for our wound treatment technologies, and postpone the hiring of new personnel.
It is uncertain whether we will be able to obtain such financing on satisfactory terms or at all.
We may not be able to obtain additional capital as required to finance our efforts, through equity or debt financings or any combination thereof, on satisfactory terms or at all. Additionally, any such financing, if at all obtained, may not be adequate to meet our capital needs and to support our operations.
Financing and Related Developments in 2018, 2019, 2020, and 2021
Spring 2019 Cessation of Normal Operating Activities
InApril 2019 , the Company made the decision to cease normal operational activities and we furloughed the Company's remaining employees effectiveMay 1, 2019 . This decision was necessitated by the depletion of the Company's resources during the conduct of the CED studies being undertaken to pursue Medicare reimbursement coverage for the Aurix System. In the spring of 2019, we had collected clinical outcomes and analyzed the data from the subjects involved in the CED studies and were engaged in discussions with CMS concerning the adequacy of the results and a NCD reconsideration request.
2018 Monetization Transactions
During the year endedDecember 31, 2018 , the Company was able to monetize several of its remaining assets, including through agreements with Rohto, as described in "Business -Aurix Licensing and Collaboration Agreement," and with STEMCELL, as described in "Business - Patents, Licenses, and Property Rights." While the sale of those assets provided critical inflow of funds to alleviate the Company's ongoing liquidity concerns, the Company now has no further assets left to monetize and is facing immediate cessation of operations and liquidation. OnMay 28, 2018 , we entered into a pair of agreements with Rohto Pharmaceutical Co., Ltd. ("Rohto"). Pursuant to a securities purchase agreement, dated as ofMay 28, 2018 , the Company issued to Rohto, and Rohto agreed to purchase from the Company, 1,000,000 shares of the Company's common stock at a price of$0.50 per share onJune 11, 2018 .
Convertible Notes Issuance and Amendments
OnSeptember 17, 2018 , we entered into two separate financing transactions with two separate investors,Auctus Fund, LLC ("Auctus") andEMA Financial, LLC ("EMA" and, collectively withAuctus , the "Investors"). Pursuant to separate securities purchase agreements, the Company issued and sold to the Investors 12% convertible promissory notes, each in the principal amount of$175,000 , for an aggregate purchase price of$315,800 (reflecting a combined$34,200 in original issue discount and transaction fees) (the "2018 Convertible Notes" or the "notes"). OnSeptember 17, 2018 , the Company issued the notes to the Investors. Pursuant to the purchase agreements, the Company also issued to each Investor a warrant exercisable to purchase 233,333 shares of the Company's common stock, for an aggregate of 466,666 shares of common stock, subject to adjustment as referenced below. The 2018 Convertible Notes matured nine months from the date of issuance (June 17, 2019 ) and, in addition to any original issue discount, accrued interest at a rate of 12% per year. The maturity date of the note issued to EMA was extendable up to one year beyond the original maturity date at the option of EMA. Under the original terms of the notes, the Company could prepay the notes, in whole or in part, for 130% of outstanding principal and interest ending on the date that is 90 days following the date of issuance, and for 145% of outstanding principal and interest at any time commencing on the date that is 91 days following the date of issuance and ending on the date that is 180 days following the date of issuance, to the extent that it was not then in default under the notes. Under the original terms of the notes, beginning on the date that is 181 days following the date of issuance, the Company could no longer prepay the notes. Under the original terms of the notes, after six months from the date of issuance, the Investors could convert the notes, at any time, in whole or in part, into shares of the Company's common stock, at a conversion price corresponding to a 40% discount to the average of the two lowest trading prices of the common stock during the 25 trading days prior to the conversion, subject to certain adjustments and price-protection provisions contained in the notes, including full-ratchet anti-dilution protection in the case of dilutive issuance of securities that do not meet the requirements of "exempt issuance" as defined in the notes. 29
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OnMarch 19, 2019 ,May 3, 2019 ,June 10, 2019 , andAugust 6, 2019 , the Company entered into amendments to the 2018 Convertible Notes. The amendments extended the date when the Company could prepay the notes and deferred the date upon which theConvertible Note Investors could initiate conversion of the notes into common shares of the Company pursuant to the notes' terms untilSeptember 17, 2019 in the case of the fourth amendment. The Company paid the Convertible Note Investors cumulative amendment fees totaling$69,000 representing approximately 20% of the face value of the 2018 Convertible Notes and agreed to an increase in the principal balance of each note to$205,000 or$30,000 . The maturity date of theAuctus note was also extended untilSeptember 17, 2019 . OnDecember 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 thanFebruary 10, 2020 . The Company made the required cash payments totaling$220,000 onDecember 10, 2019 and issued the common shares as ofFebruary 5, 2020 in final settlement of the 2018 Convertible Notes. The Company was required to maintain authorized and unissued shares of its common stock equal to seven times the number issuable upon conversion of the notes. Each note contained potential additional discounts to the conversion price upon the occurrence of an event of default or specified other events related to the trading status of the Company's common stock (which would result in a higher number of shares being issued if converted). The notes included certain event of default provisions, a default interest rate of 24% per year and certain penalties for specified breaches that would be added to the principal amount of such note. Upon the occurrence of an event of default, the Investors could require the Company to redeem the note (or convert it into shares of common stock) at 150% of the outstanding principal balance plus accrued and unpaid interest. The notes also restricted the Company's ability to make distributions to its shareholders, repurchase its shares, borrow funds, or sell its assets (with limited exceptions). The warrants are exercisable at any time, at an exercise price per share equal to$0.15 , subject to certain adjustments and price protection provisions (including full ratchet anti-dilution protection) contained in the warrants. The warrants have five-year terms.
The transaction documents also included most favored nations provisions and limitations on the Company's ability to offer additional securities (unless the use of proceeds was to repay the notes).
Senior Secured Note Issuance OnNovember 15, 2019 andDecember 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 theSenior 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 theSenior Note Investors by the Company. 30
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The notes had a maturity date ofJune 30, 2020 and accrued interest at a rate of 12% per year. The Company could prepay the Senior Notes, in whole or in part, at any time. The warrants were exercisable at any time, at an exercise price per share equal to$0.40 , subject to certain adjustments and price protection provisions (including full ratchet anti-dilution protection) contained in the warrants. The warrants had five-year terms. The use of proceeds from the Notes beyond the initial$50,000 and up to an estimated aggregate amount of$270,000 (for the sake of clarity, such aggregate amount is not deemed to include the initial$50,000 ) was specifically dedicated to payment to theConvertible Note Investors , in a final amount to be agreed between the Company and theConvertible Note Investors such that the 2018 Convertible Notes were considered retired and no longer in effect.
Series A Preferred Stock Exchange Agreement
By letter dated
By letter datedSeptember 10, 2020 , theSenior Note Investors notified the Company pursuant to Del.UCC Sections 9-620 and 9-621 of their unconditional alternative proposals to accept from the Company, onOctober 1, 2020 , a transfer of all collateral securing the Senior Notes in full satisfaction of the indebtedness due under the related loan documents. OnSeptember 21, 2020 , theSenior Note Investors proposed to the Company an alternative restructuring proposal, which formed the basis for the Recapitalization Agreement described below. OnOctober 5, 2020 (the "Effective Date"), the Company entered into a Recapitalization Agreement (the "Recap Agreement) withDeerfield Private Design Fund II, L.P. ("DPDF") andDeerfield 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 theDeerfield 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 throughSeptember 30, 2020 of approximately$30,400 into an aggregate 838,487 shares of common stock (the "Conversion Shares") of the Company at a conversion price of$0.40 per share, plus the purchase, for cash, of 487,500 shares of common stock (the "Purchase Shares") at$0.40 per share, or$195,000 in total. On the Effective Date, all shares of Series A preferred stock and Senior Notes were cancelled in full.Lawrence S. Atinsky , theDeerfield Investors' representative on the Company's board, resigned as of the Effective Date, and the number of Company directors was reduced to four. Outstanding options to purchase common stock held byMr. Atinsky as of the Effective Date were canceled. Pursuant to the Agreement, the Company also issued to theSenior Note Investors warrants to purchase an aggregate of 3,977,961 shares of the Company's common stock, subject to adjustment as referenced below. The warrants were exercisable at any time, at an exercise price per share equal to$0.40 , subject to certain adjustments and price protection provisions (including full ratchet anti-dilution protection) contained in the warrants. The warrants had five-year terms. The warrants to purchase 457,500 shares of common stock issued to the Noteholders upon the original 2019 issuance of the Notes were canceled. Series A Preferred Stock Under our 2016 Plan of Reorganization, the Company issued 29,038 shares of Series A Preferred Stock to the Deerfield lenders. The Series A Preferred Stock had no stated maturity date, was not convertible or redeemable and carried a liquidation preference of$29,038,000 , which was required to be paid to holders of such Series A Preferred Stock before any payments were made with respect to shares of common stock (and other capital stock that was not issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction. For so long as Series A Preferred Stock was outstanding, the holders of Series A Preferred Stock had the right to nominate and elect one member of the Board of Directors.Lawrence S. Atinsky served on our Board as the designee of the holders of Series A Preferred Stock, which are all currently affiliates ofDeerfield Management Company, L.P. , of whichMr. Atinsky is a Partner. The Series A Preferred Stock had voting rights, voting with the common stock as a single class, representing approximately one percent (1%) of the voting rights of the capital stock of the Company, and the holders of Series A Preferred Stock had the right to approve certain transactions. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limited the Company's ability to (i) issue securities that were senior or pari passu with the Series A Preferred Stock, (ii) incur debt other than for working capital purposes not in excess of$3.0 million , (iii) issue securities that were junior to the Series A Preferred Stock and that provided certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, (iv) pay dividends on or purchase shares of its capital stock, and (v) change the authorized number of members of its Board of Directors to a number other than five, in each case without the consent of holders representing at least two-thirds of the outstanding shares Series A Preferred Stock. 31
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As described above, the Series A Preferred Stock was extinguished in conjunction
with the Recap Agreement effective
Warrant Modification Agreement and Early Warrant Exercise
Effective as ofDecember 1, 2021 , the Company entered into a Warrant Modification Agreement (the "WMA") with the holders of an aggregate 6,865,461 Warrants (the "Warrant Investors ") whereby the Warrants were modified to adjust the warrant exercise price from$0.40 per share to$0.20 per share provided the Investor exercised the warrant prior toJanuary 31, 2022 . All Warrants not exercised prior toJanuary 31, 2022 were to be forfeited and deemed expired or otherwise cancelled.
As of
Cash Flows
Net cash provided by (used in) operating, investing, and financing activities for the periods presented were as follows (in millions):
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2021 2020 2019
Cash flows used in operating activities $ (0.1 ) $ (0.1 ) $ (0.9 )
Cash flows provided by (used in)
investing activities $ - $ - $ -
Cash flow provided by financing
activities $ 1.4 $ 0.2 $ 0.3
Operating Activities
Cash used in operating activities for the year ended
Cash used in operating activities for the year endedDecember 31, 2020 of$0.1 million primarily reflects our net loss of$0.1 million adjusted by (i) approximately$0.3 million of equity based compensation expense which was fully offset by approximately$0.3 million gain on the extinguishment of debt. Cash used in operating activities for the year endedDecember 31, 2019 of$0.9 million primarily reflects our net loss of$1.2 million adjusted by (i) approximately$0.1 million of depreciation expense, and (ii) approximately$0.1 million of debt discount amortization. Investing Activities
We had no material investing activities in the years ended
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Table of Contents Financing Activities Cash provided by financing activities for the year endedDecember 31, 2021 of$1.4 million represents proceeds from the early exercise of warrants inDecember 2021 . Cash provided by financing activities for the year endedDecember 31, 2020 of$0.2 million of net proceeds represents the purchase of shares of common stock for proceeds of$195,000 inOctober 2020 in conjunction with the Series A Preferred Stock exchange agreement. Cash provided by financing activities for the year endedDecember 31, 2019 of$0.3 million of net proceeds represents the proceeds from the issuance of senior secured notes in November andDecember 2019 . Inflation
The Company believes that the rates of inflation in recent years have not had a significant impact on its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance withU.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 withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to stock-based compensation, the fair value of common stock and equity-linked and derivative financial instruments, recoverability and depreciable lives of long-lived assets, deferred taxes and associated valuation allowance, the valuation and classification of debt instruments, and allowances for inventory obsolescence and doubtful accounts. Actual results could differ from those estimates. 33
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Basic and Diluted Earnings (Loss) per Share
In periods of net loss, basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential dilutive common shares is anti-dilutive. For periods of net income, diluted earnings per share is computed using the more dilutive of the "treasury method" or "two class method." Dilutive earnings per share under the "treasury method" is calculated by dividing net income available to common stockholders by the weighted- average number of shares outstanding plus the dilutive impact of all potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method, and convertible notes using the if-converted method. Because none of the Company's equity-linked financial instruments contain non-forfeitable rights to dividends, the "two class" method results in the same diluted earnings per share as the "treasury method." Fair Value Measurements Our consolidated balance sheets include certain financial instruments that are carried at fair value. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date.U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:
? 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.
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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