Sanara MedTech Inc. - Quarter Report: 2013 September (Form 10-Q)
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2013
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 0-11808
WOUND MANAGEMENT TECHNOLOGIES, INC.
| Texas | 59-2219994 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
777 Main Street
Suite 3100
Fort Worth, Texas 76102
(Address of principal executive offices)
(817) 820-7080
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
|
Large accelerated filer o
|
Non-accelerated filer o
|
| Accelerated filer o |
Smaller reporting company þ
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 8, 2013, 85,564,558 shares of the Issuer's $.001 par value common stock were issued and 85,560,469 shares were outstanding.
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended September 30, 2013
| Page | |||
|
PART I – FINANCIAL INFORMATION
|
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| ITEM 1. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 | |
| ITEM 2. | Financial Statements | 7 | |
|
Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012
|
7 | ||
|
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012
|
8 | ||
|
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012
|
9 | ||
| Notes to Unaudited Condensed Consolidated Financial Statements | 10 | ||
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 18 | |
| ITEM 4. | Controls and Procedures | 18 | |
|
PART II. OTHER INFORMATION
|
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| ITEM 1. | Legal Proceedings | 19 | |
| ITEM 1A | Risk Factors | 19 | |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 | |
| ITEM 3. | Defaults upon Senior Securities | 19 | |
| ITEM 4. | Mine Safety Disclosures | 19 | |
| ITEM 5. | Other Information | 20 | |
| ITEM 6. | Exhibits | 20 | |
| Signatures | 21 | ||
2
PART I – FINANCIAL INFORMATION
ITEM 1. 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, 2012 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 September 30, 2013. 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, 2012.
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.
Wound Management Technologies, Inc., was organized on December 14, 2001, as a Texas corporation under the name MB Software Corporation. In March 2008, the Company changed its name to Wound Management Technologies, Inc.
The Company, through its wholly-owned subsidiary, Wound Care Innovations, LLC (WCI), markets and sells the patented CellerateRX® products 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 healing process. CellerateRX is cleared by the FDA as a medical device for use on all acute and chronic wounds, except third degree burns, and is ready for distribution 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 Company is focused on delivering the CellerateRX® product line to the diabetic care and long term care markets as well as to hospitals and operating rooms. Additionally, the Company is studying the feasibility of three other markets where CellerateRX formulas may have great sales potential: dental, dermatology/plastic surgery and sunburn relief.
The Company is also pursuing additional product lines through its subsidiary, Resorbable Orthopedic Products, LLC. In September 2009, ROP acquired a patent for resorbable bone wax and bone void filler products, which offer a solution to the problem of bone wound healing in a cost effective manner. The Company is currently working on the 510k submission for the resorbable orthopedic hemostat. In 2011, the Company executed a development and license agreement with BioStructures, LLC to develop products in the field of bone remodeling, based on ROP’s patent for use in the human skeletal system. This license agreement excludes the fields of 1) a resorbable hemostat (resorbable bone wax), 2) a resorbable orthopedic hemostat (resorbable bone wax) and antimicrobial dressing, and 3) veterinary orthopedic applications. The Company will begin receiving royalties under this agreement at year end 2013 and royalties will continue for the life of the patent which expires in 2023.
3
Management Letter
Wound Management Technologies is pleased to report continued sales growth with year to date revenues of $1,263,170 up 72% from $734,191 in 2012 and 3rd quarter revenues of $472,753, up 31% from 2012 3rd quarter revenues of $360,245. Our relationship with WellDyne has continued to strengthen culminating in the formalization of a three-year Marketing Services and Shipping Agreement for the CellerateRX wound care and surgical product lines. Together we are exploring those and other new marketing programs and segments for our products.
We announced the expansion of our Agreement with Academy Medical which adds our CellerateRX surgical products to the products they are representing. This raises their annual purchase quotas in year one to over $1.1 million and to over $5.8 million by year five. Academy Medical has received FSS numbers for our products and is aggressively pursuing marketing to the VA, federal prisons and Indian Health sectors.
These activities contributed to the October 15, 2013 letter of intent from Brookhaven Medical, Inc. to acquire the Company. As we have announced, the letter of intent, which outlines the primary terms of the merger of Wound Management into Brookhaven, has been approved by the board of directors of both companies and the parties are now working on a formal agreement for a merger which is anticipated to close in the first half of 2014.
Brookhaven has also entered into two funding agreements with the Company to help us retire existing debt and to provide working capital for better execution of our strategic growth plan. This has enabled us to expand our executive management team in operations, sales and marketing. We are now working on updating and strengthening our strategic plan and look forward to sharing new activities and successes with you in the near future.
Results of Operations
For the three and nine months ended September 30, 2013, compared with the three and nine months ended September 30, 2012:
Revenues. The Company generated revenues for the three months ended September 30, 2013, of $472,753, as compared to revenues of $360,245 for the three months ended September 30, 2012, or 31% increase in revenues. The Company generated revenues for the nine months ended September 30, 2013, of $1,263,170, as compared to revenues of $734,191 for the nine months ended September 30, 2012, or 72% increase in revenues. The increase in revenues is the result of the successful implementation of the Company’s strategic plan to introduce our products into hospitals, operating rooms and wound centers and the successful launch of the CellerateRX Surgical powder product.
Cost of goods sold. Cost of goods sold for the three months ended September 30, 2013, was $238,737, as compared to costs of goods sold of $209,423 for the three months ended September 30, 2012, or a 14% increase. Cost of goods sold for the nine months ended September 30, 2013, was $683,522, as compared to costs of goods sold of $521,369 for the nine months ended September 30, 2012, or a 31% increase. The increase in cost of goods sold is the result of increased sales.
General and administrative expenses (“G&A"). G&A expenses for the three months ended September 30, 2013, were $545,575, as compared to G&A expenses of $1,183,580 for the three months ended September 30, 2012, or a 54% decrease in G&A expenses. G&A expenses for the nine months ended September 30, 2013, were $1,520,302, as compared to G&A expenses of $3,015,949 for the nine months ended September 30, 2012, or a 50% decrease in G&A expenses. The G&A expenses for 2012 included the cost of reacquiring distributorship rights from Juventas, LLC and reorganizing the Company’s sales force.
Bad debt expense. Bad debt expense for the three months ended September 30, 2013, was $7,106 as compared to $783,239 for the three months ended September 30, 2012, or a 99% decrease in bad debt expense. Bad debt expense for the nine months ended September 30, 2013, was $12,816 as compared to $864,649 for the nine months ended September 30, 2012, or a decrease of 99%. In 2012 the Company incurred bad debt expense related to the accrued interest receivable on several notes receivable. The bad debt expense recorded in 2013 is significantly lower because it relates only to uncollectible customer accounts receivable.
4
Interest income. The Company did not record any interest income for the three and nine months ended September 30, 2013, as compared to $39,888 and $126,650 for the three and nine months ended September 30, 2012. The Company has stopped accruing interest on notes receivable on which the collectability is highly questionable and has focused its resources on the development of new sales strategies and product lines.
Interest expense. Interest expense was $94,608 for the three months ended September 30, 2013, as compared to $74,270 for the three months ended September 30, 2012, or an increase of 27%. Interest expense was $264,616 for the nine months ended September 30, 2013, as compared to $175,297 for the nine months ended September 30, 2012, or an increase of 51%. Interest expense increased in 2013 as the Company decreased its reliance on complex financing agreements which included equity compensation in favor of agreements with traditional interest terms.
Debt related expense. Debt related expense was $401,755 for the three months ended September 30, 2013, as compared to $214,867 for the three months ended September 30, 2012, or an 87% increase. Debt related expense was $463,900 for the nine months ended September 30, 2013, as compared to $731,044 for the nine months ended September 30, 2012, or a 37% decrease. Debt related expenses have decreased overall in 2013 as the Company reduces the amount of equity compensation included in financing agreements.
Net income/loss. We had a net loss for the three months ended September 30, 2013 of $1,687,496, as compared to a net loss of $1,397,869 for the three months ended September 30, 2012. We had a net loss of $2,662,187 for the nine months ended September 30, 2013 as compared to a net loss of $1,140,014 for the nine months ended September 30, 2012. In the first nine months of 2012, the Company recorded a significant gain on the change in fair market values of its derivative liabilities of approximately $3,355,868 which offset operating expenses resulting in net income for the period. In the first nine months of 2013, the Company successfully increased revenues and controlled operating costs, but recorded a loss on derivative liabilities of $941,928.
Liquidity and Capital Resources
As of September 30, 2013, we had total current assets of $875,580, including cash of $131,221 and inventories of $459,034. As of December 31, 2012, our current assets of $1,044,027 included cash of $45,861 and inventories of $454,211.
As of September 30, 2013, we had total current liabilities of $6,563,444 including $2,889,785 of notes payable to related and unrelated parties and $569,000 advanced to the Company in anticipation of the Series C Preferred Stock offering. Our current liabilities also include $281,250 of current year royalties payable and other accrued liabilities consisting of commissions and payroll of $64,189. As of December 31, 2012, our current liabilities of $5,010,162 included $2,229,907 of related and unrelated notes payable and prior year accrued royalties payable of $803,238. These royalties were paid in full during the first six months of 2013. Our current liabilities as of December 31, 2012 also included accrued commissions of $54,925 and accrued payroll tax and penalties of $208,142. In February of 2013, the Company’s offer of Compromise was accepted by the IRS and on March 20, 2013, the Company paid the final $16,000 due under the compromise.
As of September 30, 2013, our current liabilities also included derivative liabilities of $2,153,795 compared to derivative liabilities of $1,336,574 at December 31, 2012. At September 30, 2013, our derivative liabilities consisted of 16,925,743 outstanding stock purchase warrants and convertible promissory notes and debentures in the total amount of $625,600. At December 31, 2012, our derivative liabilities consisted of 12,099,968 outstanding stock purchase warrants and convertible promissory notes and debentures in the total amount of $823,645.
For the nine months ended September 30, 2013, net cash used in operating activities was $1,185,125 compared to $1,300,221 used in the first nine months of 2012.
We had no cash used in or provided by investing activities in the nine months ended September 30, 2013 compared to $369,779 provided by investing activities in the nine months ended September 30, 2012.
Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities generated $1,270,485 for the nine months ended September 30, 2013, and $946,248 for the nine months ended September 30, 2012. The financing activities in 2013 include the $569,000 advanced to the Company in anticipation of the Series C Preferred Stock offering. We may need to raise additional capital to bring additional products to market in the next year.
5
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
For the period ended September 30, 2013, 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, 2012.
Contractual Commitments
Federal payroll taxes. The Company was delinquent in the payment of 2004-2005 tax liabilities with the Internal Revenue Service (the “IRS”). A tax lien was filed against the Company in December 2009. In January of 2012 the Company made payment to the IRS for the balance due for the payroll tax liabilities. As of December 31, 2012, unpaid penalties and interest related to the payroll tax liabilities totaled $208,142. In February of 2013, the Company’s offer of Compromise was accepted by the IRS and on March 20, 2013, the Company paid the final $16,000 due under the compromise.
Royalty agreement. 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, 2012 was $803,238. These prior year royalties were paid in full during the first six months of 2013. As of September 30, 2013, the balance of accrued royalties for the current year is $281,250.
6
ITEM 2. FINANCIAL STATEMENTS
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012
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ASSETS
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September 30,
2013
|
December 31,
2012
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||||||
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CURRENT ASSETS:
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||||||||
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Cash
|
$ | 131,221 | $ | 45,861 | ||||
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Accounts Receivable, net
|
137,121 | 203,967 | ||||||
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Inventory, net
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459,034 | 454,211 | ||||||
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Employee Advances
|
43,729 | 11,832 | ||||||
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Deferred Loan Costs
|
5,794 | 7,400 | ||||||
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Deferred Compensation
|
83,100 | 309,450 | ||||||
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Prepaid and Other Assets
|
15,581 | 11,306 | ||||||
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Total Current Assets
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875,580 | 1,044,027 | ||||||
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LONG-TERM ASSETS:
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||||||||
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Intangible Assets, net ($204,124, $165,851)
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306,186 | 344,459 | ||||||
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Deferred Loan Costs
|
423 | 5,126 | ||||||
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Total Long-Term Assets
|
306,609 | 349,585 | ||||||
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TOTAL ASSETS
|
$ | 1,182,189 | $ | 1,393,612 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Accounts Payable
|
$ | 201,057 | $ | 205,206 | ||||
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Accrued Royalties
|
281,250 | 803,238 | ||||||
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Accrued Liabilities
|
64,189 | 263,165 | ||||||
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Accrued Interest - Related Parties
|
72,615 | 34,054 | ||||||
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Accrued Interest
|
331,753 | 132,018 | ||||||
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Derivative Liabilities
|
2,153,795 | 1,336,574 | ||||||
|
Notes Payable - Related Parties
|
415,620 | 415,620 | ||||||
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Notes Payable, net of discount ($59,807, $18,005)
|
2,474,165 | 1,814,287 | ||||||
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Stock Subscription Payable
|
569,000 | 6,000 | ||||||
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Total Current Liabilities
|
6,563,444 | 5,010,162 | ||||||
|
LONG-TERM LIABILITIES
|
||||||||
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Debentures, net of discount ($46,945, $160,744)
|
103,055 | 189,256 | ||||||
|
Total Long-Term Liabilities
|
103,055 | 189,256 | ||||||
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TOTAL LIABILITIES
|
6,666,499 | 5,199,418 | ||||||
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STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
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Series A Preferred Stock, $10 par value, 5,000,000 shares authorized; 0 issued and outstanding
|
- | - | ||||||
|
Series B Preferred Stock, $10 par value, 75,000 shares authorized; 0 issued and outstanding
|
- | - | ||||||
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Common Stock: $.001 par value; 100,000,000 shares authorized; 82,548,991 Issued and 82,544,902 outstanding as of September 30, 2013 and 68,782,470 issued and 68,778,381 outstanding as of December 31, 2012.
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82,549 | 68,782 | ||||||
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Additional Paid-in Capital
|
36,124,652 | 35,154,736 | ||||||
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Treasury Stock
|
(12,039 | ) | (12,039 | ) | ||||
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Accumulated Deficit
|
(41,679,472 | ) | (39,017,285 | ) | ||||
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Total Stockholders' Equity (Deficit)
|
(5,484,310 | ) | (3,805,806 | ) | ||||
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TOTAL LIABILITIES AND STOCKHOLDERS'
|
||||||||
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EQUITY (DEFICIT)
|
$ | 1,182,189 | $ | 1,393,612 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
|
THREE MONTHS
|
THREE MONTHS
|
NINE MONTHS
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NINE MONTHS
|
|||||||||||||
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ENDED
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ENDED
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ENDED
|
ENDED
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|||||||||||||
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September 30,
2013
|
September 30,
2012
|
September 30,
2013
|
September 30,
2012
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REVENUES
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$ | 472,753 | $ | 360,245 | 1,263,170 | $ | 734,191 | |||||||||
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COST OF GOODS SOLD
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238,737 | 209,423 | 683,522 | 521,369 | ||||||||||||
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GROSS PROFIT
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234,016 | 150,822 | 579,648 | 212,822 | ||||||||||||
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GENERAL AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||
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General and Administrative Expenses
|
545,575 | 1,183,580 | 1,520,302 | 3,015,949 | ||||||||||||
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Depreciation / Amortization
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12,758 | 16,138 | 38,273 | 48,415 | ||||||||||||
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Bad Debt Expense
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7,106 | 783,239 | 12,816 | 864,649 | ||||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS:
|
(331,423 | ) | (1,832,135 | ) | (991,743 | ) | (3,716,191 | ) | ||||||||
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OTHER INCOME (EXPENSES):
|
||||||||||||||||
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Change in fair value of Derivative Liability
|
(859,710 | ) | 683,515 | (941,928 | ) | 3,355,868 | ||||||||||
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Interest Income
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- | 39,888 | - | 126,650 | ||||||||||||
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Interest Expense
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(94,608 | ) | (74,270 | ) | (264,616 | ) | (175,297 | ) | ||||||||
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Debt related Expense
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(401,755 | ) | (214,867 | ) | (463,900 | ) | (731,044 | ) | ||||||||
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NET INCOME (LOSS)
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$ | (1,687,496 | ) | $ | (1,397,869 | ) | (2,662,187 | ) | $ | (1,140,014 | ) | |||||
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Basic and diluted loss per share of common stock
|
$ | (0.02 | ) | $ | (0.02 | ) | (0.04 | ) | $ | (0.02 | ) | |||||
|
Weighted average number of common shares outstanding
|
80,321,828 | 63,576,004 | 75,462,813 | 61,749,477 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
|
2013
|
2012
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income (loss) from continuing operations
|
$ | (2,662,187 | ) | $ | (1,140,014 | ) | ||
|
Adjustments to reconcile net loss to net cash provided (used) in
|
||||||||
|
Operating activities:
|
||||||||
|
Depreciation and amortization
|
38,273 | 48,413 | ||||||
|
Amortization of discounts and deferred costs
|
183,765 | 386,721 | ||||||
|
Stock and warrants issued as payment for services
|
203,500 | 143,900 | ||||||
|
Warrant Expense
|
376,550 | 705,537 | ||||||
|
Re-acquisition of distributorship
|
- | 907,872 | ||||||
|
(Gain) loss on fair market value of derivative liabilities
|
941,928 | (3,355,868 | ) | |||||
|
Increase (decrease) in allowance for uncollectible notes receivable
|
- | 493,233 | ||||||
|
Non-cash debt related costs
|
146,962 | (18,560 | ) | |||||
|
Changes in assets and liabilities:
|
||||||||
|
(Increase) decrease in accounts receivable
|
66,846 | (149,409 | ) | |||||
|
(Increase) decrease in inventory
|
(4,823 | ) | (273,308 | ) | ||||
|
(Increase) decrease in employee advances
|
(31,897 | ) | 20,733 | |||||
|
(Increase) decrease in accrued interest receivable - related parties
|
- | (22,378 | ) | |||||
|
(Increase) decrease in accrued interest receivable
|
- | (104,272 | ) | |||||
|
(Increase) decrease in prepaids and other assets
|
(4,275 | ) | (17,247 | ) | ||||
|
(Increase) decrease in deferred compensation
|
41,550 | 309,450 | ||||||
|
Increase (decrease) in allowance for uncollectible interest
|
- | 131,011 | ||||||
|
Increase (decrease) in accrued royalties
|
(521,988 | ) | 281,250 | |||||
|
Increase (decrease) in accounts payable
|
(4,149 | ) | 255,914 | |||||
|
Increase (decrease) in accrued liabilities
|
(198,976 | ) | (71,238 | ) | ||||
|
Increase (decrease) in accrued interest payable - related parties
|
38,561 | 12,964 | ||||||
|
Increase (decrease) in accrued interest payable
|
205,235 | 155,075 | ||||||
|
Net cash flows provided (used) in operating activities
|
(1,185,125 | ) | (1,300,221 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Purchase of property and equipment
|
- | (2,060 | ) | |||||
|
Proceeds from notes receivable - related parties
|
- | 371,839 | ||||||
|
Net cash flows used in investing activities
|
- | 369,779 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from notes payable - related parties
|
- | 315,200 | ||||||
|
Payments on notes payable - related parties
|
- | (26,200 | ) | |||||
|
Proceeds from notes payable
|
891,160 | 1,774,500 | ||||||
|
Payments on notes payable
|
(195,435 | ) | (1,480,000 | ) | ||||
|
Proceeds from debentures
|
- | 347,500 | ||||||
|
Proceeds from sale of stock
|
- | 15,248 | ||||||
|
Proceeds from exercise of warrants
|
5,760 | - | ||||||
|
Proceeds from stock subscriptions payable
|
569,000 | - | ||||||
|
Net cash flows provided by financing activities
|
1,270,485 | 946,248 | ||||||
|
Increase (decrease) in cash
|
85,360 | 15,806 | ||||||
|
Cash and cash equivalents, beginning of period
|
45,861 | 3,608 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 131,221 | $ | 19,414 | ||||
|
Cash paid during the period for:
|
||||||||
|
Interest
|
$ | 20,821 | $ | 7,258 | ||||
|
Income Taxes
|
- | - | ||||||
|
Supplemental non-cash investing and financing activities:
|
||||||||
|
Common stock issued for debt conversion
|
$ | 301,145 | $ | 678,000 | ||||
|
Derivative Liability reduced by stock issuance for debt conversion
|
$ | 342,987 | $ | 723,923 | ||||
|
Derivative Liability reduced by stock issuance for warrant exercise
|
$ | 74,188 | - | |||||
|
Common stock issued for debt related costs
|
$ | 5,500 | $ | 1,200 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
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 condensed consolidated balance sheet as of September 30, 2013 and unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 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 nine month period ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, 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, 2012, and December 31, 2011, included in the Company’s Annual Report on Form 10-K. The accompanying consolidated balance sheet as of December 31, 2012, 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 BioPharma Management Technologies, Inc., a Texas corporation (“BioPharma”). In June of 2013, the board of directors voted to dissolve BioPharma. All intercompany accounts and transactions have been eliminated.
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.
10
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.
At September 30, 2013, the Company’s financial instruments consist of the derivative liabilities related to stock purchase warrants and the conversion features of certain outstanding debentures and notes payable. The derivative liability on stock purchase warrants was valued using the American Options Binomial Method, a Level 3 input. The fair value of the conversion features is calculated 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.
NOTE 2 - GOING CONCERN
The Company has current liabilities in excess of current assets and has a stockholders’ deficiency. The Company has had limited operations and has not been able to develop an ongoing, reliable source of revenue to fund its existence. The Company’s day-to-day expenses have been covered by proceeds obtained and services paid by the issuance of stock and notes payable. The adverse effect on the Company’s results of operations due to its lack of capital resources can be expected to continue until such time as the Company is able to generate additional capital from other sources. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
These unaudited interim condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The continuation of the Company as a going concern is dependent upon the success of the Company in obtaining additional funding and the success of its future operations. The ability of the Company to achieve these objectives cannot be determined at this time.
NOTE 3 - SIGNIFICANT TRANSACTIONS
Forbearance Agreement
On August 17, 2012, Tonaquint, Inc., (“Tonaquint”) and the Company entered into a forbearance agreement in connection with a Securities Purchase Agreement by and between Tonaquint and the Company under which Tonaquint purchased a Secured Convertible Promissory Note in the original principal amount of $560,000 (the “Note”). Tonaquint agreed to convert $20,000 in principal amount owed under the Note into shares of the Company’s Common Stock and to accept a cash payment of $200,000 as payment in full for the remaining balance on or before October 16, 2012. The forbearance also gave the Company the option to extend the final payment date. In January of 2013, the Company issued 74,993 shares of Common Stock according to the original terms of the Forbearance agreement. The Company also paid $45,000 in 2013 and issued an additional 213,147 shares of Common Stock to Tonaquint to extend the final payment date to October 15, 2013 at which time the final $200,000 was paid in full.
Federal Payroll Tax Settlement Negotiation
In January of 2012, the Company made payment to the Internal Revenue Service (the “IRS”) for delinquent tax liabilities from 2004 and 2005. In February of 2013, the IRS accepted Company’s offer of Compromise related to unpaid penalties and interest and on March 20, 2013, the Company paid the final $16,000 due under the compromise.
Shipping and Consulting Agreement
On September 20, 2013, the Company entered into a Shipping and Consulting Agreement with WellDyne Health, LLC (“WellDyne”). Under the agreement, WellDyne agreed to provide certain storage, shipping, and consulting services, and was granted the right to conduct online resale of certain of the Company’s products to U.S. consumers.
As additional consideration, an affiliate of WellDyne was issued a warrant (the “WellDyne Warrant”) for the purchase shares of the Company’s Common Stock equal to the lesser of (a) 4.9% of the issued and outstanding Common Stock (on a fully-diluted basis), or (b) 4,500,000 shares. The WellDyne Warrant has a term of five years and an exercise price of $0.06, subject to adjustment as provided for therein.
11
NOTE 4 – NOTES PAYABLE
In the first six months of 2013, the Company paid the $35,000 in principal and $851 interest due on the October 1, 2012 note payable in the original amount of $75,000.
In the first six months of 2013, the Company paid the $50,000 in principal and $1,879 interest due on the December 11, 2012 note payable in the original amount of $50,000.
In the first six months of 2013, the Company paid the $75,000 in principal and $2,340 interest due on the December 7, 2012 note payable in the original amount of $75,000.
In January of 2013, the Company paid $5,025 in principal related to a $50,000 purchase order financing agreement.
In February of 2013, the Company received a total of $500,000 from two lenders. The Company established two notes payable in the principal amount of $250,000 each. The notes accrue interest at 10% per annum and are due upon the Company’s achievement of certain revenue targets. The notes are convertible at the option of the holder into shares of the Company’s common stock at a conversion price of $0.07 per share, or into an equivalent number of shares of the Company’s Series C Preferred Stock.
In June of 2013, the Company received $40,000 from a lender established a note payable in the same amount. The note accrues interest at 10% per annum and is due in five installments between July 25, 2013 and November 25, 2013. In the third quarter of 2013, the Company made principal payments totaling $10,000 to the lender according to the terms of the note agreement.
In June of 2013, the Company received $50,000 from a lender established a note payable in the same amount. The note accrues interest at 9% per annum and is due in five installments between August 19, 2013 and December 19, 2013. In the third quarter of 2013, the Company made principal payments totaling $10,000 to the lender according to the terms of the loan agreement.
In the first nine months of 2013, the Company received $138,160 from a lender under a note agreement which allows funding of up to $142,000. The note accrues interest at 10% per annum and has a maturity date of May 13, 2015. The note agreement requires that all proceeds generated from the sale of inventory the note financed will be paid to the lender until the note is paid in full. As of September 30, 2013, the Company has paid $10,410 of the note balance. In October of 2013, the entire remaining principal balance of $127,457 and all related accrued interest was paid in full.
In July of 2013, the Company received $50,000 from a lender established a note payable in the same amount. The note accrues interest at 10% per annum and is due in four installments between October 12, 2013 and January 12, 2014. In October of 2013, the Company made payment in full on this note.
In the first nine months of 2013, the Company received additional cash of $113,000 under the Note payable agreement established in May of 2012 and increased the note payable balance by $130,100, which included an approximate original issue discount of 10% and deferred loan costs.
2012 Debentures
In connection with the 2012 debentures disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, the Company issued 5,970,416 shares of Common Stock to the debenture holder in conversion of $200,000 of principal. A pro rata share of the discount associated with the debentures was expensed with each issuance of Common Stock.
The unamortized discount balance of the debentures outstanding at September 30, 2013 is $46,946 for a total debenture balance, net of discount, of $103,055. The unamortized balance of deferred loan costs and accrued interest payable at September 30, 2013 is $2,671 and $29,809, respectively.
12
NOTE 5 - STOCKHOLDERS’ EQUITY
Preferred Stock
It is the Company’s intention to initiate an offering (the “Series C Offering”) of a new Series C Preferred Stock (“Series C Preferred”) during the fourth quarter of 2013. In anticipation of the Series C Offering, the Company has received advance subscriptions in the amount of $569,000 from outside investors, which amounts are reflected as a Stock Subscription Payable under Current Liabilities on the Company’s balance sheet. If the Series C Offering is not consummated, the Company will be obligated to return the advanced funds.
Common Stock
In January of 2013, $5,760 was received and 240,000 shares of common stock were issued in an exercise of warrants.
On January 30, 2013, 74,993 shares of stock with a market value of $3,382 were issued according to the terms of the Forbearance Agreement related to the June 21, 2011 Note Payable (see Note 3 "Significant Transaction - Forbearance Agreement").
On February 4, 2013, 400,000 shares of common stock were issued in conversion of $9,688 of the May 30, 2012 Convertible Note and on February 19, 2013, 1,587,301 shares were issued in conversion of $50,000 of debentures. The Company issued an additional 500,000 shares of common stock with a market value of $40,000 to a consultant on February 21, 2013, according to the terms of the engagement agreement.
In February of 2013, 400,000 shares of common stock were issued in conversion of $12,880 of the May 30, 2012 Convertible Note. The Company also issued 500,000 shares of common stock with a market value of $40,000 to a consultant according to the terms of the engagement agreement.
On April 2, 2013, the Company issued 350,000 shares of common stock in conversion of $13,802 of principal and interest on the May 30, 2012 Convertible Note. On April 4, 2013, the Company issued 500,000 shares of common stock with a market value of $41,000 to a consultant according to the terms of the engagement agreement. On April 4, 2013, the Company issued 300,000 shares of common stock with a market value of $24,600 to a consultant according to the terms of the engagement agreement.
On May 13, 2013, the Company issued 288,603 shares of common stock in conversion of $12,525 of principal and interest on the May 30, 2012 Convertible Note. On May 8, 2013, the Company issued 1,948,051 shares of common stock in conversion of $75,000 of principal of the 2012 Debentures and 500,000 shares of common stock with a market value of $35,000 to a consultant according to the terms of the engagement agreement.
On June 4, 2013, the Company issued 1,029,334 shares of common stock in the cashless exercise of 1,299,769 stock purchase warrants and 500,000 shares of common stock with a market value of $32,500 to a consultant according to the terms of the engagement agreement. On June 24, 2013, the Company also issued 350,000 shares of common stock in conversion of $15,027 of principal of unrelated party debt.
On July 11, 2013, the Company issued 250,000 shares of Common Stock with a market value of $17,250 to various sales representatives as part of a sales incentive program. On July 16, 2013, the Company issued 304,361 shares of Common Stock in conversion of $13,848 of principal and interest on the May 30, 2012 Convertible Note. On July 17, 2013, the Company issued 100,000 shares of common stock with a market value of $7,500 to a consultant according to the terms of the engagement agreement. On July 26, the Company issued 102,459 shares of Common stock with a market value of $6,148 for an extension of the Tonaquint forbearance agreement.
On August 13, 2013, the Company issued 380,000 shares of Common Stock in conversion of $13,832 of principal on the May 30, 2012 Convertible Note. On August 15, 2013, the Company issued 100,000 shares of common stock with a market value of $5,700 to a consultant according to the terms of the engagement agreement and 2,435,064 shares of Common Stock in conversion of $75,000 of debentures.
On September 2, 2013, the Company issued 415,667 shares of Common Stock in conversion of $15,043 of principal and interest on the May 30, 2012 Convertible Note. On September 13, 2013, the Company issued 100,000 shares of common stock with a market value of $6,300 to a consultant according to the terms of the engagement agreement. On September 25, the Company issued 110,668 shares of Common stock with a market value of $7,083 for an extension of the Tonaquint forbearance agreement.
13
Warrants
A summary of the status of the warrants granted for the nine month period ended September 30, 2013, and changes during the period then ended is presented below:
|
For the Nine Months Ended September 30, 2013
|
||||||||
|
Shares
|
Weighted Average Exercise Price
|
|||||||
|
Outstanding at beginning of period
|
12,099,968 | $ | 0.65 | |||||
|
Granted
|
7,115,544 | 0.15 | ||||||
|
Exercised
|
1,539,769 | 0.02 | ||||||
|
Forfeited
|
375,000 | 0.09 | ||||||
|
Expired
|
375,000 | 1.00 | ||||||
|
Outstanding at end of period
|
16,925,743 | $ | 0.38 | |||||
On June 19, 2013, the Company issued a total of 725,000 stock purchase warrants with a five year term to a lender as part of a note payable agreement. Of the 725,000 warrants issued, 350,000 are immediately exercisable at $0.09 per share. The remaining 375,000 warrants are exercisable at $0.09 per share only upon the Company’s default under the terms of the note payable agreement. The original value of the warrants calculated using the American Option Binomial Model was $46,400.
On June 25, 2013, the company issued 175,000 stock purchase warrants to a lender related to a note purchase agreement. The five year warrants are immediately exercisable into common stock at $0.09 per share. The original value of the warrants calculated using the American Option Binomial Model was $12,950.
On August 12, 2013 the Company issued 200,000 stock purchase warrants with a five year term to a lender as part of a note payable agreement. The warrants are immediately exercisable at $0.075 per share. The original value of the warrants calculated using the American Option Binomial Model was $11,200.
On September 26, 2013, the Company issued the WelldDyne Warrant (see Note 3 “Significant Transactions”). The warrant allows the purchase shares of the Company’s Common Stock equal to the lesser of (a) 4.9% of the issued and outstanding Common Stock (on a fully-diluted basis), or (b) 4,500,000 shares. The WellDyne Warrant has a term of five years and an exercise price of $0.06, subject to adjustment as provided for therein. The original value of the warrants calculated using the American Option Binomial Model was $306,000.
On September 30, 2013, the Company recorded 1,515,544 warrants exercisable at $0.44 per share. The warrants have an expiration date of August 22, 2016 and were issued to an advisory and investment services firm.
14
|
As of September 30, 2013
|
As of September 30, 2013
|
|||||||||||||||||||||
|
Warrants Outstanding
|
Warrants Exercisable
|
|||||||||||||||||||||
|
Range of Exercise Prices
|
Number Outstanding
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
Number Exercisable
|
Weighted-Average Exercise Price
|
|||||||||||||||||
| $ | 0.06 | 4,500,000 | 5.0 | $ | 0.06 | 4,500,000 | $ | 0.06 | ||||||||||||||
| 0.08 | 550,000 | 4.4 | 0.08 | 550,000 | 0.08 | |||||||||||||||||
| 0.09 | 1,125,000 | 4.6 | 0.09 | 750,000 | 0.09 | |||||||||||||||||
| 0.15 | 1,571,300 | 3.9 | 0.15 | 1,571,300 | 0.15 | |||||||||||||||||
| 0.25 | 120,000 | 2.1 | 0.25 | 120,000 | 0.25 | |||||||||||||||||
| 0.40 | 1,299,999 | 1.0 | 0.40 | 1,299,999 | 0.40 | |||||||||||||||||
| 0.44 | 1,515,544 | 2.9 | 0.44 | 1,515,544 | 0.44 | |||||||||||||||||
| 0.50 | 2,614,450 | 0.7 | 0.50 | 2,614,450 | 0.50 | |||||||||||||||||
| 0.60 | 975,000 | 3.0 | 0.60 | 975,000 | 0.60 | |||||||||||||||||
| 0.75 | 120,000 | 2.1 | 0.75 | 120,000 | 0.75 | |||||||||||||||||
| 1.00 | 2,534,450 | 0.6 | 1.00 | 2,534,450 | 1.00 | |||||||||||||||||
| $ | 0.06-1.00 | 16,925,743 | 2.9 | $ | 0.38 | 16,550,743 | $ | 0.38 | ||||||||||||||
Stock Options
A summary of the status of the stock options granted for the nine month period ended September 30, 2013, and changes during the period then ended is presented below:
|
For the Nine Months Ended September 30, 2013
|
||||||||
|
Options
|
Weighted Average Exercise Price
|
|||||||
|
Outstanding at beginning of period
|
5,043,500 | $ | 0.15 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
1,100,000 | $ | 0.15 | |||||
|
Expired
|
- | - | ||||||
|
Outstanding at end of Period
|
3,943,500 | $ | 0.15 | |||||
|
As of September 30, 2013
|
As of September 30, 2013
|
|||||||||||||||||||||
|
Stock Options Outstanding
|
Stock Options Exercisable
|
|||||||||||||||||||||
|
Exercise Price
|
Number Outstanding
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
Number Exercisable
|
Weighted-Average Exercise Price
|
|||||||||||||||||
| $ | 0.15 | 3,943,500 | 3.89 | 0.15 | 3,510,165 | $ | 0.15 | |||||||||||||||
15
NOTE 6 – DERIVATIVE LIABILITIES
As of September 30, 2013 and December 31, 2012, 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 outstanding debentures and convertible notes payable. As a result, the Company determined that the warrants and the embedded beneficial conversion features of the debt instruments did not qualify for equity classification. Accordingly, the warrants and beneficial conversion features are treated as derivative liabilities and are carried at fair value.
The following table sets forth the fair value hierarchy within our financial assets and liabilities by level that they were accounted for at fair value on a recurring basis as of September 30, 2013.
|
Fair Value Measurement at September 30, 2013
|
||||||||||||||||
|
Liabilities
|
Carrying Value at September 30,
2013
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Warrant Derivative Liability
|
$ | 837,373 | $ | - | $ | - | $ | 837,373 | ||||||||
|
Convertible Debt Derivative Liability
|
$ | 1,072,580 | $ | - | $ | - | $ | 1,072,580 | ||||||||
|
Debenture Derivative Liability
|
$ | 243,842 | $ | - | $ | - | $ | 243,842 | ||||||||
The Company estimates the fair value of the derivative warrant liabilities by using the American Option Binomial Model, a Level 3 input, with the following assumptions used:
|
Dividend yield:
|
1%
|
|
Expected volatility
|
283.86% to 549.88%
|
|
Risk free interest rate
|
.31% to 1.41%
|
|
Expected life (years)
|
1.00 to 5.00
|
The following table sets forth the changes in the fair value of derivative liabilities for the nine months ended September 30, 2013:
|
Balance, December 31, 2012
|
(1,336,574 | ) | ||
|
Change in Fair Value of Warrant Derivative Liability
|
(79,125 | ) | ||
|
Change in Fair Value of Beneficial Conversion Derivative Liability
|
(762,204 | ) | ||
|
Change in Fair Value of Debenture Derivative Liability
|
(40,364 | ) | ||
|
Adjustments to Warrant Derivative Liability
|
(171,627 | ) | ||
|
Adjustment to Beneficial Conversion Derivative Liability
|
(10,152 | ) | ||
|
Adjustment to Debenture Derivative Liability
|
246,251 | |||
|
Balance, September 30, 2013
|
(2,153,795 | ) |
NOTE 7 – RELATED PARTY TRANSACTIONS
Funds are advanced to the Company from various related parties, including from Mr. Robert Lutz Jr., company CEO and members of the board of directors. As of September 30, 2013, the Company owes a total of $415,620 in principal and $72,615 in accrued interest to four related parties.
NOTE 8 - SUBSEQUENT EVENTS
On October 11, 2013, the Company, together with certain of its subsidiaries, entered into a term loan agreement (the “Loan Agreement”) with Brookhaven Medical, Inc. (“BMI”), pursuant to which BMI made a loan to the Company in the amount of $1,000,000 under a Senior Secured Convertible Promissory Note (the “First BMI Note”). In connection with the Loan Agreement, the Company and BMI also entered into a letter of intent contemplating (i) an additional loan to the Company (the “Additional Loan”) of up to $2,000,000 by BMI (or an outside lender), and (ii) entrance into an agreement and plan of merger (the “Merger Agreement”) pursuant to which the Company would merge with a subsidiary of BMI, subject to various conditions precedent.
The First BMI Note carries an interest rate of 8% per annum, and all unpaid principal and accrued but unpaid interest under the First BMI Note is due and payable on the later of (i) October 10, 2014, or (ii) the first anniversary of the date of the Merger Agreement. The First BMI Note may be prepaid in whole or in part upon ten days’ written notice, and all unpaid principal and accrued interest under the Note may be converted, at the option of BMI, into shares of the Company’s Series C Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price of $70.00 per share. The Company’s obligations under the First BMI Note are secured by all the assets of the Company and its subsidiaries.
16
On October 15, 2013, BMI agreed to make the Additional Loan pursuant to a Secured Convertible Drawdown Promissory Note (the “Second BMI Note”), which allows the Company to drawdown, as needed, an aggregate of $2,000,000, subject to an agreed upon drawdown schedule or as otherwise approved by BMI. In connection with the Second BMI Note, the Company, its subsidiaries, and BMI entered into an additional loan agreement as well as an additional security agreement.
The Second BMI Note carries an interest rate of 8% per annum, and (subject to various default provisions) all unpaid principal and accrued but unpaid interest under the Second BMI Note is due and payable on the later of (i) October 15, 2014, or (ii) the first anniversary of the date of the Merger Agreement. The Second BMI Note may be prepaid in whole or in part upon ten days’ written notice, and all unpaid principal and accrued interest under the Second BMI Note may be converted, at the option of BMI, 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 the Maturity Date (provided that the transaction contemplated by the Merger Agreement has not been consummated as of that time).
In the fourth quarter of 2013, the Company paid ten notes in the combined principal amount of $515,457 and all related accrued interest in full. The Company made partial payment on three additional notes payable in the combined principal amount of $144,200.
In October of 2013, the Company paid $90,000 to redeem debentures in the principal amount of $75,000.
In October of 2013, the Company paid $50,000 cash and issued 384,615 shares of Common Stock as a finder’s fee related to the agreement with BMI.
In November of 2013, the Company issued 250,000 shares of Common Stock to various sales representatives as part of a sales incentive program.
In November of 2013, the Company issued 2,380,952 shares of Common Stock in conversion of debentures in the principal amount of $75,000 and accrued interest of $25,000.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
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 September 30, 2013, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of September 30, 2013, our disclosure controls and procedures were not effective to due to definciencies in our controls over valuation of embedded derivatives.
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.
18
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 14, 2011, Ken Link instituted litigation against the Company and Scott A. Haire in the District Court of Tarrant County Texas, 342nd Judicial District alleging default under the terms of a certain promissory note executed by Wound Management Technologies, Inc. and guaranteed by Scott A. Haire. Ken Link asserts that the unpaid balance of the note, including accrued interest as of December 4, 2011, is the sum of $355,292 plus 200,000 shares of the Company’s common stock. We have disputed the claim, because we believe the contract is tainted by usury, and therefore, a usury counterclaim will more than offset the unpaid balance of the promissory note. The note, in the original principal amount of $223,500, required the payment of interest accrued at 13% per annum, an additional one-time charge of $20,000 due on maturity, the issuance of 200,000 shares of stock as interest, and a $1,000 per day late fee for each day the principal and interest is late. It is our contention that these sums make the contract usurious and more than offset the amount of the unpaid indebtedness. Furthermore, we have filed an action for recovery of damages for usury under the Texas Finance Code for a note which was previously executed by the Company and payable to Ken Link, which was in fact paid to Mr. Link in full. While the amount of the promissory note remains unpaid, the counterclaims more than offset the maximum amount that could be asserted on the promissory note. We are taking steps to vigorously defend this matter, however, we are unable at this time to determine the ultimate outcome of this matter or determine the effect it may have on our business, financial condition or result of operations.
ITEM 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
Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the three months ended September 30, 2013. The securities bear a restrictive legend and no advertising or public solicitation was involved. The Company did not purchase any of its own securities during the quarter ended September 30, 2013.
As further described in Part I – Financial Information “Notes to Unaudited Condensed Consolidated Financial
Statements” filed herewith:
On July 11, 23013, the Company issued 250,000 shares of Common Stock with a market value of $17,250 to various sales representatives as part of a sales incentive program. On July 16, 2013, the Company issued 304,361 shares of Common Stock in conversion of $13,848 of principal and interest on the May 30, 2012 Convertible Note. On July 17, 2013, the Company issued 100,000 shares to a consultant according to the terms of the engagement agreement. On July 26, the Company issued 102,459 shares of Common stock with a market value of $6,148 for an extension of the Tonaquint forbearance agreement.
On August 13, 2013, the Company issued 380,000 shares of Common Stock in conversion of $13,832 of principal on the May 30, 2012 Convertible Note. On August 15, 2013, the Company issued 100,000 shares to a consultant according to the terms of the engagement agreement and 2,435,064 shares of Common Stock in conversion of $75,000 of debentures.
On September 12, 2013, the Company issued 415,667 shares of Common Stock in conversion of $15,043 of principal and interest on the May 30, 2012 Convertible Note. On September 13, 2013, the Company issued 100,000 shares to a consultant according to the terms of the engagement agreement. On September 25, the Company issued 110,688 shares of Common stock with a market value of $7,083 for an extension of the Tonaquint forbearance agreement.
The issuances described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration. In addition to any noted exemption below, we relied upon Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”). The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions. We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
This item is not applicable.
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ITEM 5. OTHER INFORMATION
On July 16, 2013 the Company executed two settlement agreements with Caesar Capital Group, LLC and ARRG Corp. related to convertible promissory notes executed on June 9, 2011 and subsequently assigned to Secure eHealth, LLC as part of an Assignment and Assumption agreement dated December 29, 2011. Secure eHealth, LLC was a subsidiary of the Company until December 29, 2011 at which point it was sold to HEB, LLC and Commercial Holding AG, LLC as part of a membership purchase agreement. According to the terms of the July 16, 2013 settlement agreements the Company has established two $45,000 notes payable, one to Caesar Capital Group, LLC and one to ARRG Corp. The notes, which mature April 14, 2014, accrue interest at 8% per annum and are convertible 180 days after the issue date at a price per share equal to 80% of the fair market value of common stock. In consideration for the notes, Caesar Capital LLC and ARRG Corp fully and forever release, discharge and acquit the Company from and against any and all claims pertaining to the June 9, 2011 note agreements and December 29, 2011 Assignment and Assumption agreement.
ITEM 6. EXHIBITS
The following documents are filed as part of this Report:
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Exhibit No.
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Description | |
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2.1
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Agreement and Plan of Merger, dated as of September 17, 2009, by and among BioPharma Management Technologies, Inc., a Texas corporation, certain shareholders thereof, Wound Management Technologies, Inc., a Texas corporation, and BIO Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 21, 2009) | |
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3.1
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Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)
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3.2
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Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit A to the Company’s Information Statement filed with the Commission on May 13, 2008)
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3.3
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Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)
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| 4.1 | Certificate of Designations, Number, Voting Power, Preferences And Rights of Series CConvertible Preferred Stock (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed October 15, 2013) | |
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10.1
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Manufacturer Exclusive Distributor Agreement dated as of June 21, 2013 by and between Wound Care Innovations, LLC and Academy Medical, LLC (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 8, 2013)
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| 10.2 | Shipping and Consulting Agreement dated September 20, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 26, 2013) | |
| 10.3 | Warrant for the Purchase of Shares of Common Stock, dated September 26, 2013 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 26, 2013) | |
| 10.4 | Amendment A to Manufacturer Exclusive Distributor Agreement, dated October 2, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 26, 2013) | |
| 10.5 | Amendment B to Manufacturer Exclusive Distributor Agreement, dated October 1, 2013 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 26, 2013) | |
| 10.6 | Letter of Intent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 15, 2013) | |
| 10.7 | Term Loan Agreement (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 15, 2013) | |
| 10.8 | Senior Secured Convertible Promissory Note (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 15, 2013) | |
| 10.9 | Security Agreement (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed October 15, 2013) | |
| 10.10 | Secured Convertible Drawdown Promissory Note dated October 15, 2013 (Incorporated by reference to Exhibit 10.1 to Amendment No. 1 the Company’s Current Report on Form 8-K/A Filed October 22, 2013) | |
| 10.11 | Loan Agreement dated October 15, 2013 (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 the Company’s Current Report on Form 8-K/A filed October 22, 2013) | |
| 10.12 | Security Agreement dated October 15, 2013 (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 the Company’s Current Report on Form 8-K/A filed October 22, 2013) | |
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31.1*
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Certification of Principal Executive Officer and Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002*
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32.1*
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Certification of Principal Executive Officer and Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002*
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101
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Interactive Data Files pursuant to Rule 405 of Regulation S-T.
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* Filed herewith
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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.
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WOUND MANAGEMENT TECHNOLOGIES, INC.
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Date: November 14, 2013
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By:
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/s/ Robert Lutz, Jr. | |
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Robert Lutz, Jr.,
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Chairman of the Board and Chief Executive Officer
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