U.S. SECURITIES AND EXCHANGE COMMISSION

 

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, 20172018

 

 

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)

 

 

 

 

 

As of May 12, 2017, 110,540,38715, 2018, 236,642,901 shares of the Issuer's $.001 par value common stock were issued and 110,536,298 shares were outstanding.

 

Form 10-Q

 

Quarter Ended March 31, 20172018

 

 

Part I – Financial Information

 

Item 1. Financial Statements

 

 

 

 

 

Wound Management Technologies, Inc. and Subsidiaries

Consolidated StatementStatements of Operations

For the Three MonthsThree-months Ended March 31, 20172018 and 20162017

 

 

 

 

 

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. and its wholly owned subsidiaries. The accompanying unaudited consolidated balance sheet as of March 31, 2017,2018, and unaudited consolidated statements of operations for the three monthsthree-months ended March 31, 20172018 and 20152017, 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 period ended March 31, 2017,2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017,2018, 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, 2016,2017, and December 31, 2015,2016, included in the Company’s Annual Report on Form 10-K. The accompanying consolidated balance sheet as of December 31, 2016,2017, 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 $99 for the three-months ended March 31, 2018, compared to $26,878 for the three monthsthree-months ended March 31, 2017, and $147,980 for the three months ended March 31, 2016.2017. The allowance for obsolete and slow movingslow-moving inventory had a balance of $126,145$144,897 at March 31, 2017,2018, and $153,023$144,996 at December 31, 2016.2017.

 

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.

 

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.

 

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 lossincome available to common stockholdersshareholders 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. The dilutive effect of the outstanding convertible preferred stock and certain warrants for the three months ended March 31, 2017, was 97,440,635 shares and an adjustment to net income of $12,936.

  

Note 32 – Notes Payable

 

On June 15, 2015, the Company paidentered 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 final payment of $300 to Quest Capital as part of the furniture purchase agreementCompany in the original amount of $11,700.

 

Note 43 – Commitments and Contingencies

 

 

Effective November 28, 2007,January 3, 2008, WCI entered into separate exclusive license agreements with both Applied Nutritionals, LLC (“Applied”) and its founder George Petito (“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. The licenses were limited to the human health care market, (excluding dental and retail) for external wound care (including surgical wounds) and include any new product developments based on the licensed patent and processes and any continuations. Although the term of these licenses expired on February 27, 2018, the agreements permit WCI to continue to sell and distribute products for a period not exceeding six (6) months from the effective termination date.

In consideration for the licenses, WCI agreed to pay to Applied and Petito, (in the aggregate), the following royalties, beginning January 3, 2008: (a) an upfrontadvance royalty of $100,000 in the aggregate,$100,000; (b) an aggregatea royalty of fifteen percent (15%)15% of gross sales occurring during the first year of the license; (c) an additional upfrontadvance royalty of $400,000 in the aggregate, which was paid October,on January 3, 2009; plus (d) an aggregatea royalty of three percent (3%)3% of gross sales for all sales occurring after the payment of the $400,000 upfrontadvance royalty. In addition, WCI must maintain a minimum aggregate annual royalty payment of $375,000 for 2009 and thereafter if the royalty percentage payments made do not meet or exceed that amount. The totalamounts listed in the two preceding sentences are the aggregate of unpaid royalties asamounts paid/owed to Applied and Petito) and the Company has paid the minimum aggregate annual royalty payments each year since 2008, including both 2017 and 2016. Sales of December 31, 2016, was $276,916. These prior year royalties were paid in full in January of 2017. As of March 31, 2017,CellerateRX occurring after the balance of accrued royalties fortermination date are subject to the current year is $93,750.3% royalty.

 

On September 29, 2009, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), by and among the Company, RSI-ACQ,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,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. Constantine) and/or their heirs. The royalty expense was $4,020 for each of the three-months ended March 31, 2017 and March 31, 2016. Mr. Constantine is a contract employee of the Company holding the position of Director of R&D.

 

Office leases

 

 

Payables to Related Parties

 

As of March 31, 2017,2018, and December 31, 2016,2017, the Company had outstanding payables to related parties totaling $45,108$5,885 and $93,655,$60,000, respectively. The payables are unsecured, bear no interest and due on demand.

 

 

Preferred Stock

 

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 iswas 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 iswas senior to the Company’s common stockCommon Stock and any other currently issued series of the Company’s preferred stockPreferred Stock upon liquidation and iswas 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 iswas convertible at the option of the holder into 1,000 shares of common stockCommon Stock as provided in the Certificate. Additionally, each holder of Series C Preferred Stock shall bewas 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 behave been converted.

As of MarchDecember 31, 2017, and December 31, 2016, there were 86,361 and 85,64685,561 shares of Series C Preferred Stock issued and outstanding, respectively.

 

 

 

On March 9, 2017,6, 2018, the Company issued 150,00022,651,356 shares of common stock to eachCommon Stock for the conversion of the Company’s four Board Directors, (a total of 600,000 shares valued at $42,000).

 

Warrants

 

A summary of the status of the warrants granted for the three monthsthree-months ended March 31, 2017,2018, and changes during the period then ended is presented below:

 

 

 

The aggregate intrinsic value of the exercisable warrants as of March 31, 2017,2018, was $148,300.$0.

 

Stock Options

 

A summary of the status of the stock options granted for the three-month period ended March 31, 2017,2018, and changes during the period then ended is presented below:

 

 

 

(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.

 

Note 75 – Related Party Transactions

 

On April 25, 2016, and as amended March 10, 2017, the Company and John Siedhoff, a memberthe Chairman 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.Agreement. The Agreement providedprovides for a paymentcompensation payable to an entity controlled by Mr. Siedhoff 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$20,000 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.month. The consulting fee expense was $100,000$60,000 for the three monthsthree-months ended March 31, 2017, (including a bonus of $40,000).2018.

  

Note 86 – Capital Lease ObligationSubsequent Events

 

In December 2014,On April 3, 2018, the Company entered intoannounced that it will be operating under a Capital Lease agreement fornew trade name, “WNDM Medical Inc.”, a registered DBA of Wound Management Technologies, Inc. The purpose of the purchase ofchange was to better align the Company’s name with its innovative and cost-effective products provided across a phone system. The agreement required a down payment ofbroad range clinical needs.

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20162017 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.

 

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, 2017.2018.  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, 2016.2017.

 

Business Overview

 

Unless otherwise indicated, we use “WMT,” “the Company,” “we,” “our” and “us” in this report to refer to the businesses of Wound Management Technologies, Inc. and its wholly owned subsidiaries.

 

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.

 

CellerateRX®/CRXɑ® Activated Collagen®/CRXɑ® Adjuvant, (the “Product”) is cleared by the FDA as a medical device for use on all acute and chronic wounds, except third degree burns, and is offered in both powder and gel form. CellerateRX Wound Care Innovations,Products are available without a prescription and are currently approved for reimbursement under Medicare Part B. CellerateRX Activated Collagen® Surgical Adjuvant Products are available under a physician’s order. Applied Nutritionals, LLC (“WCI”AN”), a wholly-owned subsidiary of manufactures the Products and owns the CellerateRX registered trademark. The Company was organizedhas incurred no research and development costs related to CellerateRX during the last two fiscal years.

We believe that the Products are unique in composition, applicability and clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. The Company is focused on delivering the CellerateRX/CRXɑ product lines to hospitals and surgery centers as a Nevada limited liability company on August 21, 2003. WCI is a growing provider ofwell as the patented CellerateRX® Activated Collagen® product in the wounddiabetic care and surgicallong-term care markets. The wound care market is quickly expanding, particularly with respect to diabetic wound applications due to an aging global population; an increase in the incidence of obesity; and an increase in the number of diabetic patients. In 2012, WCI expanded its Activated Collagen product line to include CellerateRX Surgical products, which is a key factor in the Company’s growth.

 

Resorbable Orthopedic Products, LLC (“ROP”) a wholly-owned subsidiary of the Company was organized as a Texas limited liability company on August 24, 2009, as part of a transaction to acquire a multi-faceted patent for resorbable bone hemostasis products. ROP is both licensing technology from this patent and also developing products itself. In 2014, the Company entered into a commercial licenseout-license for a bone void filler. The Company began receiving royalties under this agreement in the fourth quarter of 2013. Royalties will continue for the life of the patent which expires in 2023. In 2016 ROP received FDA 510(k) clearance for HemaQuell™HemaQuell® Resorbable Bone Wax. HemaQuell™Hemostat. HemaQuell is a mechanical tamponade for bleeding bone that resorbs within 2-7 days after use. InThe Company received 510(k) clearance for the first quarterresorbable orthopedic hemostat in February of 2017, ROP2016; completed subsequent testing and launched HemaQuell® Resorbable Bone Wax viaHemostat in 2017, with our first sales realized in the Company’s Innovate OR, Inc, subsidiary. Initialfourth quarter. The Company is currently focusing its sales efforts are focusedin the domestic (United States) market, with an emphasis on orthopedic, cardiovascular, and spine surgeries.

 

Our primary focus is developing and marketing products for the advanced wound care market, with a focusan emphasis on surgical products, as pursued through our wholly owned subsidiaries, WCI and ROP, which brings a unique mix of products, procedures and expertise to the wound care arena andincluding surgical wounds. CellerateRX’s patentedCellerateRX/CRXɑ® Adjuvant’s unique Activated CollagenCollagen® fragments (CRa® are a fraction of the size of the native collagen molecules and particles found in other products, which delivers the benefits of collagen to the body immediately.

  

Management Letter

 

Wound Management Technologies, Inc. is pleased to report another profitablefirst quarter to start 2017 with net income2018 revenue of $53,058. First quarter revenues were $1,605,246, a 47% increase$1,961,787 which was up 22% compared to prior year and represented an all-time high in quarterly sales for the first quarter of 2016 revenues of $1,095,223. Approximately 96% ofCompany. The higher revenues were from the CellerateRX product line and the other 4% of revenue occurred in royalties from the Resorbable Orthopedic Products, LLC subsidiary (ROP).

 

Our newly-cleared HemaQuell™ Resorbable Bone Wax has been usedThe Company also achieved another profitable quarter, as it continues to invest heavily in a few cardiac, spineexpanding its sales reach, product development and orthopedic cases and ROP is nowclinical support. All convertible debt was converted to common shares of the Company's stock in working with strategic partners for clinical studies. HemaQuell received FDA 510(k) clearancethe first quarter of 2018, resulting in February of 2016. The Innovate OR, Inc. subsidiary has prepared initial marketing materialszero debt on the balance sheet for the HemaQuell launch with initial sales anticipated before year end 2016.first time in the history of the Company. In addition, all Series C Convertible Preferred Stock shareholders converted their Series C shares and related dividends to common shares of the Company's stock resulting in one class of common shares issued and outstanding as of March 31, 2018.

 

 

Results of Operations

 

For the three months ended March 31, 2017,2018, compared with the three months ended March 31, 2016:2017:

 

 

 

 

 

 

Liquidity and Capital Resources

 

As a result of the conversion of the two notes payable to related parties totaling $1,200,000, the Company has a working capital surplus of $1,532,790 as of March 31, 2018, an increase of $1,610,754 from the 2017 year-end deficit balance of $77,964.

As of March 31, 2018, we had total current assets of $1,751,015,$2,011,793, including cash of $531,194$261,446 and inventories of $301,811.$613,714. As of December 31, 2016,2017, our current assets of $1,996,013$2,037,360 included cash of $833,480$463,189 and inventories of $348,457.$711,397.

 

As of March 31, 2017,2018, we had total current liabilities of $1,081,175 including $341,507 of notes payable.$479,003. Our current liabilities also include $93,750$102,250 of current year royalties payable.accrued payables and royalties. As of December 31, 2016, our current liabilities of $1,394,359 included $414,338 of notes payable and royalties payable of $276,916.

 

For the three monthsthree-months ended March 31, 2017,2018, net cash used in operating activities was $163,844$200,446 compared to $136,219$163,844 used in the first three monthsthree-months of 2016.2017.

 

In the three monthsthree-months ended March 31, 2017,2018, net cash used in investing activities was $114,535$1,297 compared to $702$114,535 used in the first three monthsthree-months of 2016. The 2017 expenditure is for a robust new software system.2017.

 

In the three monthsthree-months ended March 31, 2017,2018, net cash used in financing activities was $23,907.$0. For the three monthsthree-months ended March 31, 2016,2017, financing activities provided $237,906.$23,907.

 

Off-Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

For the period ended March 31, 2017,2018, 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, 2016.2017.

 

Contractual Commitments

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we are not required to provide this information.

 

 

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.

 

 

Part II — Other Information

 

Item 1.  Legal Proceedings

 

 

Item 1A.1a.  Risk Factors

As a smaller reporting company, we are not required to provide this information.

 

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

 

Item 3.  Defaults Upon Senior Securities

 

Item 4.  Mine Safety Disclosure

This item is not applicable.

 

Item 5.  Other Information

 

Item 6.  Exhibits

 

 

 

*  Filed herewith

 

 

Signatures