Note 1 - Description of Business and Bankruptcy Proceedings

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Nature of Operations [Text Block]

Note

1

– Description of Business and Bankruptcy Proceedings

Description of Business

Nuo Therapeutics, Inc. (“Nuo Therapeutics,” the “Company,” “we,” “us,” or “our”) is a biomedical company marketing its product 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. Growth opportunities for the Aurix System in the United States in the near to intermediate term include the treatment of chronic wounds with Aurix in: (i) the Medicare population under a National Coverage Determination (“NCD”), when registry data is collected under the Coverage with Evidence Development (“CED”) program of the Centers for Medicare & Medicaid Services (“CMS”); and (ii) the Veterans Affairs (“VA”) healthcare system and other federal accounts settings.

As of

December

31,

2016,

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 the Effective Date (as defined below), 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 (as defined below), on

May

5,

2016,

the Company assigned its rights, title and interest in and to its existing license agreement with Arthrex to the Deerfield Lenders (as defined below), as well as rights to collect royalty payments thereunder.

Bankruptcy Proceedings

On

January

26,

2016,

the Company filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter

11

of Title

11

of the United States Code (the “Bankruptcy Code”), which is administered under the caption “In re: Nuo Therapeutics, Inc.”, Case No.

16

-

10192

(MFW) (the “Chapter

11

Case”).

On

April

25,

2016

 (the “Confirmation Date”), the Bankruptcy Court entered an Order Granting Final Approval of Disclosure Statement and Confirming Debtor’s Plan of Reorganization (the “Confirmation Order”), which confirmed the Modified First Amended Plan of Reorganization of the Debtor under Chapter

11

of the Bankruptcy Code (as confirmed, the “Plan,” or “Plan of Reorganization”).

Scenario A contemplated by the Plan of Reorganization became effective on

May

5,

2016

(the “Effective Date”). Pursuant to the Plan, as of the Effective Date: (i) all equity interests of the Company, including but not limited to all shares of the Company’s common stock,

$0.0001

par value per share (including its redeemable common stock) (the “Old Common Stock”), warrants, and options that were issuable or issued and outstanding immediately prior to the Effective Date, were cancelled; (ii) the Company’s certificate of incorporation that was in effect immediately prior to the Effective Date was amended and restated in its entirety; (iii) the Company’s by-laws that were in effect immediately prior to the Effective Date were amended and restated in their entirety; and (iv) the Company issued New Common Stock, Warrants and Series A Preferred Stock (all as defined below).

Upon emergence from bankruptcy on the Effective Date, the Company applied fresh start accounting, resulting in the Company becoming a new entity for financial reporting purposes (see Note

2

–

Fresh Start Accounting

). As a result of the application of fresh start accounting, the Company reflected the disposition of its pre-petition debt and changes in its equity structure effected under the Confirmation Order in its balance sheet as of the Effective Date. Accordingly, all financial statements prior to

May

5,

2016

are referred to as those of the "Predecessor Company", as they reflect the periods prior to application of fresh start accounting. The balance sheet as of

December

31,

2016,

and the financial statements for periods subsequent to

May

4,

2016,

are referred to as those of the "Successor Company." Under fresh start accounting, the Company's assets and liabilities were adjusted to their fair values, and a reorganization value for the entity was determined by the Company based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The fresh start adjustments are material and affect the Company’s results of operations from and after

May

5,

2016.

As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after

May

5,

2016

are not comparable to the financial statements prior to that date.

Common Stock

Recapitalization

In accordance with the Plan of Reorganization, as of the Effective Date, the Company issued

7,500,000

shares (the “Recapitalization Shares”) of new common stock, par value

$0.0001

per share (the “New Common Stock”), to certain accredited investors (the “Recapitalization Investors”) for gross cash proceeds of

$7,300,000

and net cash to the Company of

$7,052,500

(the “Recapitalization Financing”). 

200,000

of the

7,500,000

shares of New Common Stock were issued in partial payment of an advisory fee.  The net cash amount excludes the effect of

$100,000

in offering expenses paid from the proceeds of the DIP Financing (as defined below in Note

10

-

Debt

), which was converted into Series A Preferred Stock as of the Effective Date, as described below under

“Series A Preferred Stock

.” As part of the Recapitalization Financing, the Company also issued warrants to purchase

6,180,000

shares of New Common Stock to certain of the Recapitalization Investors (the “Warrants”). The Warrants terminate on

May

5,

2021

,

and are exercisable at any time on or after

November

5,

2016

at exercise prices ranging from

$0.50

per share to

$1.00

per share.  The number of shares of New 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. 

A significant majority of the Recapitalization Investors executed backstop commitments to purchase up to

12,800,000

additional shares of New Common Stock for an aggregate purchase price of up to

$3,000,000

(collectively, the “Backstop Commitment”). The Company cannot call the Backstop Commitment prior to

June

30,

2017

.

With respect to each Recapitalization Investor who executed a Backstop Commitment, the commitment terminates on the earlier of: (i) the date on which the Company receives net proceeds (after deducting all costs, expenses and commissions) from the sale of New Common Stock in the aggregate amount of the Backstop Commitment; (ii) the date that all shares of Series A Preferred Stock (as defined below) have been redeemed by the Company; or (iii) the date that all shares of Series A Preferred Stock are no longer owned by entities affiliated with Deerfield Mgmt, L.P., Deerfield Management Company, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Private Design Fund II, L.P.  (the “Deerfield Lenders” or “Deerfield”). We refer to this date as the “Termination Date.” Under the terms of the Backstop Commitment, the Company is obligated to pay to the committed Recapitalization Investors a commitment fee of

$250,000

in the aggregate upon the Termination Date.

As of the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Recapitalization Investors.  The Registration Rights Agreement provides certain resale registration rights to the Recapitalization Investors with respect to securities received in the Recapitalization Financing.  Pursuant to the Registration Rights Agreement, the Company filed a registration statement, which was declared effective on

January

11,

2017,

covering the resale of all shares of New Common Stock issued to the Recapitalization Investors on the Effective Date.

Issuance of New Common Stock to Holders of Old Common Stock

As of the Effective Date, the Company committed to the issuance of up to

3,000,000

shares of New Common Stock and subsequently issued

2,264,612

shares of New Common Stock (the “Exchange Shares”) to record holders of the Old Common Stock as of

March

28,

2016,

who executed and timely delivered the required release documents no later than

July

5,

2016,

in accordance with the Confirmation Order and the Plan.  The holders of Old Common Stock who executed and timely delivered the required release documents are referred to as the “Releasing Holders.”

The

2,264,612

Exchange Shares were issued as of the Effective Date to Releasing Holders who asserted ownership of a number of shares of Old Common Stock that matched the Company’s records or could otherwise be confirmed at a rate of

one

share of New Common Stock for every

41.8934

shares of Old Common Stock held by such holders as of

March

28,

2016.

  In accordance with the Plan, if the calculation would otherwise have resulted in the issuance to any Releasing Holder of a number of shares of New Common Stock that is not a whole number, then the number of shares actually issued to such Releasing Holder was determined by rounding down to the nearest number.

Issuance of Shares in Exchange for Administrative Claims

On

June

20,

2016,

the Company issued

162,500

shares of New Common Stock (the “Administrative Claim Shares”) pursuant to the Order Granting Application of the Ad Hoc Equity Committee Pursuant to

11

U.S.C. §§

503(b)(3)(D)

and

503(b)(4)

for Allowance of Fees and Expenses Incurred in Making a Substantial Contribution, entered by the Bankruptcy Court on

June

20,

2016.

   The Administrative Claim Shares were issued to holders of administrative claims under sections

503(b)(3)(D)

and

503(b)(4)

of the Bankruptcy Code. Of the

162,500

shares,

100,000

shares were issued to outside counsel to the Ad Hoc Equity Committee of the Company’s equity holders as compensation of all remaining allowed fees for legal services provided by such counsel.  The remaining

62,500

were issued to designees of the Ad Hoc Equity Committee who had granted loans in an aggregate amount of

$62,500

to the Ad Hoc Equity Committee in

December

2015

as repayment of such loans.

Series A Preferred Stock

On the Effective Date, the Company filed a Certificate of Designations of Series A Preferred Stock (the “Certificate of Designations”) 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 (the “Series A Preferred Stock”). On the Effective Date, the Company issued

29,038

shares of Series A Preferred Stock to Deerfield 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 New 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 “Board of Directors”) and to have such director serve on a standing committee of the Board of Directors established to exercise powers of the Board of Directors in respect of decisions or actions relating to the Backstop Commitment.   The holders of the Series A Preferred Stock nominated and elected

one

member of the Board of Directors to serve as the designee of the holders of Series A Preferred Stock. 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. The Certificate of Designations limits the Company’s ability to pay dividends on or purchase shares of its capital stock.

Assignment and Assumption Agreement; Transition Services Agreement

Pursuant to the Plan, on

May

5,

2016,

the Company entered into an Assignment and Assumption Agreement with Deerfield SS, LLC (the “Assignee”), the designee of the Deerfield Lenders, to assign to the Assignee the Company’s rights, title and interest in and to its existing license agreement with Arthrex, and to transfer and assign to the Assignee associated intellectual property owned by the Company and licensed thereunder, as well as rights to collect royalty payments thereunder. The assignment and transfer was effected in exchange for a reduction of

$15,000,000

in the amount of the allowed claim of the Deerfield Lenders pursuant to the Plan. As a result of the assignment and transfer, the Aurix System currently represents the Company’s only commercial product offering.

On the Effective Date, the Company and the Assignee entered into a Transition Services Agreement in which the Company agreed to continue to service its license agreement with Arthrex for a transition period.

Termination of Deerfield Facility Agreement and DIP Credit Agreement

On the Effective Date, the obligations of the Company under the Deerfield Facility Agreement, and under the DIP Credit Agreement (as defined below in Note

10

-

Debt

), were cancelled in accordance with the Plan of Reorganization, and the Company ceased to have any obligations thereunder.