Business and Summary of Significant Accounting Principles (Policies)

3 Months Ended

Mar. 31, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Policy Text Block]

Description of Business

Nuo Therapeutics, Inc. (“Nuo Therapeutics,” the “Company,” “we,” “us,” or “our”) is a biomedical company marketing products within the U.S. and internationally. We commercialize innovative cell-based technologies that harness the regenerative capacity of the human body to trigger natural healing. The use of autologous 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. Growth drivers in the U.S. include Medicare coverage for the treatment of chronic wounds under a National Coverage Determination when registry data is collected under Coverage with Evidence Development (“CED”), and a worldwide distribution and licensing agreement that allows our partner to promote the Angel^® System for all uses other than wound care.

Our current commercial offerings consist of point of care technologies for the safe and efficient separation of autologous blood and bone marrow to produce platelet based therapies or cell concentrates. We currently have two distinct platelet rich plasma (“PRP”) devices, the Aurix™ System for wound care and the Angel concentrated Platelet Rich Plasma (“cPRP”) System used primarily in the orthopedic and cardiovascular markets. During the first quarter of 2015, approximately 90% of our product sales were generated in the United States where we sell our products through direct sales representatives and distributors. Beginning in 2013, Arthrex, Inc. (“Arthrex”) became our exclusive distributor for Angel. 

Since our inception, we have financed our operations by raising debt, issuing equity and equity-linked instruments, 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. In 2014, we raised $35 million from the issuance of convertible debt and warrants and $2.0 million from the sale of common stock and warrants. We used approximately $6.2 million of the proceeds from these transactions to retire outstanding debt and accrued interest in 2014, and we converted approximately $3.1 million of previously outstanding convertible debt and interest into common stock. 

At March 31, 2015 we had total debt outstanding of $36.5 million including accrued interest, and we had cash and cash equivalents on hand of $11.8 million. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results. The accompanying unaudited interim condensed 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 that our current resources, expected revenue from current products, royalty revenue and license fees will be adequate to maintain our operations through at least the end of 2015. Accordingly, management believes the going-concern basis is appropriate for the accompanying condensed consolidated financial statements.

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed 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 condensed consolidated balance sheet at December 31, 2014, has been derived from audited financial statements of that date. The interim condensed 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 United States Securities and Exchange Commission, or the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our annual report on Form 10-K for the year ended December 31, 2014. Certain prior period information has been reclassified to conform to the current period presentation.

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and controlled subsidiary. All significant inter-company accounts and transactions are eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

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 unaudited condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts, valuation of derivative liabilities and contingent consideration, contingent liabilities, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of fixed assets (including intangible assets and goodwill). Actual results could differ from those estimates.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash Equivalents

We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Pursuant to the terms of the Deerfield Facility Agreement (See Note 4 - Debt and Derivative Liabilities for additional details), we are required to maintain a compensating cash balance of $5,000,000 in deposit accounts subject to control agreements in favor of the lenders. Approximately $11,319,691 and $15,486,000 held in financial institutions was in excess of FDIC insurance at March 31, 2015 and December 31, 2014, respectively.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Credit Concentration

Our accounts receivables balance at March 31, 2015 was primarily from Arthrex (72%). In addition, Arthrex accounted for 90% and 89% of total products sales in the quarters ended March 31, 2015 and 2014, respectively. No other single customer accounted for more than 5% of total product sales.

We use single suppliers for several components of the Angel and Aurix product lines. We outsource the manufacturing of various products, including component parts for Angel, to contract manufacturers. While we believe these manufacturers to 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.

Receivables, Policy [Policy Text Block]

Accounts Receivables

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, 2015 and December 31, 2014, we maintained an allowance for doubtful accounts of $67,516 and $32,000, respectively.

Inventory, Policy [Policy Text Block]

Inventory

Our inventory is produced by third party manufacturers and consists primarily of 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 five years. In order to meet the anticipated disposable product requirements of our customers, among other reasons, we purchased a certain inventory item at a price which is significantly higher than the previous purchase price for this item. Management is currently exploring alternative supply arrangements and strategies to reduce these costs.

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, 2015 and December 31, 2014, the Company maintained an allowance for expired and excess and obsolete inventory of $103,240 and $90,000, respectively. Expired products are segregated and used for demonstration purposes only; the Company records the associated expense for this reserve to costs of products sales in the condensed consolidated statement of operations.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and is depreciated, using the straight-line method, over its estimated useful life ranging from two to five years for all assets except for furniture, lab, and manufacturing equipment which is depreciated over seven and ten years, respectively. Leasehold improvements are stated at cost less accumulated depreciation and is amortized, using the straight-line method, over the lesser of the expected lease term or its estimated useful life ranging from three to six 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, leased, or placed at no charge with customers. Depreciation expense for centrifuges that are available for sale, leased, or placed at no charge with customers are charged to costs of product 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.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Intangible Assets and Goodwill

Intangible assets were acquired as part of our acquisitions of the Angel business and Aldagen, and consist of definite-lived and indefinite-lived intangible assets, including goodwill.

Definite-lived intangible assets

Our definite-lived intangible assets include trademarks, technology (including patents) and customer relationships, and are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators were present, we test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the carrying amount (i. e., the asset is not recoverable), we would perform the next step, which is to determine the fair value of the asset and record an impairment loss, if any. We periodically reevaluate the useful lives for these intangible assets to determine whether events and circumstances warrant a revision in their remaining useful lives. There were no triggering events identified during the three months ended March 31, 2015 and 2014 that would suggest an impairment test may be needed. We recognized an impairment charge related to our trademarks of $1.0 million in the second quarter of 2014.

Indefinite-lived intangible assets

We evaluate our indefinite-lived intangible asset, consisting solely of in-process research and development (“IPR&D”) acquired in the Aldagen acquisition, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis on October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we would recognize an impairment loss in the amount of that excess. There were no triggering events identified during the three months ended March 31, 2015 and 2014 that would suggest an impairment test may be needed. We recognized an impairment charge related to our IPR&D of $3.7 million in the second quarter of 2014.

Goodwill

Goodwill represents the purchase price of acquisitions in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Goodwill is tax deductible in all relevant jurisdictions. As a result of our acquisition of Aldagen in February 2012, we recorded goodwill of approximately $422,000. Prior to the acquisition of Aldagen, we had goodwill of approximately $707,000 as a result of the acquisition of the Angel business in April 2010.

We conduct an impairment test of goodwill on an annual basis as of October 1 of each year, and will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the Company’s fair value below its net equity value. The Company conducted an impairment test of our Goodwill as of October 1, 2014, and concluded that Goodwill was not impaired.

Exit Activities [Policy Text Block]

Exit Activities

In May 2014, we announced preliminary efficacy and safety results of our RECOVER-Stroke Phase 2 clinical trial in patients with neurological damage arising from ischemic stroke and treated with ALD-401. Observed improvements in the primary endpoint (mean modified Rankin Score or mRS) of the trial were not clinically or statistically significant. In light of this outcome, we discontinued further funding of the ALD-401 development program, decided to close our facilities in Durham, NC, and terminated certain employees, and recognized approximately $695,000 of expenses in 2014 associated with the exit activities; approximately $386,899 remains accrued and unpaid as of March 31, 2015. The accrued loss will be  amortized over the life of the lease against future rental payments made and sublet income payments received.

Conditionally Redeemable Common Stock, Policy [Policy Text Block]

Conditionally Redeemable Common Stock

The Maryland Venture Fund (“MVF,” part of Maryland Department of Business and Economic Development) has an investment in our common stock, and can require us to repurchase the common stock, at MVF’s option, upon certain events outside of our control. MVF’s common stock is classified as contingently redeemable common shares in the accompanying unaudited condensed consolidated balance sheets.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

We recognize revenue when the four basic criteria for recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured.

Sales of products

We provide for the sale of its 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.

Usage or leasing of blood separation equipment

As a result of the acquisition of the Angel business, we acquired various multiple element revenue arrangements that combined the (i) usage or leasing of blood separation processing equipment, (ii) maintenance of processing equipment, and (iii) purchase of disposable processing sets and supplies. We assigned these multiple element revenue arrangements to Arthrex in 2013 and no longer recognize revenue under these arrangements.

Percentage-based fees on licensee sales of covered products, including those sold by Arthrex, 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.

Deferred revenue at March 31, 2015 consists of prepaid licensing revenue of $1,341,257 from the licensing of Angel centrifuges, which is being recognized on a straight-line basis over the five-year term of the agreement. Revenue of $100,595 related to the prepaid license was recognized during both the three months ended March 31, 2015 and 2014. In 2013, a medical device excise tax came into effect that required manufacturers to pay tax of 2.3% on the sale of certain medical devices; we report the medical device excise tax on a gross basis, recognizing the tax as both revenue and costs of sales.

License Fees

 

The Company’s license agreement with Rohto (See Note 2 – Distribution and License Arrangements for additional details) contains multiple elements that include the delivered license and other ancillary performance obligations, such as maintaining its intellectual property and providing regulatory support and training to Rohto. The Company has determined that the ancillary performance obligations are perfunctory and incidental and are expected to be minimal and infrequent. Accordingly, the Company has combined the ancillary performance obligations with the delivered license and is recognizing revenue as a single unit of accounting following revenue recognition guidance applicable to the license. Because the license is delivered, the Company recognized the entire $3.0 million license fee as revenue for the three months ended March 31, 2015. Other elements contained in the license agreement, such as fees and royalties related to the supply and future sale of the product, are contingent and will be recognized as revenue when earned.

Segment Reporting, Policy [Policy Text Block]

Segments and Geographic Information

We operate in one business segment. Approximately 10% and 28% of our product sales were generated outside of the United States for the quarters ended March 31, 2015 and 2014, respectively.

Research and Development Expense, Policy [Policy Text Block]

Research and Development Expenses

Research and development costs are expensed as incurred; advance payments are deferred and expensed as performance occurs.  Research and development costs include salaries and wages and related benefits, including stock-based compensation expense, clinical trials, CED costs, related material and supplies, contract services and other outside services. 

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation

The Company awards stock options, restricted stock or equity instruments to employees, directors, consultants, and other service providers under its 2002 Long-Term Incentive Plan or 2013 Equity Incentive Plan (collectively, the “Plans”). The Company also issues stock purchase warrants to service providers outside of the Plans.

Stock-based compensation cost for employee and non-employee director stock options is determined at the grant date using an option pricing model and stock-based compensation cost for restricted stock is based on the closing market price of the stock at the grant date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee's requisite service period. Stock-based compensation for awards granted to non-employees is periodically remeasured as the underlying equity awards vest. We recognize 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. We recognize the estimated fair value of stock-based awards and classify the expense where the underlying salaries or other related costs are classified.

Valuation of stock awards requires management to make assumptions and to apply judgment to determine the fair value of the awards. The fair value of equity-based compensation awards is estimated on the accounting grant date using the Black-Scholes-Merton option-pricing formula. Various assumptions used in this model for grants in the quarters ended March 31, 2015 and 2014 are summarized in the following table. Changes in these assumptions can affect the fair value estimates.

	2015			2014
Risk free rate		1.6	%		1.6	%
Expected years until exercise		6.3			6.3
Expected stock volatility		115-117	%		126	%
Dividend yield		--			--

For stock options, expected volatilities are based on historical volatility of the Company’s stock. Company data was used to estimate option exercises and employee terminations within the valuation model for the period ending March 31, 2015 and the year ended December 31, 2014, whereas peer company data was used in 2013 and prior periods. 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. 

Income Tax, Policy [Policy Text Block]

Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of future tax benefits or liabilities on the temporary differences between the financial reporting and tax bases of our assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense.

Income tax expense was $4,871 and $4,645 during the three months ended March 31, 2015 and 2014, respectively relating exclusively to the generation of a deferred tax liability associated with the tax amortization of goodwill, which is included as a component of other long-term liabilities on our condensed consolidated balance sheets.

Earnings Per Share, Policy [Policy Text Block]

Basic and Diluted 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 during the period.

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 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. The total number of anti-dilutive shares, common stock options, warrants exercisable for common stock, and convertible debt, which have been excluded from the computation of diluted earnings (loss) per share, was 201,809,265 for the quarter ended March 31, 2015.

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. The total number of anti-dilutive shares, common stock options, warrants exercisable for common stock, and convertible debt, which have been excluded from the computation of diluted earnings (loss) per share, was 99,654,298 for the quarter ended March 31, 2014.

 

Earnings per share for the three months ended March 31, 2015 and 2014 are calculated for basic and diluted earnings per share as follows:

	Three months ended March 31,
	2015		2014
Net income (loss)	$	4,107,001	$	(5,632,913)
Net income allocated to participating securities		(1,777,865)		-
Numerator for basic income (loss) per share	$	2,329,136	$	(5,632,913)
Incremental allocation of net income to participating securities		-		-
Numerator adjustments for potential dilutive securities		-		-
Numerator for diluted income per share	$	2,329,136	$	(5,632,913)
Denominator for basic income (loss) per share weighted average outstanding common shares		125,951,100		111,222,841
Dilutive effect of stock options		-		-
Dilutive effect of warrants		-		-
Dilutive effect of convertible debt		-		-
Denominator for diluted income per share		125,951,100		111,222,841

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.” The amendments in this update require the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal periods. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. The Company intends to adopt this requirement in 2016, and currently anticipates that the impact of adoption will solely be a reclassification of its deferred financing costs from asset classification to contra-liability classification.