U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31,September 30, 2017

 

 

WOUND MANAGEMENT TECHNOLOGIES, INC.

 

Suite 414

Fort Worth, Texas 76102

(Address of principal executive offices)

(817) 529-2300

(Registrant’s telephone number, including area code)

 

 

 

 

 

Form 10-Q

 

Quarter Ended March 31,September 30, 2017

Part I – Financial Information

Item 1. Financial Statements

 

 

 

 

 

 

Wound Management Technologies, Inc. and Subsidiaries

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 March 31,September 30, 2017, and unaudited consolidated statements of operations for the threenine months ended March 31,September 30, 2017 and 20152016, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10- Q10-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-month periodthree and nine-month periods ended March 31,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

 

 

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.

 

At March 31,On July 25, 2017, the Company’s financial instruments consist ofstock 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. The derivative liability on stock purchase warrants was valued using the Black-Scholes Option Pricing Model, a Level 3 input. The fair value of the conversion features associated with the convertible debt was estimated in accordance with ASC Topic No. 470-20-25-4. The change in fair value of the derivative liabilities is classified in other income (expense) in the statement of operations.

 

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

 

 

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

 

Note 3 – Accounts Payable and Notes Payable

Notes Payable

 

During the threenine months ended March 31,September 30, 2017, the Company paid the final paymenta total of $300 to Quest Capital as part of the furniture purchase agreement in the original amount of $11,700.

 

Convertible notes payableNotes Payable - related partiesRelated Parties

 

InOn June of15, 2015, Mr. Sthe Company entered into term loan agreements with The James W. Stuckert Revocable Trust (“SRT) and The S. Oden Howell Jr. was electedRevocable Trust (“HRT”), pursuant to which SRT made a loan to the BoardCompany in the amount of Directors. Mr. Howell$600,000 and HRT made a loan to the Company in Junethe amount of 2015 is the holder of a$600,000 under Senior Secured Convertible Promissory Note PayableNotes (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 the principle amount of $600,000whole or in part upon ten days’ written notice, and all unpaid principal and accrued interest under the Notes may be converted, at 10%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 annum compounded. In September of 2015, Mr. James Stuckert was electedshare at any time prior to the Board of Directors. Mr. Stuckert in June of 2015 is the holder of a Senior Secured Convertible Promissory Note Payable in the principle amount of $600,000 and accrued interest at 10% per annum compounded.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

 

 

 

 

 

 

Office leases

 

 

Payables to Related Parties

 

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.

 

 

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 March 31,September 30, 2017, and December 31, 2016, there were 86,36185,561 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 March 31,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 March 31,September 30, 2017, and December 31, 2016, there are no shares of Series E Preferred Stock issued and outstanding.

 

During the three months endedOn March 31,7, 2017, the Company issued 715 shares of Series C Preferred Stock for cash proceeds of $50,050.

 

The Series C Preferred Stockpreferred stock earned dividends of $12,936$100,677 and $73,269$213,435 for the threenine months ended March 31,September 30, 2017 and 2016, respectively. As of March 31,September 30, 2017, no Series C Preferred Stockpreferred stock dividends have been declared.

 

 

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 $17,500$18,250 to a contract consultant upon achievement of specified revenue targets.

 

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 threenine months ended March 31,September 30, 2017, and changes during the period then ended is presented below:

 

 

 

The aggregate intrinsic value of the exercisable warrants as of March 31,September 30, 2017, was $148,300.$45,000.

 

Stock Options

 

 

 

 

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, 2015,2016, all of the outstanding convertible notes that qualified as derivative liabilities were paid in full or converted to common stock. As of March 31,September 30, 2017, only 10,000no warrants remained as derivative liabilities due to the existence of reset provisions that qualify the instruments as derivative liabilities under FASB ASC 815.their expiration on July 25, 2017.

 

 

 

 

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 $100,000$220,000 for the threenine months ended March 31,September 30, 2017, (including a bonus of $40,000)$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

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Forward-Looking Statements

 

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such a statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

 

The following discussion and analysis of our financial condition is as of March 31,September 30, 2017.  Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2016.

 

Business Overview

 

Wound Management Technologies, Inc. (“WMT” or the “Company”) was organized on December 14, 2001, as a Texas corporation under the name eAppliance Innovations, Inc. In June of 2002, MB Software Corporation, a public corporation formed under the laws of Colorado, merged with the Company (which at the time was a wholly owned subsidiary of MB Software Corporation), and the Company changed its name to MB Software Corporation as part of the merger. In May of 2008, the Company changed its name to Wound Management Technologies, Inc.

 

The Company, through its wholly-owned subsidiary, Wound Care Innovations, LLC (“WCI”)(WCI), a wholly-owned subsidiary of the Company was organized as a Nevada limited liability company on August 21, 2003. WCI is a growing provider ofmarkets and sells the patented CellerateRX® Activated Collagen® productproducts in the expanding advanced wound care market. CellerateRX’s activated collagen, which is approximately 1/100th the size of native collagen, delivers the essential benefits of collagen to a wound immediately—other forms of native, intact collagen in commercially available products require time for the body to prepare the collagen for use in the wound carehealing process. CellerateRX is cleared by the FDA as a medical device for use on all acute and surgical markets.chronic wounds, except third degree burns, and are offered in both gel and powder form. CellerateRX is currently approved for reimbursement under Medicare Part B and no prescription is required.

We believe that these products are unique in composition, applicability and clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. The wound care marketCompany is quickly expanding, particularly with respect to diabetic wound applications due to an aging global population; an increase infocused on delivering the incidence of obesity; and an increase in the number of diabetic patients. In 2012, WCI expanded its Activated CollagenCellerateRX® product line to include CellerateRX Surgical products, which is a key factor inhospitals and surgery centers as well as the Company’s growth.diabetic care and long-term care markets.

 

 

 

Management Letter

 

Wound Management Technologies, Inc. is pleased to report anotherrevenues of $1,549,016 for the third quarter of 2017, an increase of approximately 10% over the $1,409,530 reported during the same period in 2016. Year-to-date revenues of $4,607,162 for the nine months ended September 30, 2017, were up 22% from the $3,762,681 reported during the same period in 2016. This increase of approximately $845,000 is the result of continued expansion of our network of distributor sales partners since the third quarter of 2016. Although third quarter revenues were up from the previous quarter by approximately $100,000, revenues from the Texas Coast were down approximately $65,000 from the previous quarter primarily during a period in which the region was feeling the impact of Hurricane Harvey.

Although we incurred a net loss of $48,562 for the three-months ended September 30, 2017, year-to-date remained profitable quarter to start 2017 with net income of $53,058. First$83,539 for the nine-months ended September 30, 2017. The current quarter revenuesloss was primarily due to sales and marketing initiatives including HemaQuell™ prelaunch expenses, and sales advisory services. Additional one-time consulting expenses were $1,605,246,incurred related to a 47% increase comparednew business development opportunity that we decided not to pursue.

 

CellerateRXWe are continuing to focus on growing CellerateRX® revenues continue to increase as the result ofby developing and carrying out our strategic initiatives toto: grow our sales force; expand our surgical product sales to new customers, develop our sales forcecustomers; and to continueincrease sales to existing customers. Our Regional Sales Managers are working closely with our distributor and representative network to increase awareness and sales. We are also increasing our market presence with continuing case studies by key opinion leaders.

 

Our newly-cleared HemaQuell™ Resorbable Bone Wax has been usedThe Company hired a seasoned medical industry veteran with experience in a few cardiac, spineboth surgical suite sales and orthopedic casesgeneral wound care as Director of Strategic Accounts in September of this year, to spearhead our efforts to expand our distributor partner networks and ROP is now in workingto work with strategic partners for clinical studies. HemaQuell received FDA 510(k) clearance in February of 2016. The Innovate OR, Inc. subsidiary has prepared initial marketing materials forto facilitate the HemaQuell launch with initial sales anticipated before year end 2016.product’s adoption by major hospital systems across the Country.

 

In closing, Wound Management Technologies iscontinues to be well positioned to execute on itsour strategic growth initiatives with a solid go-to-market plan in place and an expanding distribution team.place.  The Company looks forward to capitalizing on the traction it has built in the market thus far with additional investments in thestrategic growth, sales, marketing and marketing of the CellerateRX ® productclinical support for CellerateRX® and the emergence of HemaQuell™.

 

Results of Operations

 

For the three and nine months ended March 31,September 30, 2017, compared with the three and nine months ended March 31,September 30, 2016:

 

 

 

 

 

 

Liquidity and Capital Resources

 

As a result of March 31,the current status of the Company’s two Convertible notes payable to Related parties totaling $1,200,000, the Company has a working capital deficit of $448,630 as of September 30, 2017, a decrease of $1,050,284 from the 2016 year-end surplus balance of $601,654.

As of September 30, 2017, we had total current assets of $1,751,015,$1,888,182, including cash of $531,194$151,314 and inventories of $301,811.$820,908. As of December 31, 2016, our current assets of $1,996,013 included cash of $833,480 and inventories of $348,457.

 

As of March 31,September 30, 2017, we had total current liabilities of $1,081,175$2,336,812 including $341,507$223,500 of notes payable. Our current liabilities also include $93,750$232,511 of current year royalties payable. As of December 31, 2016, our current liabilities of $1,394,359 included $414,338 of notes payable and prior year accrued royalties payable of $276,916.

 

As of March 31,September 30, 2017, our current liabilities also includedno derivative liabilities remained due to the expiration of $178 compared to derivative liabilities of $44 at December 31, 2016.the related warrants on July 25, 2017. At March 31, 2017, and December 31, 2016, our derivative liabilities totaled $44 related to 10,000 of the 10,00021,736,844 outstanding common stock purchase warrants.

 

For the threenine months ended March 31,September 30, 2017, net cash used in operating activities was $163,844$411,503 compared to $136,219$10,091 used in the first threenine months of 2016.

 

In the threenine months ended March 31,September 30, 2017, net cash used in investing activities was $114,535$126,453 compared to $702$3,029 used in the first threenine months of 2016. The 2017 expenditure is for a robust new software system.

 

In the threenine months ended March 31,September 30, 2017, net cash used in financing activities was $23,907.$144,210. For the threenine months ended March 31,September 30, 2016, financing activities provided $237,906.$273,743.

 

Off-Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

For the period ended March 31,September 30, 2017, there were no other changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Contractual Commitments

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures as of March 31,September 30, 2017, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of March 31,September 30, 2017, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  We will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.

 

 

Item 1.  Legal Proceedings

Item 1A.1a.  Risk Factors

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.  Defaults Upon Senior Securities

 

Item 4.  Mine Safety Disclosure

 

Item 5.  Other Information

Item 6.  Exhibits

 

 

 

 

Signatures

 

Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.