Nuo Therapeutics, Inc. (AURX)·Q2 2015 Earnings Summary

Executive Summary

• Q2 2015 revenue was $2.90M, up 24% year over year on higher Angel royalties; gross margin was 18% (flat YoY), and GAAP net loss improved sharply to $(0.87)M or $(0.01) per share, aided by a $4.48M non-cash gain from derivative liabilities .
• Management adopted a strategic realignment: intensified focus on VA market, reassigned 4 sales reps to expand VA team to 8, and implemented a ~30% workforce reduction to lower cash burn .
• Liquidity and credit covenant risk are central: cash was $6.9M at 6/30; management expects to fall below the $5.0M Deerfield cash covenant in September and must pay ~$2.6M interest on 10/1 in cash absent share settlement; they have initiated discussions to modify the facility to avoid default .
• Commercial traction in VA accelerating: seven VA hospitals and one Air Force base have treated Aurix; additional sites initiating trials; reimbursement dialog ongoing with CMS targeting a higher 2016 rate from the current ~$430 per application in Medicare and ~$340 ASP in the VA FSS .
• Near-term stock reaction catalysts: outcome of Deerfield negotiations and CMS final reimbursement rules in November (for Jan 2016), plus the pace of VA adoption following sales redeployment .

What Went Well and What Went Wrong

What Went Well

• VA adoption expanded: “we have seven VA hospitals and one airforce base treating patients with Aurix” with additional facilities entering trials; conversion rates from evaluation to usage described as “incredibly high” .
• Commercial redeployment for velocity: VA-focused sales team expanded from 3 to 8 reps to accelerate penetration and footprint, signaling commitment to where traction is strongest .
• Operating leverage and cleaner P&L: operating expenses fell to $5.0M from $10.3M YoY (lapped prior-year $4.7M impairment and reduced R&D/G&A), and net loss narrowed to $(0.9)M, supported by a $4.5M derivative fair value gain .

What Went Wrong

• Cash/covenant risk: cash fell to $6.9M, with a likely breach of the $5.0M minimum cash covenant in September and a required ~$2.6M cash interest payment on October 1, prompting urgent facility renegotiation; management warned of “technical default” absent modifications .
• Hospital outpatient CED ramp slower than anticipated: initial Au/Gold Study enrollment lagged until Net Health WoundExpert integration; nine centers are enrolling as of the call, with process complexities acknowledged and no interim timeline guidance .
• Mixed margin signals: gross margin remained low at 18% (flat YoY) with dependence on Angel royalties; Q1’s high margin (42%) was non-recurring from the Rohto license fee gross profit .

Financial Results

Segment and revenue component breakdown:

KPIs and liquidity:

Drivers and quality notes:

• YoY revenue growth in Q2 driven by Angel royalties and sales; Q1 benefited from a $3.0M Rohto license fee (net $1.5M gross profit after Millennia) .
• Q2 net loss improvement primarily from derivative fair value gain ($4.48M), not core operations; CFO cautioned GAAP complexities around derivatives .

Guidance Changes

No formal quantitative revenue/EPS/margin guidance was issued; management emphasized operational actions and reimbursement initiatives .

Earnings Call Themes & Trends

Management Commentary

• “We now have seven VA hospitals and one airforce base treating patients with Aurix… the ratio we experience of converting… sites that want to evaluate and ultimately use Aurix is incredibly high.” — Dean Tozer (CEO) .
• “Four of our sales representatives… are being reassigned to the VA… bringing our dedicated VA sales team to eight.” — Dean Tozer (CEO) .
• “We have implemented a workforce reduction… approximately 30%… lowering our long-term cash burn while… expanding our VA business.” — Dean Tozer (CEO) .
• “We currently expect that our cash on deposit balance will fall below the $5 million threshold… and that we will be required to pay the October 1 interest payment in cash… We intend to engage in discussions… to modify the facility… to avoid a situation that would result in default.” — David Jorden (Acting CFO) .
• “Total revenues… $2.9 million… Gross margin was 18%… net loss… $0.9 million… non-cash gain… $4.5 million.” — Q2 press release .

Q&A Highlights

• Reimbursement cadence: CMS proposed rules in July; final rules in November for Jan 2016 effect; current Medicare national average is ~$430 per Aurix application; management is advocating for a higher rate .
• VA economics and coverage: Aurix is on VA’s FSS nationwide; average selling price ~$340; adoption is about clinical trials and product review at each facility, not coverage hurdles .
• Gold Study outlook: No interim analysis guidance provided; with WoundExpert integration, management expects better enrollment flow and to update progress next call .

Estimates Context

• Wall Street consensus estimates (S&P Global Capital IQ) for Q2 2015 EPS/revenue were unavailable due to data access limits during retrieval; as such, no beat/miss comparison versus consensus can be provided at this time [SPGI retrieval error].
• Given the absence of consensus figures, investors should focus on sequential/YoY trajectories and the non-GAAP derivative impacts in Q2 when assessing run-rate performance .

Key Takeaways for Investors

• VA traction is the near-term growth engine: expanded team and high conversion from trials to usage should lift Aurix volumes; monitor site adds and ordering cadence .
• Liquidity risk is acute: a likely September covenant breach and October cash interest payment create binary outcome risk; the terms of any Deerfield modification are a key stock catalyst; downside includes default or bankruptcy if negotiations fail .
• Q2 P&L quality mixed: operational loss persists; headline net loss improved via non-cash derivative gains; assess underlying gross profit (18%) and OpEx trajectory post workforce reduction .
• Reimbursement is pivotal: CMS final rule in November could reset economics for 2016; a higher Aurix rate would materially improve outpatient viability and adoption under CED .
• Angel royalties provide ballast: continued royalty contributions supported Q2 revenue; any sustained improvement depends on Arthrex’s field deployment and device supply continuity .
• Execution shift to clinical affairs for data capture should accelerate Gold Study enrollment via WoundExpert; next call should bring clearer KPIs on sites/patient flow .
• Strategic optionality remains: management referenced assets (Angel royalty stream, Aurix, Aldagen trial) when discussing Deerfield; partner interest in VA channel could emerge given the focused footprint .

Appendix: Additional Data and References

• Cash and debt covenants: cash $6.9M at 6/30; $5.0M minimum; ~$2.6M interest due Oct 1; management anticipates September shortfall and expects cash payment, not share settlement .
• Q1 context: total revenues $4.8M (incl. $3.0M Rohto license fee), gross margin 42%, net income $4.1M ($0.02 EPS); cash $11.8M at 3/31 .
• Q4 2014 context: total revenue $1.9M; gross margin (10%); net income $2.9M; driven by derivative fair value gain; Angel refurb costs pressured margins .