Notes to Unaudited Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The
terms “WMT,” “we,” “the
Company,” and “us” as used in this report refer
to Wound Management Technologies, Inc. The accompanying unaudited
consolidated balance sheet as of September 30, 2017, and unaudited
consolidated statements of operations for the nine months ended
September 30, 2017 and 2016, have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements. In the
opinion of management of WMT, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine-month
periods ended September 30, 2017, are not necessarily indicative of
the results that may be expected for the year ending December 31,
2017, or any other period. These financial statements and notes
should be read in conjunction with the financial statements for
each of the two years ended December 31, 2016, and December 31,
2015, included in the Company’s Annual Report on Form 10-K.
The accompanying consolidated balance sheet as of December 31,
2016, has been derived from the audited financial statements filed
in our Form 10-K and is included for comparison purposes in the
accompanying balance sheet. Certain prior year amounts have been
reclassified to conform to current year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of WMT and its wholly-owned subsidiaries: Wound
Care Innovations, LLC a Nevada limited liability company
(“WCI”); Resorbable Orthopedic Products, LLC, a Texas
limited liability company (“Resorbable); and Innovate OR,
Inc. “InnovateOR” formerly referred to as BioPharma
Management Technologies, Inc., a Texas corporation
(“BioPharma”). All intercompany accounts and
transactions have been eliminated.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost
computed on a first-in, first-out basis. Inventories consist of
finished goods and related packaging supplies. The Company recorded
inventory obsolescence expense of $
0 for the three months and $8,347
for the nine months ended September 30, 2017, compared to $15,631
for the nine months ended September 30, 2016. The allowance for
obsolete and slow-moving inventory had a balance of $116,772 at
September 30, 2017, and $153,023 at December 31, 2016.
Fair Value Measurements
As
defined in Accounting Standards Codification (“ASC”)
Topic No. 820, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(exit price). The Company utilizes market data or assumptions that
market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market corroborated, or generally unobservable. ASC 820
establishes a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurement) and the lowest priority to
unobservable inputs (level 3 measurement). This fair value
measurement framework applies at both initial and subsequent
measurement.
The
three levels of the fair value hierarchy defined by ASC Topic No.
820 are as follows:
Level 1
– Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial
instruments such as exchange-traded derivatives, marketable
securities and listed equities.
Level 2
– Pricing inputs are other than quoted prices in active
markets included in Level 1, which are either directly or
indirectly observable as of the reported date. Level 2 includes
those financial instruments that are valued using models or other
valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace. Instruments
in this category generally include non-exchange-traded derivatives
such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are
generally less observable from objective sources. These inputs may
be used with internally developed methodologies that result in
management’s best estimate of fair value.
On July
25, 2017, the stock purchase warrants related to the remaining
derivative liabilities expired and on September 30, 2017, the
Company had no derivative liabilities related to stock purchase
warrants.
Our
intangible assets have also been valued using the fair value
accounting treatment and a description of the methodology used,
including the valuation category, is described in the
Company’s Annual Report on Form 10-K.
Income (Loss) Per Share
The
Company computes income (loss) per share in accordance with
Accounting Standards Codification “ASC” Topic No. 260,
“Earnings per Share,” which requires the Company to
present basic and dilutive income (loss) per share when the effect
is dilutive. Basic income (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted
average number of common shares available. Diluted income (loss)
per share is computed similar to basic income (loss) per share
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional
common shares were dilutive. All convertible instruments were
excluded as their inclusion would have been anti-dilutive during
both the three months and nine months ended September 30, 2017 and
the nine months ended September 30, 2016. The dilutive effect of
the outstanding convertible preferred stock for the three months
ended September 30, 2016 was 85,689,772 shares and an adjustment to
net income of $75,032.
Recently Issued Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers
which is to be effective for reporting periods beginning after
December 15, 2017. The Company has reviewed the pronouncement and
believes it will not have a material impact on the Company’s
financial position, operations or cash flows.
In
February 2016, the FASB issued ASC 842
Leases
which is to be effective for
reporting periods beginning after December 15, 2018. The Company is
currently reviewing any impact that it will have on the
Company’s financial position, operations or cash
flows.
Note 2 - Going Concern
The Company has continuously incurred losses from operations,
however, the operating loss in 2016 included a significant
nonrecurring expense in the amount of $818,665, primarily a
non-cash loss on the issuance of warrants for services valued at
$758,665. Without this non-cash expense, operating income was
$342,918 for 2016. The Company has a working capital deficit of
$448,630 on September 30, 2017, and surplus of $601,654 on December
31, 2016. The Company has adopted a robust operating plan for 2017
that projects existing cash and future cash to be generated from
operations will satisfy our foreseeable working capital, debt
repayment and capital expenditure requirements for at least the
next twelve months. However, minimal funding may be required at
certain times during the year due to the timing of significant
expenditures such as inventory purchases. The Company obtained
$50,050 cash proceeds from the issuance of series C preferred stock
during the nine months ended September 30, 2017, and believes it
will be able to obtain any such additional funding, if required
during the remainder of 2017. We will also monitor our cash flow;
assess our business plan; and make expenditure adjustments
accordingly. Based upon the Company's current ability to obtain
additional financing or equity capital and to achieve profitable
operations, it is not appropriate at this time to continue using
the going concern basis.
Note 3 – Accounts Payable and Notes Payable
Accounts Payable
During
the nine months ended September 30, 2017, the WMTI reached an
agreement to settle an outstanding payable with WellDyne Health,
LLC, (“WellDyne”), a third party that had provided
shipping and consulting services on behalf of the Company effective
through September 19, 2015. As part of that settlement, WellDyne
forgave $39,709 of the outstanding payable.
Notes Payable
During
the nine months ended September 30, 2017, the Company paid a total
of $190,838 principal and $10,937 in accrued interest to three
non-related party note holders and reached an agreement with them
to forgive $10,937 in accrued interest. As a result, all three of
these notes were retired. As of September 30, 2017, the balance
consists of one note in the amount of $223,500. See Note 9
Subsequent Events for a discussion of the disposition of this note
payable.
Convertible Notes Payable - Related Parties
On June
15, 2015, the Company entered into term loan agreements with The
James W. Stuckert Revocable Trust (“SRT) and The S. Oden
Howell Revocable Trust (“HRT”), pursuant to which SRT
made a loan to the Company in the amount of $600,000 and HRT made a
loan to the Company in the amount of $600,000 under Senior Secured
Convertible Promissory Notes (the “Notes”). Both SRT
and HRT are controlled by affiliates of the Company. The Notes each
carry an interest rate of 10% per annum, and (subject to various
default provisions) all unpaid principal and accrued but unpaid
interest under the Notes is due and payable on June 15, 2018. The
Notes may be prepaid in whole or in part upon ten days’
written notice, and all unpaid principal and accrued interest under
the Notes may be converted, at the option of SRT and HRT, into
shares of the Company’s Series C Convertible Preferred Stock
at a conversion price of $70.00 per share at any time prior to
maturity.”). The Company’s obligations under the two
notes are secured by all the assets of the Company and its
subsidiaries.
Note 4 – Commitments and Contingencies
Royalty agreements.
Effective
November 28, 2007, WCI entered into separate exclusive license
agreements with Applied Nutritionals, LLC (“Applied”)
and its founder George Petito, pursuant to which WCI obtained the
exclusive world-wide license to make products incorporating
intellectual property covered by a patent related to CellerateRX
products. In consideration for the licenses, WCI agreed to pay to
Applied the following royalties, beginning January 3, 2008: (a) an
upfront royalty of $100,000 in the aggregate, (b) an aggregate
royalty of fifteen percent (15%) of gross sales occurring during
the first year of the license; (c) an additional upfront royalty of
$400,000, in the aggregate, which was paid October, 2009; plus (d)
an aggregate royalty of three percent (3%) of gross sales for all
sales occurring after the payment of the $400,000 upfront royalty.
In addition, WCI must maintain a minimum aggregate annual royalty
payment of $375,000 for 2009 and thereafter, if the royalty
payments made do not meet or exceed that amount. The total of
unpaid royalties as of December 31, 2016, was $276,916, and it was
paid in full in January of 2017. As of September 30, 2017, the
balance of accrued royalties for the current year is
$232,511.
On
September 29, 2009, the Company entered into an Asset Purchase
Agreement (the “Asset Purchase Agreement”), by and
among the Company, RSIACQ, LLC, a wholly-owned subsidiary of the
Company (RSI), Resorbable Orthopedic Products, LLC
(“Resorbable”) and Resorbable’s members, pursuant
to which, RSI acquired substantially all of Resorbable’s
assets, in exchange for (i) 500,000 shares of the Company’s
common stock, and (ii) a royalty equal to eight percent (8%) of the
net revenues generated from products sold by the Company or any of
its affiliates, which products are developed from or otherwise
utilize any of the patented technology acquired from Resorbable.
The royalty is paid to Barry Constantine Consultants, LLC for
distribution to the original patent holders, (including Mr. Barry
Constantine) and/or their heirs. The royalty expense was $12,060
for each of the nine-months ended September 30, 2017, and September
30, 2016, and $4,020 for each of the three-months ended September
30, 2017 and September 30, 2016. Mr. Constantine resigned effective
October 1, 2017, as a contract employee of the Company in which he
held the position of Director of R&D.
Evolution Partners LLC Letter Agreement and Termination
Agreement
On
October 10, 2017, Wound Management Technologies, Inc. (the
“Company”) and Evolution Venture Partners LLC
(“EVP”) entered into a termination agreement (the
“Termination Agreement”) terminating, effective as of
September 29, 2017, that certain letter agreement dated April 26,
2016, (the “Agreement”), by and between the Company,
EVP, and Middlebury Securities, LLC (“Middlebury”).
Middlebury terminated its charter on or about July 27, 2016, and
therefore is not a party to the Termination Agreement. The
Agreement had an initial term of one year (with an automatic
six-month renewal term) and provided for:
·
A $60,000 consulting fee payable upon execution of the Agreement,
refundable only upon cancellation of the Agreement by EVP during
the initial one-year term.
·
A success fee in an amount equal to 5% of the transaction value of
any strategic transaction.
·
A selling fee equal to 3% of the gross proceeds of any debt
financing transaction or 5% of the gross proceeds of any equity
financing transaction.
·
The issuance to EVP of a warrant (the “Warrant”) for
the purchase of 60,000,000 shares of the Company’s common
stock, par value $0.001 per share (“Common Stock”), at
an exercise price of $0.12 per share.
The
total amount of the consulting fee and warrant expense was $818,665
and is recognized in 2016 as “Other administrative
expenses” in the Consolidated Statement of
Operations.
As of
the termination date, there were no Financing Transactions or
Strategic Transactions (as defined in the Agreement) being
considered by the Company and no such transactions
occurred.
Pursuant
to the Termination Agreement, EVP has agreed to cancel the Warrant
in exchange for the Company’s issuance to EVP of 750,000
shares of Common Stock. There was no incremental increase in the
fair value of the modified stock-based compensation award as of the
modification date and accordingly, no additional compensation cost
was recognized.
Office leases
In
March of 2017, the Company executed a new office lease for office
space located at 1200 Summit Ave., Suite 414, Fort Worth, TX 76102
and relocated our corporate offices there on April 22, 2017. The
lease is effective May 1, 2017, and ends on the last day of the
fiftieth (50th) full calendar month following the effective date,
(June 30, 2021). Monthly base rental payments are as follows:
months 1-2, $0; months 3-14, $7,250; months 15-26, $7,401; months
27-38, $7,552; and months 39-50, $7,703. Rent expense is recognized
on a straight-line basis over the term of the Lease and the
resulting deferred rent liability is $14,138 as of September 30,
2017.
Payables to Related Parties
As of
September 30, 2017, and December 31, 2016, the Company had
outstanding payables to related parties totaling $21,842 and
$93,655, respectively. The payables are unsecured, bear no interest
and due on demand.
Note 5 - Stockholders’ Equity
Preferred Stock
There
are currently 5,000,000 shares of Series A Preferred Stock
authorized, with no shares of Series A Preferred Stock currently
issued or outstanding.
Effective
June 24, 2010, the Company filed a Certificate of Designations,
Number, Voting Power, Preferences and Rights of Series B
Convertible Redeemable Preferred Stock (the
“Certificate”) with the Texas Secretary of State,
designating 7,500 shares of Series B Preferred Stock, par value
$10.00 per share (the “Series B
Shares”). The Series B
Shares rank senior to shares of all other common and preferred
stock with respect to dividends, distributions, and payments upon
dissolution. Each of the Series B Shares is convertible at the
option of the holder into shares of common stock as provided in the
Certificate. There are currently no Series B Shares issued or
outstanding.
On
October 11, 2013, the Company filed a Certificate of Designations,
Number, Voting Power, Preferences and Rights of Series C
Convertible Preferred Stock (the “Certificate of
Designations”), under which it designated 100,000 shares of
Series C Preferred Stock, par value $10.00. The Series C Preferred
Stock is entitled to accruing dividends (payable, at the
Company’s options, in either cash or stock) of 5% per annum
until October 10, 2016, and 3% per annum until October 10,
2018.
The
Series C Preferred Stock is senior to the Company’s common
stock and any other currently issued series of the Company’s
preferred stock upon liquidation, and is entitled to a liquidation
preference per share equal to the original issuance price of such
shares of Series C Preferred Stock together with the amount of all
accrued but unpaid dividends thereon. Each of the Series C Shares
is convertible at the option of the holder into 1,000 shares of
common stock as provided in the Certificate. Additionally, each
holder of Series C Preferred Stock shall be entitled to vote on all
matters submitted for a vote of the holders of Common Stock a
number of votes equal to the number of full shares of Common Stock
into which such holder’s Series C shares could then be
converted. As of September 30, 2017, and December 31, 2016, there
were 85,561 and 85,646 shares of Series C Preferred Stock issued
and outstanding, respectively.
On
November 13, 2013, the Company filed a Certificate of Designations,
Number, Voting Power, Preferences and Rights of Series D
Convertible Preferred Stock (the “Certificate of
Designations”), under which it designated 25,000 shares of
Series D Preferred Stock. Shares of Series D Preferred Stock are
not entitled to any preference with respect to dividend or upon
liquidation, and will automatically convert (at a ratio of
1,000-to-1) into shares of the Company’s common stock, par
value $0.001 upon approval of the Company’s stockholders (and
filing of) and amendment to the Company’s Certificate of
Incorporation increasing the number of authorized shares of Common
Stock from 100,000,000 to 250,000,000. As of September 30, 2017,
and December 31, 2016, there are no shares of Series D Preferred
Stock issued and outstanding.
On May
30, 2014, the Company filed a Certificate of Designations, Number,
Voting Power, Preferences and Rights of Series E Convertible
Preferred Stock (The “Certificate of Designations”),
under which it designated 5,000 shares of Series E Preferred Stock.
Shares of Series E Preferred Stock are not entitled to any
preference with respect to dividends or upon liquidation, and will
automatically convert (at a ratio of 1,000 shares of Common Stock
for every one share of Series E Preferred Stock) into shares of the
Company’s common stock, $0.001 par value upon approval of the
Company’s stockholders (and filing of) and amendment to the
Company’s Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100,000,000 to
250,000,000. As of September 30, 2017, and December 31, 2016, there
are no shares of Series E Preferred Stock issued and
outstanding.
On
March 7, 2017, the Company issued 715 shares of Series C Preferred
Stock for cash proceeds of $50,050.
The
Series C preferred stock earned dividends of $100,677 and $213,435
for the nine months ended September 30, 2017 and 2016,
respectively. As of September 30, 2017, no Series C preferred stock
dividends have been declared.
Common Stock
On
March 9, 2017, the Company issued 150,000 shares of common stock to
each of the Company’s four Board Directors, (a total of
600,000 shares valued at $42,000).
On
March 10, 2017, the Company issued 250,000 shares of common stock
valued at $18,250 to a contract consultant upon achievement of
specified revenue targets.
On July
31, 2017, the Company issued 937,556 shares of common stock for the
conversion of 800 shares of Series C Convertible Preferred Stock
and $9,629 of related Series C dividends.
Warrants
During
the nine months ended September 30, 2017, 61,326,300 of the
67,246,300 warrants outstanding at the beginning of the period were
either forfeited or expired, leaving a balance of 5,920,000
outstanding on September 30, 2017. A summary of the status of the
warrants granted for the nine months ended September 30, 2017, and
changes during the period then ended is presented
below:
|
For the Nine
Months Ended
September 30,
2017
|
|
|
Weighted
Average
Exercise
Price
|
Outstanding at
beginning of period
|
67,246,300
|
$
0.12
|
Granted
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
(60,051,300
)
|
-
|
Expired
|
(1,275,000
)
|
|
Outstanding at end
of period
|
5, 920,000
|
$
0.07
|
|
|
|
|
|
|
|
|
Weighted-Average
Remaining Contract Life
|
Weighted- Average
Exercise Price
|
|
Weighted-Average
Exercise Price
|
$
0.06
|
4,500,000
|
1.00
|
$
0.06
|
4,500,000
|
$
0.06
|
0.08
|
550,000
|
0.43
|
0.08
|
550,000
|
0.08
|
0.09
|
625,000
|
0.54
|
0.09
|
625,000
|
0.09
|
0.15
|
245,000
|
0. 05
|
0.15
|
245,000
|
0.15
|
$
0.06 -.15
|
5,920,000
|
.86
|
$
0.07
|
5,920,000
|
$
0.07
|
The
aggregate intrinsic value of the exercisable warrants as of
September 30, 2017, was $45,000.
On
October 10, 2017, Wound Management Technologies, Inc. (the
“Company”) and Evolution Venture Partners LLC
(“EVP”) entered into a termination agreement (the
“Termination Agreement”) terminating, effective as of
September 29, 2017, that certain letter agreement dated April 26,
2016, (the “Agreement”), by and between the Company,
EVP, and Middlebury Securities, LLC (“Middlebury”).
Middlebury terminated its charter on or about July 27, 2016, and
therefore is not a party to the Termination Agreement. Pursuant to
the Termination Agreement, EVP has agreed to cancel a warrant for
the purchase of 60,000,000 shares of the Company’s common
stock in exchange for the Company’s issuance to EVP of
750,000 shares of Common Stock (the “Shares”). As the
fair value of the surrendered warrants exceeded the fair value of
the Shares, there is no expense associated with this
transaction.
Stock Options
During
the nine months ended September 30, 2017, 943,500 of the 1,093,500
options outstanding at the beginning of the period expired. A
summary of the status of the stock options granted for the
nine-month period ended September 30, 2017, and changes during the
period then ended is presented below:
For the Nine Months Ended September 30, 2017
|
|
|
Weighted Average
Exercise Price
|
Outstanding
at beginning of period
|
1,093,500
|
$
0.15
|
Granted
|
-
|
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
(943,500
)
|
$
0.15
|
Outstanding
at end of period
|
150,000
|
|
|
|
|
|
Stock Options
Outstanding
|
Stock Options
Exercisable
|
Exercise
Price
|
|
Weighted-Average
Remaining
Contract Life
|
Weighted-
Average
Exercise
Price
|
|
Weighted-Average
Exercise
Price
|
(a)
|
150,000
|
-
|
-
|
-
|
(a)
|
(a)
On
January 1, 2015, the company granted three tranches of options,
25,000, 25,000, and 100,000 which vest upon meeting specific
performance measures agreed upon. The measures include achieving
three specific sales targets per month for 3 consecutive months.
The exercise price and expiration date of each tranche will be set
upon achieving the targets. As of the date of this filing the
performance measures have not been met. As a result, the exercise
price is undetermined and these options are excluded from the
calculation of weighted average remaining life.
The
aggregate intrinsic value of the exercisable options as of
September 30, 2017 was $0.
Note 6 – Derivative Liabilities
As of
December 31, 2013, the Company did not have a sufficient number of
common shares authorized to fulfill the possible exercise of all
outstanding warrants and the conversion of all convertible notes
payable. As a result, the Company determined that the warrants and
the embedded conversion features of the outstanding debt
instruments did not qualify for equity classification. Accordingly,
the warrants and conversion features were treated as derivative
liabilities and were carried at fair value. During the year ended
December 31, 2016, all of the outstanding convertible notes that
qualified as derivative liabilities were paid in full or converted
to common stock. As of September 30, 2017, no warrants remained as
derivative liabilities due to their expiration on July 25,
2017.
The
following table sets forth the changes in the fair value of
derivative liabilities for the nine months ended September 30,
2017:
Balance, December
31, 2016
|
$
(44
)
|
Gain on
change in fair value of derivative liabilities
|
44
|
Balance, September
30, 2017
|
$
0
|
The
aggregate gain on derivative liabilities for the nine months ended
September 30, 2017 was $44.
Note 7 – Related Party Transactions
On
April 25, 2016, the Company and John Siedhoff, a member of the
Company’s Board of Directors, entered into a Consulting
Agreement (the “Agreement”), pursuant to which Mr.
Siedhoff provides certain consulting services to the Company. The
Agreement provided for a payment in the amount of $200,000 to Mr.
Siedhoff as compensation for consulting services rendered to the
Company prior to April 1, 2016, as well as a consulting fee of
$15,000 per month during the term of the Agreement. The Agreement
also provides for the reimbursement of reasonable and necessary
expenses, and may be terminated by either party upon 30 days’
advance written notice. On March 10, 2017, the Agreement, was
amended to: (i) change the name of the consultant under the
Agreement from John Siedhoff to Twin Oaks Equity, LLC (an entity
controlled by Mr. Siedhoff), and (ii) increase the monthly
compensation payable from $15,000 to $20,000, effective as of
January 1, 2017. The consulting fee expense was $220,000 for the
nine months ended September 30, 2017, (including a bonus of $40,000
in recognition of 2016 results).
Note 8 – Capital Lease Obligation
In
December 2014, the Company entered into a Capital Lease agreement
for the purchase of a phone system. The agreement required a down
payment of $2,105 and 36 monthly payments of $375. The Company
recorded an asset of $13,512 and a capital lease obligation of
$13,512. Aggregate payments under the lease were $3,423 for the
nine months ended September 30, 2017. At September 30, 2017, a
total lease liability of $344 remained which is due in full in
2017.
Note 9 – Subsequent Events
On
November 1, 2017, the Company and Ken Link entered into a binding
settlement agreement, which will result in dismissal with prejudice
of all claims and counterclaims asserted in Cause No.
342-256486-11, in exchange for which the Company will deliver to
Ken Link 1,200,000 shares of Wound Management Technologies, Inc.
common stock in total satisfaction of all obligations between the
parties. As a result of this settlement the Note Payable to Mr.
Link in the amount of $223,500 is cancelled.