NUO THERAPEUTICS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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 contained elsewhere in this annual report. The discussion in this section regarding the business and operations of the Company 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 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 (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 effective May 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 by May 2022 after the favorable NCD determination
was issued in April 2021, the Aurix System supply chain was re-established and
equity capital was accessed in December 2021 via the early exercise of warrants
under a warrant modification agreement.



Revenue amounts presented in these comparison sections are rounded to the nearest thousand.

Comparison of the years ended December 31, 2021 and 2020


Revenue and Gross Profit



There were no revenues in the years ended December 31, 2021 and December 31,
2020 as the Company ceased ongoing operational activities effective May 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 ended
December 31, 2021 as compared to the year ended December 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 by May 2022. A
discussion of the various components of operating expenses follows below.



Sales and Marketing and Research and Development

Spending in both categories remained zero during the year December 31, 2021 following the cessation of normal operational activities effective May 1, 2019.



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General and Administrative



Interest Expense, net


Interest expense was nil for the year ended December 31, 2021 given that the Company had no outstanding debt during the year due to the conversion of the senior secured notes into October 2020.


Other income (expense)


Other income (expenses) was nil for the year ended December 31, 2021 and decreased by about $336,000 due to the two debt extinguishment gains recognized during the year December 31, 2020.

Comparison of the years ended December 31, 2020 and 2019


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

Spending in both categories fell to zero during the year ended December 31, 2020 compared to the year ended December 31, 2019 following the cessation of normal operational activities effective May 1, 2019.


General and Administrative



General and administrative expenses decreased approximately $411,000 (52%) to
approximately $378,000 in the year ended December 31, 2020 as compared to the
year ended December 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 in May 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 ended December 31, 2020 as compared to the year ended December 31,
2019. The decrease was primarily due to the completed settlement of the
convertible notes in February 2020 which in the year ended December 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 in October 2020.



Other income (expense)



Other income for the year ended December 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 December 31, 2019 and 2018


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 ended
December 31, 2019 to the year ended December 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 ended
December 31, 2019 to the year ended December 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 ended December 31, 2019 to the year
ended December 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 ended December 31, 2019 to the year
ended December 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 ended December 31, 2019 to the year
ended December 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 ended December 31, 2019 to the year
ended December 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 the May
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.



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Interest Expense, net



Interest expense, net increased approximately $183,000 to approximately $221,000
comparing the year ended December 31, 2019 to the year ended December 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 March 31, 2021 and 2020


Revenue and Gross Profit



There were no revenues in any period during the years ended December 31, 2021
and December 31, 2020 as the Company ceased ongoing operational activities in
April 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                -                   -             - 

N / A

General and administrative          5,721              42,378       (36,657 )     (87 )
Total operating expenses     $      5,721       $      42,378     $ (36,657 )     (87 )



Comparison of three and six month periods ended March 31, 2021 and 2020

Turnover and gross profit



There were no revenues in any period during the years ended December 31, 2021
and December 31, 2020 as the Company ceased ongoing operational activities in
April 2019 and no longer treated subjects under the previous CED program with
related product sales.



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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 month periods ended March 31, 2021 and 2020

Turnover and gross profit



There were no revenues in any period during the years ended December 31, 2021
and December 31, 2020 as the Company ceased ongoing operational activities in
April 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 March 31, 2020 and 2019



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 ended March 31,
2020 compared to the prior year period 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 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 three and six month periods ended June 30, 2020 and 2019



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 month periods ended September 30, 2020 and 2019



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 )



Cash and capital resources


Overview



As of December 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 of March 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 ended December 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 of December 31, 2021, our accumulated deficit was approximately
$23.6 million and our stockholders' equity was approximately $0.8 million.



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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 necessary to fund our efforts, through equity or debt financing or any combination thereof, on satisfactory terms or at all. In addition, any such financing, if obtained, may not be sufficient to meet our capital requirements and sustain our business.

Funding and related developments in 2018, 2019, 2020 and 2021

Spring 2019 Cessation of normal operating activities



In April 2019, the Company made the decision to cease normal operational
activities and we furloughed the Company's remaining employees effective May 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 operations



During the year ended December 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.



On May 28, 2018, we entered into a pair of agreements with Rohto Pharmaceutical
Co., Ltd. ("Rohto"). Pursuant to a securities purchase agreement, dated as of
May 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 on June 11, 2018.


Issue and Modifications of Convertible Bonds



On September 17, 2018, we entered into two separate financing transactions with
two separate investors, Auctus Fund, LLC ("Auctus") and EMA Financial, LLC
("EMA" and, collectively with Auctus, 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"). 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 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.



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On March 19, 2019, May 3, 2019, June 10, 2019, and August 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 the Convertible Note Investors could initiate conversion of the notes into
common shares of the Company pursuant to the notes' terms until September 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
the Auctus note was also extended until September 17, 2019.



On December 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 than February 10, 2020. The
Company made the required cash payments totaling $220,000 on December 10, 2019
and issued the common shares as of February 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-favoured-nation provisions and limitations on the company’s ability to offer additional titles (unless the use of proceeds was for redemption of tickets).


Senior Secured Note Issuance



On November 15, 2019 and December 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 the Senior 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 the Senior Note Investors by the Company.



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The notes had a maturity date of June 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 the Convertible Note Investors, in a final amount to be agreed
between the Company and the Convertible Note Investors such that the 2018
Convertible Notes were considered retired and no longer in effect.



Series A Preferred Share Exchange Agreement

By dated letter September 1, 2020the Senior Note Investors notified the Company of its default under the Senior Notes and submitted a forbearance and recapitalization proposal to the Company.



By letter dated September 10, 2020, the Senior 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, on October 1, 2020, a transfer
of all collateral securing the Senior Notes in full satisfaction of the
indebtedness due under the related loan documents. On September 21, 2020, the
Senior Note Investors proposed to the Company an alternative restructuring
proposal, which formed the basis for the Recapitalization Agreement described
below.



On October 5, 2020 (the "Effective Date"), the Company entered into a
Recapitalization Agreement (the "Recap Agreement) with Deerfield Private Design
Fund II, L.P. ("DPDF") and Deerfield 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 the Deerfield 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 through September 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, the Deerfield 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 by Mr.
Atinsky as of the Effective Date were canceled.



Pursuant to the Agreement, the Company also issued to the Senior 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 of Deerfield Management Company, L.P., of which Mr. 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.



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As described above, the Series A Preferred Shares were extinguished in conjunction with the Effective Recap Agreement October 5, 2020.

Warrant Amendment Agreement and Early Exercise of Warrants

Effective as of December 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 to January 31, 2022. All Warrants not
exercised prior to January 31, 2022 were to be forfeited and deemed expired or
otherwise cancelled.


From December 31, 2021all the BSAs had been exercised in return for $1,373,092 and the resulting issuance of 6,865,461 common shares.



Cash Flows



Net cash provided by (used in) operating, investing and financing activities for the periods presented was 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 flows used in operating activities for the year ended December 31, 2021 of $0.1 million primarily reflects our net loss of $0.1 million.



Cash used in operating activities for the year ended December 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 ended December 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 have had no significant investing activity during the years ended December 31, 20212020 and 2019.



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Financing Activities



Cash provided by financing activities for the year ended December 31, 2021 of
$1.4 million represents proceeds from the early exercise of warrants in December
2021.



Cash provided by financing activities for the year ended December 31, 2020 of
$0.2 million of net proceeds represents the purchase of shares of common stock
for proceeds of $195,000 in October 2020 in conjunction with the Series A
Preferred Stock exchange agreement.



Cash provided by financing activities for the year ended December 31, 2019 of
$0.3 million of net proceeds represents the proceeds from the issuance of senior
secured notes in November and December 2019.



Inflation


The Company is of the opinion that the inflation rates of recent years have not had a material impact on its activities.

Off-balance sheet arrangements

The Company has no 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 with U.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 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, 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.



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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 of similar assets; quoted prices in markets that are not active; or

other observable data or data that can be corroborated by observable market data

data for substantially the entire duration of the assets or liabilities; and

? Level 3, defined as unobservable entries 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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