Sanara MedTech Inc. - Annual Report: 2018 (Form 10-K)

   

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2018

Commission File Number 0-11808

 

WOUND MANAGEMENT TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

Texas		59-2219994
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1200 Summit Ave, Suite 414, Fort Worth, Texas 76102

(Address of principal executive offices) (Zip Code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $ .001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No

 

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 ☐ No

 

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). ☑ Yes ☐ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Yes ☑ 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 the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☑

Emerging growth company ☐

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2018 based on the $0.065 closing price as of such date was approximately $7,449,324.

 

As of April 1, 2019, 236,646,512 shares of the Issuer’s $.001 par value common stock were issued and 236,642,423 were outstanding.

 

 

WOUND MANAGEMENT TECHNOLOGIES, INC.

Form 10-K

For the Year Ended December 31, 2018

 

		Page
Letter from the President		(i)
ITEM 1	BUSINESS	1
ITEM 1A	RISK FACTORS	3
ITEM 1B	UNRESOLVED STAFF COMMENTS	11
ITEM 2	PROPERTIES	11
ITEM 3	LEGAL PROCEEDINGS	11
ITEM 4	MINE SAFETY DISCLOSURES	11
ITEM 5	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	12
ITEM 6	SELECTED FINANCIAL DATA	13
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	16
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	38
ITEM 9A	CONTROLS AND PROCEDURES	38
ITEM 9B	OTHER INFORMATION	38
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	39
ITEM 11	EXECUTIVE COMPENSATION	41
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	43
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	44
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	45
ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	46

  

 

LETTER FROM THE CEO

 

Dear Shareholders:

Last year was a year of growth and change for our Company. We continued our three-year strategic plan to grow top line revenues, build a strong company infrastructure, and maintain positive cash flow. We also entered into an exciting new alliance with The Catalyst Group, Inc. (Catalyst), a middle market private equity firm whose primary focus is healthcare products and services. Catalyst currently has ownership interests in several companies in the healthcare industry. Our new relationship with Catalyst and its affiliated companies has already provided additional cross-selling opportunities, as well as a soon to be launched antimicrobial product focused on biofilm management in surgical and chronic wounds.

As previously announced, our rights to sell CellerateRX® hydrolyzed collagen products expired in August 2018. Despite diligent efforts, we were unsuccessful with renewing this license agreement. Catalyst, however, managed to secure the rights to market CellerateRX in North America. Recognizing our success in building a strong team with extensive healthcare experience along with our proven revenue growth, Catalyst and WNDM believe it will be in the best interest of both parties as well as our patients to form a partnership to jointly execute a shared growth strategy. Effective August 28, 2018, we entered into agreements with Catalyst to continue our core operations of marketing CellerateRX through a newly formed entity, Cellerate, LLC, in which the Company and Catalyst each had a 50% ownership interest.

More recently, on March 15, 2019, we were pleased to announce the Company acquired Catalyst’s 50% ownership in Cellerate, LLC in exchange for the issuance to Catalyst of 1,136,815 shares of WNDM's newly created Series F Convertible Preferred Stock, which are convertible into 227,363,000 shares of our common stock. As of the transaction effective date of March 15, 2019, WNDM owns 100% of Cellerate, LLC. As a wholly owned subsidiary, we will report its operations and financial results on a consolidated basis beginning on the effective date. Following the closing of this transaction, Mr. Ron Nixon, Founder and Managing Partner of Catalyst, was appointed to WNDM's Board of Directors. Mr. Nixon currently serves on the board of directors of publicly traded LHC Group, Inc., and is also a director of Trilliant Surgical, LLC, Rochal Industries, LLC, Triad Life Sciences, Inc. and several other privately held companies. Mr. Nixon holds a bachelor's degree in mechanical engineering from the University of Texas at Austin. With his strong background in financing and growing companies, particularly in health care, and his many contacts in advanced wound care, Ron is already making an outstanding impact on our business.

 

As we look forward to 2019, WNDM will continue its strategy to expand the distribution of CellerateRX and other products related to our strategy. We are also seeking potential new opportunities that have arisen as part of our association with Catalyst. This includes a focus in areas such as biofilm management, placental biologics, negative pressure wound therapy adjunct products, debridement, and oxygen delivery systems to the wound bed.

Our 2018 reported results include the use of the equity method of accounting for our ownership interest in Cellerate, LLC during the four-month period of September through December 2018. Under the equity method, Cellerate, LLC revenues were not recognized by the Company in its consolidated financial statements. Rather, the Company’s 50% share of Cellerate, LLC’s net income was presented as a single line item on our Statement of Operations. As a result, our 2018 reported results only include product sales for January through August. Product sales for September through December were reported in Cellerate, LLC’s unaudited Statement of Operations which is attached as an exhibit to our 10-K.

On a combined basis, sales of our core product, CellerateRX, totaled $8.6 million in 2018. This represented a 40% increase over 2017 sales. Our strong sales performance is largely due to the fact that we have a great product that is efficacious and significantly improves patient outcomes This theme of providing efficacious products that improve patient outcomes will continue to be our focus going forward.

On March 25, 2019, the Company announced a 1-for-100 reverse stock split and a corresponding adjustment to authorized capital stock. We believe these changes will take effect near the end of April or early May, 2019. When it becomes effective, the reverse stock split will not change a shareholder's ownership percentage of the Company's common stock, except for the small effect where the reverse stock split would result in a shareholder owning a fractional share. No fractional shares will be issued as a result of the reverse split. Shareholders who would otherwise be entitled to receive a fractional share will instead receive a cash payment based on the market price of a share of common stock on the day after the reverse stock split becomes effective. The reverse split is intended to increase the per share trading price of our stock, and increase the appeal of our common stock to the financial community and investing public, as well as give us more flexibility for a possible future listing of our common stock on a national stock exchange.

We also recently announced that we plan to change the name of the Company to Sanara MedTech Inc. Sanara comes from the Latin word ‘sana’ meaning ‘heal’ in English. The name reflects our commitment to provide an expanded portfolio of products for patients to benefit from reduced pain and better healing outcomes.

We are off to an excellent start this year and we are optimistic that our sales momentum will continue in 2019 and beyond.

J. Michael Carmena

Chief Executive Officer

 

 

PART I

 

Item 1. BUSINESS

 

Background

 

The terms “WMTI,” “WNDM,” “we,” “the Company,” and “us” as used in this report refer to Wound Management Technologies, Inc. and its wholly owned subsidiaries, unless the context suggests otherwise. With its No. 1 goal of improving patient outcomes, the Company develops, markets and distributes biotechnology products to physicians, hospitals, nursing homes and clinics. Our primary products are in the $11 billion U.S. consumable medical device market and the $1.5 billion biomaterials market.

 

Wound Management Technologies, Inc. (“WMTI”) 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.

 

WCI, LLC (“WCI”), a wholly-owned subsidiary of the Company was organized as a Nevada limited liability company on August 21, 2003 under the name Wound Care Innovations, LLC. WCI has been a growing provider of CellerateRX®/CRXɑ® Activated Collagen® Adjuvant (CellerateRX) in the general wound care and surgical markets. The general/chronic wound care market is quickly expanding, particularly with respect to chronic wound applications due to an aging population and increases in the incidence of obesity and diabetes. In 2012, WCI expanded its CellerateRX product line to include surgical products, which has significantly contributed to the Company’s sales 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. The Company is both licensing technology from this patent and also developing products itself. In 2014, the Company entered into a commercial license for a bone void filler and in 2016 received FDA 510(k) clearance for ROP Bone Hemostasis Material, (registered tradename HemaQuell®). HemaQuell® Resorbable Bone Hemostat is a mechanical tamponade for bleeding bone that resorbs within 2 to 7 days after use. ROP was dissolved during the third quarter of 2018. All of its rights and obligations were assigned to its parent company WMTI.

 

The Company’s exclusive license to sell and distribute CellerateRX products in the human health care market (excluding dental and retail) expired on February 27, 2018. The license agreements permitted the Company to continue to sell and distribute products through August 27, 2018. Subsequent to the expiration of the license agreement between the Company and Applied Nutritionals, LLC, an affiliate of The Catalyst Group, Inc. (CGI) acquired an exclusive license to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico.

 

Effective August 28, 2018, the Company consummated definitive agreements that continued operations to market the Company’s principal products, CellerateRX, through a 50% ownership interest in a newly formed limited liability company, Cellerate, LLC. The remaining 50% ownership interest is held by an affiliate of CGI. Cellerate, LLC conducts operations with an exclusive sublicense from CGI’s affiliate to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico.

 

While the Company has significant influence over the operations of Cellerate, LLC, the Company did not have a controlling interest. CGI has the controlling vote in the event of a deadlocked vote by the Board of Managers of Cellerate, LLC. Therefore, the Company’s investment in Cellerate, LLC is reported using the equity method of accounting. Beginning September 1, 2018, the Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMTI’s Statement of Operations.

 

On March 15, 2019, the Company executed and closed an agreement with CGI to acquire the remaining 50% equity interest in Cellerate, LLC not then owned by the Company. After closing the acquisition, the Company owns 100% of Cellerate, LLC, and as a wholly owned subsidiary will report its financial results on a consolidated basis beginning March 15, 2019. The Company acquired the remaining 50% equity interest in Cellerate, LLC in exchange for the issuance of 1,136,815 shares of the Company’s newly created Series F Convertible Preferred Stock (the “Series F Preferred Stock”). For more information, see Subsequent Events (Note 12) in the notes to the consolidated financial statements.

 

 The Products

 

CellerateRX 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 products are available without a prescription and are currently approved for reimbursement under Medicare Part B. CellerateRX Surgical products are available under a physician’s order. Applied Nutritionals manufactures the products and owns the CellerateRX registered trademark. The Company has incurred no research and development costs related to CellerateRX during the last two fiscal years.

 

 

We believe that the CellerateRX products are unique in composition, applicability and clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. Through our initial 50% ownership and now 100% ownership of Cellerate, LLC, the Company is focused on delivering the CellerateRX product lines to hospitals and surgery centers as well as the diabetic care and long-term care markets.

 

In February 2016, the Company received FDA 510(k) clearance for HemaQuell® Resorbable Bone Hemostat. HemaQuell is a mechanical tamponade for bleeding bone that resorbs within 2-7 days after use. The Company completed subsequent testing and launched HemaQuell® Resorbable Bone Hemostat with our first sales realized in the fourth quarter of 2017. We are focusing HemaQuell sales efforts in the domestic (United States) market, with an emphasis on orthopedic, cardiovascular, and spine surgeries.

 

Marketing, Sales and Distribution

 

We began marketing our CellerateRX products in the chronic wound care and long-term care markets, as well as the professional medical markets, due to the prevalence of diabetic and decubitus (pressure) ulcers. We believe our products are unique in composition and clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. In 2012, the Company added the CellerateRX Surgical product line to expand into the surgical wound market.

 

The Company continues to market the CellerateRX products through its 50%, now 100%, ownership in Cellerate, LLC. The products are attracting increased business from hospitals and surgery centers due to the unique benefits of hydrolyzed collagen, including product efficacy and economic value. The products are used in specialty areas including total joint replacement, spine, orthopedic, trauma, vascular, general, plastic and reconstructive surgeries and podiatry. Chronic wound care products are sold via independent distributors, healthcare distributors, Company representatives and internal sales activities. The surgical Products are sold through a growing network of surgical product distributors and Company representatives who are credentialed to demonstrate the products in surgical settings.

  

Staffing

 

As of April 1, 2019, the Company has a staff of 24, consisting of 19 full-time employees, 2 part time employees and 4 contractors.

 

Competition

 

The general wound care market is served by a number of large, multi-product line companies offering a suite of products to the market as well as a large number of small companies. Our CellerateRX products compete with primary dressings, advanced wound care products, collagen matrices and other biopharmaceutical products. Manufacturers and distributors of competitive products include: Smith & Nephew plc, Acelity L.P. Inc., Medline Industries, Inc., and Integra LifeSciences Holdings Corporation. Many of our competitors are significantly larger than we are and have greater financial and personnel resources. Consequently, we will be at a competitive disadvantage in marketing and selling our products in the marketplace. We believe, however, that the unique molecular form of Activated Collagen® Adjuvant used in our products outperforms currently available, non-active dressings by improving efficacy, reducing the cost of patient care, and replacing numerous products with a single primary dressing.

 

New Products, Markets and Services

 

In September 2009 the Company acquired a patent (U.S. Patent No. 7,074,425, the “ROP Patent”) from Resorbable Orthopedics, LLC, (“ROP”) for a resorbable bone hemostat and delivery system for orthopedic bone void fillers (see Note 6 “Intangible Assets” in the notes to the Company’s consolidated financial statements). The ROP Patent offers innovative, safe and effective resorbable orthopedic products that are complementary to the already-existing CellerateRX Surgical products. Together, the bone hemostat and delivery system address issues such as bone wax granuloma and the cost-effective delivery of materials that manage bone wound healing. The Company received 510(k) clearance for the resorbable orthopedic hemostat in February of 2016; completed subsequent testing and launched HemaQuell® Resorbable Bone Hemostat in 2017, with our first sales realized in the fourth quarter of 2017. This product shares a complementary sales call point for surgical representatives that sell the Company’s CellerateRX Surgical products.

 

The Company has also licensed the ROP Patent to a third party to market a bone void filler product for which the Company receives a 3% royalty on product sales over the life of the ROP Patent, which expires in 2023 with annual minimum royalties of $201,000.

 

Available Information

 

The Company electronically files reports with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials the Company has filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Company’s website (http://www.wndm.com/), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any stockholder who requests it.

 

 

Item 1A. RISK FACTORS

 

The following risk factors should be considered with respect to making any investment in our securities as such an investment involves a high degree of risk. You should carefully consider the following risks and the other information set forth elsewhere in this report, including the financial statements and related notes, before you decide to purchase shares of our stock. If any of these risks occur, our business, financial condition and results of operations could be adversely affected. As a result, the trading price of our stock could decline, perhaps significantly, and you could lose part or all of your investment. As used herein, the word “business” as used in “material adverse effect on our business”, “adversely affect our business” and other similar phrases includes any of (or any combination of) the Company’s present or future operations, financial performance, margins, revenues, operating margins, stock value, competitive position, or other indicators of Company performance.

 

RISKS RELATED TO HOW WE OPERATE OUR BUSINESS:

 

We had a history of losses in prior years and may not maintain profitability as we expand our selling efforts.

 

The Company has incurred net losses in most years since we began our current operations in 2004. We plan to continue making significant investments in our sales and clinical programs resulting in a substantial increase in our operating expenses. Consequently, we will need to continue our revenue growth to maintain profitability in the future. We cannot offer any assurance that we will be able to generate future sales growth. If we fail to maintain profitability, our stock price may decline and you may lose part or all of your investment.

 

Our revenue growth for a particular period is difficult to predict, and a shortfall in forecast revenues may harm our operating results.

 

Because we are a relatively small company, our revenue growth and consequently results of operations are difficult to predict. We plan our operating expense levels based primarily on forecasted revenue levels. A shortfall in revenue could lead to operating results being below expectations as we may not be able to quickly reduce our fixed expenses in response to short-term revenue shortfalls. We have experienced fluctuations in revenue and operating results from quarter to quarter and anticipate that these fluctuations will continue until we achieve a critical mass with our product sales. These fluctuations are due to a variety of factors, including:

 

 

As a consequence, operating results for a particular future period are difficult to predict and prior results are not necessarily indicative of future results. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business.

 

If our products do not gain market acceptance, we might not be able to fund future operations.

 

Several factors may affect the market acceptance of our products or any other products we develop or acquire. These include, but are not limited to:

 

 

Our ability to effectively promote and sell any approved products may also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and our ability to obtain sufficient third-party coverage or reimbursement, if any. In addition, our efforts to educate the medical community on the benefits of our product candidates may require significant resources, may be constrained by FDA rules and policies on product promotion, and may never be successful. If our products do not gain market acceptance, we may not be able to fund future operations, including developing, testing and obtaining regulatory approval for new product candidates and expanding our sales and marketing efforts for our approved products, which would cause our business to suffer.

 

 

Disruption of, or changes in, our distribution model or customer base could harm our sales and margins.

 

If we fail to manage the distribution of our products properly, or if the financial condition or operations of our reseller channels weakens, there may be a material adverse effect on our business. Furthermore, a change in the mix of our customers between service provider and enterprise, or a change in the mix of direct and indirect sales, could adversely affect our business.

  

Several factors could also result in disruption of or changes in our distribution model or customer base, which could harm our sales and margins, including the following:

 

 

If we cannot meet our future capital requirements, our business will suffer.

 

We have a history of operating losses and with the exception of 2016 and 2018, negative cash flow from operating activities. As such, we have utilized funds from offerings of our securities to fund our operations. Future results of operations involve significant risks and uncertainties. Factors that could affect our future operating results and cause actual results to vary materially from expectations include, but are not limited to, potential demand for our products, risks from competitors, regulatory approval of our new products, technological change, and dependence on key personnel. Although we have taken steps to improve our overall liquidity, if our cash flow is insufficient, we may be forced either to secure a line of credit or seek additional equity financing in order to:

 

 

If our capital needs are met through the issuance of equity or convertible debt securities, the percentage ownership of our current stockholders may be reduced. Our future success may be determined in large part by our ability to obtain additional financing, and the incurrence of indebtedness would result in increased debt service obligations which could result in operating and financing covenants that would restrict our operations. There can be no assurance that such financing would be available or, if available, that such financing could be obtained upon terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, our operating results and financial condition may suffer.

 

Failure to retain and recruit key personnel would harm our ability to meet key objectives.

 

Our success depends, in large part, on our ability to attract and retain skilled executive, managerial, sales and marketing personnel. There can be no assurance that we will be able to find and attract additional qualified employees or retain any such executive officers and other key personnel. The inability to hire qualified personnel; the loss of services of our executive officers or key personnel; or the loss of services of executive officers or key personnel who may be hired in the future may have a material adverse effect on our business.

 

Failure to manage our planned growth could harm our business.

 

Our ability to successfully market and sell our wound care products and implement our business plan requires an effective plan for managing our future growth. We plan to increase the scope of our operations at a rapid rate. Future expansion efforts will be expensive and may strain our internal operating resources. To manage future growth effectively, we must maintain and enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. If we do not manage growth properly, it could harm our operating results and financial condition.

 

We operate in a highly competitive industry and face competition from large, well-established medical device manufacturers as well as new market entrants.

 

Competition from other medical device companies is intense, expected to increase, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We compete with other companies in acquiring rights to products or technologies from universities and other research institutions. Although our products have performed well in customer evaluations, we are a relatively unknown brand in a market controlled, in large part, by companies with a large customer base. We may not, even with strong customer accounts, be able to establish the credibility necessary to secure large national customers.

 

 

Several factors may limit the market acceptance of our products, including the timing of regulatory approvals and market entry relative to competitive products, the availability of alternative products, and the price of our products relative to alternative products, the availability of third-party reimbursement and the extent of marketing efforts by third party distributors or agents that we retain. There can be no assurance that our products will receive market acceptance in a commercially viable period of time, if at all. Furthermore, there can be no assurance that we can develop products that are more effective or achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing or acquiring products and technologies that are more effective than those being developed by us, that would render our products and technologies less competitive or obsolete.

 

Our competitors enjoy several competitive advantages over us, including but not limited to:

 

 

The presence of competition in our market may lead to pricing pressure which would make it more difficult to sell our products at a price that will make us profitable or may prevent us from selling our products at all. Our failure to compete effectively would have a material adverse effect on our business.

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

In the ordinary course of our business, we use networks to collect and store sensitive data, including intellectual property, proprietary business information and that of our customers, suppliers and business partners, personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties. Further, they may cause disruption of our operations and the services we provide to customers, damage to our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business.

 

We may not be able to maintain sufficient product liability insurance to cover claims against us.

 

Product liability insurance for the healthcare industry is generally expensive to the extent it is available at all. We may not be able to maintain such insurance on acceptable terms or be able to secure increased coverage as commercialization of our products progresses, nor can we be sure that existing or future claims against us will be covered by our product liability insurance. Moreover, the existing coverage of our insurance policy or any rights of indemnification and contribution that we may have may not be sufficient to offset existing or future claims. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage and not subject to any indemnification or contribution could have a material adverse effect on our business.

  

RISKS RELATED TO OUR PRODUCTS:

 

Competitors could invent products superior to ours and cause our products and technologies to become obsolete.

 

The wound care sector of the medical products industry is characterized by a multitude of technologies and intense competition. Our competitors currently manufacture and distribute a variety of products that are, in many respects, comparable to our products. Many suppliers of competing products are considerably larger and have much greater resources than we do. In addition, many specialized products companies have formed collaborations with large, established companies to support research, development and commercialization of wound care products which may be competitive with ours. Academic institutions, government agencies and other public and private research organizations are also conducting research activities and may commercialize wound care products on their own or through joint ventures. It is possible that these competitors may develop technologies and products that are more effective than any we currently have. If this occurs, any of our products and technology affected by these developments could become obsolete.

 

 

We may have exposure to product liability claims.

 

Although we have contractual indemnity from the manufacturer of CellerateRX for liability claims related to their products, we could face a product liability claim outside of the scope of the contractual indemnity. We do not have, and do not anticipate obtaining, contractual indemnification from parties supplying raw materials or parties marketing the products we sell. In any event, indemnification from the manufacturer of CellerateRX or from any other party is limited by the terms of the indemnity and by the creditworthiness of the indemnifying party. A successful product liability claims or series of claims brought against us could result in judgments, fines, damages and liabilities that could have a material adverse effect on our business. We may incur significant expense investigating and defending these claims, even if they do not result in liability. Moreover, even if no judgments, fines, damages or liabilities are imposed on us, our reputation could suffer, which could have a material adverse effect on our business. In the event that we do not have adequate insurance or contractual indemnification, product liability claims relating to defective products could have a material adverse effect on our business.

 

RISKS RELATED TO INTELLECTUAL PROPERTY:

 

The patent on the CellerateRX products expired in February 2018. 

 

CellerateRX products no longer benefit from the protection of a patent that expired in February 2018 and may become subject to increased competition resulting from the marketing of substantially equivalent products, and the Company’s investment in Cellerate, LLC may suffer as a result. 

 

If we are unable to protect our intellectual property rights adequately, we may not be able to compete effectively.

 

Part of our success depends on our ability to protect proprietary rights to technologies used in certain of our products. We rely on patents, copyrights, trademarks and trade secret laws to establish and maintain proprietary rights in our technology and products. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep a competitive advantage. Our patents and patent applications may not be broad enough to prevent competitors from introducing similar products into the market. Our patents, if challenged or our attempts to enforce them, may not necessarily be upheld by the courts. Efforts to enforce any of our proprietary rights could be time-consuming and expensive, which could adversely affect our business and prospects and divert management’s attention. There can be no assurance that our proprietary rights will not be challenged, invalidated or circumvented or that the rights will in fact provide competitive advantages to us.

 

We may be found to infringe on intellectual property rights of others.

 

Third parties, including customers, may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to us. These assertions may emerge over time as a result of our growth and the general increase in the pace of patent claim assertions, particularly in the U.S. Because of the existence of a large number of patents in the healthcare field, the secrecy of some pending patents and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its components infringes or will infringe the patent rights of others. The asserted claims or initiated litigation can include claims against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business could be materially and adversely affected.

 

RISKS RELATED TO REGULATIONS:

 

Our business is affected by numerous regulations.

 

Government regulation by the U.S. FDA and similar agencies in other countries is a significant factor in the development, manufacturing and marketing of our products and in the acquisition or licensing of new products. Complying with government regulations is often time consuming and expensive and may involve delays or actions adversely impacting the marketing and sale of our current or future products.

 

 

Following initial regulatory approval of any products that we may develop, we will be subject to continuing regulatory review, including review of adverse (drug or device) experiences or reactions and clinical results that are reported after our products become commercially available. This would include results from any post-marketing tests or continued actions required as a condition of approval. The manufacturing facilities we use (and may use) to make any of our products may become subject to periodic review and inspection by the FDA. If a previously unknown problem with a product or a manufacturing and laboratory facility used by us is discovered, the FDA may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often requires FDA approval before the product, as modified, can be marketed. In addition, for products we develop in the future, we and our contract manufacturers may be subject to ongoing FDA requirements for submission of safety and other post-market information. If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined, be forced to remove a product from the market or experience other adverse consequences, which would materially harm our financial results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for product promotion.

 

Further, various healthcare reform proposals have emerged at the federal and state levels. We cannot predict whether foreign, federal, state or local healthcare reform legislation or regulation affecting our business may be proposed or enacted in the future, or what effect any such legislation or regulation would have on our business. The implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes which would likely adversely affect our business. In addition, the enacted excise tax may materially and adversely affect our business.

 

Distribution of our products outside the U.S. is subject to extensive government regulation. These regulations, including the requirements for approvals or clearance to market; the time required for regulatory review and the sanctions imposed for violations, vary from country to country. We do not know whether we will obtain regulatory approvals in such countries or that we will not be required to incur significant costs in obtaining or maintaining these regulatory approvals.

 

If we fail to obtain or experience significant delays in obtaining regulatory clearances or approvals to market future medical device products, we will be unable to commercialize these products until such clearance or approval is obtained.

 

The developing, testing, manufacturing, marketing and selling of medical devices is subject to extensive regulation by governmental authorities in the U.S. and other countries. The process of obtaining regulatory clearance and approval of certain medical technology products is costly and time consuming. Inherent in the development of new medical products is the potential for delay because product testing, including clinical evaluation, is required before many products can be approved for human use. With respect to medical devices, such as those that we manufacture and market, before a new medical device, or a new use of, or claim for, an existing product can be marketed (unless it is a Class I device), it must first receive either premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act or approval of a premarket approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k)-clearance process, the FDA must determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device for its intended use based, in part, on extensive data including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The premarket approval process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Both the 510(k) and premarket approval processes can be expensive and lengthy and entail significant user fees.

 

Failure to comply with applicable regulatory requirements can result in, among other things, suspension or withdrawal of approvals or clearances, seizure or recall of products, injunctions against the manufacture, holding, distribution, marketing and sale of a product and civil and criminal sanctions. Furthermore, changes in existing regulations or the adoption of new regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals. Meeting regulatory requirements and evolving government standards may delay marketing of our new products for a considerable period of time, impose costly procedures upon our activities and result in a competitive advantage to larger companies that compete against us.

 

We cannot assure you that the FDA or other regulatory agencies will clear or approve any products developed by us on a timely basis, if at all, or, if granted, that clearance or approval will not entail limiting the indicated uses for which we may market the product, which could limit the potential market for any of these products.

 

Changes to the FDA clearance and approval processes or ongoing regulatory requirements could make it more difficult for us to obtain FDA clearance or, approval of new products or comply with ongoing requirements.

 

New government regulations may be enacted and changes in FDA policies and regulations and, their interpretation and enforcement, could prevent or delay regulatory clearance or approval of new products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. Therefore, we do not know whether we will be able to continue to comply with such regulations or whether the costs of such compliance will have a material adverse effect on our business. Changes could, among other things, require different labeling, monitoring of patients, interaction with physicians, education programs for patients or physicians, curtailment of necessary supplies, or limitations on product distribution. These changes, or others required by the FDA could have an adverse effect on our business, and specifically, on the sales of these products. The evolving and complex nature of regulatory science and regulatory requirements, the broad authority and discretion of the FDA and the generally high level of regulatory oversight results in a continuing possibility that from time to time, we will be adversely affected by regulatory actions despite ongoing efforts and commitment to achieve and maintain full compliance with all regulatory requirements. If we are not able to maintain regulatory compliance, we will not be permitted to market our products and our business would suffer.

 

 

Modifications to our current products may require new marketing clearances or approvals or require us to cease marketing or recall the modified products until such clearances or approvals are obtained.

 

Any modification to an FDA-cleared product that could significantly affect its safety or efficacy, or that would constitute a major change or modification in its intended use, requires a new FDA 510(k) clearance or, possibly, a premarket approval (PMA). The FDA requires every manufacturer to make its own determination as to whether a modification requires a new 510(k) clearance or PMA, but the FDA may review and disagree with any decision reached by the manufacturer. In the future, we may make additional modifications to our products after they have received FDA clearance or approval and, in appropriate circumstances, determine that new clearance or approval is unnecessary. Regulatory authorities may disagree with our decisions not to seek new clearance or approval and may require us to obtain clearance or approval for previous modifications to our products. If that were to occur for a previously cleared or approved product, we may be required to cease marketing or recall the modified device until we obtain the necessary clearance or approval. Under these circumstances, we may also be subject to significant regulatory fines or other penalties. If any of the foregoing were to occur, our financial condition and results of operations could be negatively impacted.

 

Changes in reimbursement policies and regulations by governmental or other third-party payers may have an adverse impact on the use of our products.

 

A significant portion of our wound care products are purchased principally for the Medicare and Medicaid eligible population by hospital outpatient clinics, wound care clinics, durable medical equipment (DME) suppliers and skilled nursing facilities (SNFs), which typically bill various third-party payers, primarily state and federal healthcare programs (e.g., Medicare and Medicaid), and managed care plans, for the products and services provided to their patients. Although our wound care products are currently eligible for reimbursement under Medicare Part B, adjustments to our reimbursement amounts or a change in Centers for Medicare & Medicaid Services’ (CMS). reimbursement policies could have an adverse effect on our market opportunities in this area. The ability of our customers to obtain appropriate reimbursement for products and services from third-party payers is critical to the success of our business because reimbursement status affects which products customers purchase and the prices they are willing to pay. In addition, our ability to obtain reimbursement approval in foreign jurisdictions may affect our ability to expand our product offerings internationally.

 

Third-party payers have adopted, and are continuing to adopt, a number of policies intended to curb rising healthcare costs. These policies include the imposition of conditions of payment by foreign, state and federal healthcare programs as well as private insurance plans, and the reduction in reimbursement amounts applicable to specific products and services.

 

Changes in healthcare systems in the U.S. or internationally in a manner that significantly reduces reimbursement for procedures using our products or denies coverage for these procedures would also have an adverse impact on the acceptance of our products and the prices which our customers are willing to pay for them.

 

We and our sales personnel, whether employed by us or by others, must comply with various federal and state anti-kickback, self-referral, false claims and similar laws, any breach of which could cause a material adverse effect on our business.

 

Our relationships with physicians, hospitals and the marketers of our products are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws. Healthcare fraud and abuse laws are complex, and even minor, inadvertent violations can give rise to liability, or claims of alleged violations. Possible sanctions for violation of these fraud and abuse laws include monetary fines, civil and criminal penalties, exclusion from federal healthcare programs, including Medicare, Medicaid, the Veterans Administration, Department of Defense, Public Health Service (PHS), and forfeiture of amounts collected in violation of such prohibitions could occur. Certain states have similar fraud and abuse laws that also authorize substantial civil and criminal penalties for violations. Any government investigation or a finding of a violation of these laws may result in an adverse effect on our business. The federal Anti-Kickback Statute prohibits any knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by any federal healthcare program, including Medicare.

 

The scope and enforcement of the healthcare fraud and abuse laws is uncertain and is subject to rapid change. There can be no assurance that federal or state regulatory or enforcement agencies will not investigate or challenge our current or future activities under these laws. Any state or federal investigation, regardless of the outcome, could be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.

 

If we engage additional physicians on a consulting basis, the agreements with these physicians will be structured to comply with all applicable laws, including the federal ban on physician self-referrals (commonly known as the “Stark Law”) the federal Anti-Kickback Statute, state anti-self-referral and anti-kickback laws. Even so, it is possible that regulatory or enforcement agencies or courts may view these agreements as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties. Because our strategy includes the involvement of physicians who consult with us on the design of our products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with our physician advisors who refer or order our products to be in violation of one or more health care fraud and abuse laws. Such government action could harm our reputation and the reputations of our physician advisors. In addition, the cost of noncompliance with these laws could be substantial because we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from state and federal healthcare programs, including Medicare and Medicaid, for non-compliance.

 

 

RISKS RELATED TO OUR GOVERNING DOCUMENTS OR OUR COMMON STOCK:

 

The trading price of the shares of our common stock is highly volatile, and purchasers of our common stock could incur substantial losses.

 

The market price of our common stock has been and is likely to continue to be highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:

 

 

Although publicly traded securities are subject to price and volume fluctuations, it is likely that our common stock will experience these fluctuations to a greater degree than the securities of more established and better capitalized organizations.  

 

Our common stock does not have a vigorous trading market and you may not be able to sell your securities when desired.

 

Although there is a public market for our common stock, trading volume has been historically low, which could impact the stock price and the ability to sell shares of our common stock. We can give no assurance that a more active and liquid public market for the shares of our common stock will develop in the future.

 

The potential sale of large amounts of common stock may have a negative effect upon the market value of our shares.

 

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock and make it more difficult for us to raise funds through future offerings of common stock. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase, which could decrease the price of our common stock.

 

In addition, future sales of large amounts of common stock could adversely affect or inhibit our ability to raise capital. Substantially all of the outstanding shares of our common stock are freely tradable, without restriction or registration under the Securities Act (other than the sales volume restrictions of Rule 144 applicable to shares held beneficially by persons who may be deemed to be affiliates). The price of our common stock could also drop as a result of the exercise of options for common stock or the perception that such sales or exercise of options could occur.

 

We have not paid, and we are unlikely to pay in the near future, cash dividends on our securities.

 

We have not paid and do not currently intend to pay dividends on our common or preferred stock, which may limit the current return available on an investment in our stock. Future dividends on our stock, if any, will depend on our future earnings, capital requirements, financial condition and such other factors as our management personnel may consider relevant. Currently, we intend to retain earnings, if any, to increase our net worth and reserves.

 

“Penny Stock” Limitations.

 

Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock.” For purposes relevant to the Company, a “penny stock” is any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are likely not available to us. It is likely that our shares will be considered to be penny stocks for the immediate foreseeable future. This classification severely and adversely affects any market liquidity of our common stock.

 

 

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and that the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and the broker or dealer must make a special written determination that the transaction in penny stocks is suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of a transaction in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market that, in highlight form, sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. These restrictions and regulations limit the appeal of penny stock to some investors and may limit the liquidity of shares of our stock.

 

Disclosure also has to be made about (a) the risks of investing in penny stock in both public offerings and in secondary trading; (b) commissions payable to both the broker-dealer and the registered representative; (c) current quotations for the securities; and (d) the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, the broker or dealer must send monthly statements disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

  

Because of these regulations, broker-dealers may not wish to engage in the above-referenced paperwork and disclosures. In addition, they may encounter difficulties when attempting to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market. These additional sales practices and disclosure requirements may impede the sale of our securities and the liquidity of our securities may decrease, with a corresponding decrease in the price. Our shares, in all probability, will be considered subject to such penny stock rules for the foreseeable future, and our shareholders may, as a result, find it difficult to sell their shares.

 

A few of our existing shareholders own a large percentage of our voting stock and have a significant influence over matters requiring stockholder approval and may delay or prevent a change in control.

 

Our directors own or control a large percentage of our common stock (See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”). As a result, our directors could have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets as well as other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of our directors, and principal stockholders; e.g., our principal stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.

 

Our Articles of Incorporation, as amended, and Bylaws, as amended, may delay or prevent a potential takeover of the Company.

 

Our Articles of Incorporation and Bylaws contain provisions that may have the effect of delaying, deterring or preventing a potential takeover of the Company, even if the takeover is in the best interest of our shareholders. For example, the Bylaws limit when shareholders may call a special meeting of shareholders, and these and other provisions may negatively affect the price of our stock. The Articles also allow our board of directors (the “Board”) to fill vacancies, including newly created directorships.

 

Our Board can authorize the issuance of preferred stock, which could diminish the rights of holders of our common stock and make a change of control of the Company more difficult even if it might benefit our shareholders.

 

The Board is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Accordingly, we may issue shares of preferred stock with a preference over our common stock with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or other rights of the holders of common stock. Issuances of preferred stock, depending upon the rights, preferences and designations of the preferred stock, may have the effect of delaying, deterring or preventing a change of control, even if that change of control might benefit our shareholders.

 

FORWARD-LOOKING STATEMENTS:

 

When used in this Form 10-K or other filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized officer of the Company’s executive officers, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “plan” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

 

 

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that forward-looking statements involve various risks and uncertainties. Our management believes its assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that our actual results of operations or the results of our future activities will not differ materially from these assumptions. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statement.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

In March of 2017, and as amended in March 2018, the Company executed a new office lease that expires June 30, 2021 for office space located at 1200 Summit Ave., Suite 414, Fort Worth, TX 76102. Monthly base rental payments are as follows: months 1-2, $8,390; months 3-14, $8,565; months 15-26, $8,740; and months 27-39, $8,914. Rent expense is recognized on a straight-line basis over the term of the Lease and the resulting deferred rent liability is $10,474 as of December 31, 2018. The amount of rent expense recognized by the Company will be reduced by the amount billed to Cellerate, LLC under the terms of the Professional Services agreement between the Company and Cellerate, LLC.

 

ITEM 3. LEGAL PROCEEDINGS

 

As of December 31, 2018, and as of this filing date, the Company has no outstanding legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

This item is not applicable. 

 

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is traded on OTCQB under the trading symbol “WNDM.” OTCQB is one of three tiers established by OTC Markets Group, Inc., which operates one of the world’s largest electronic interdealer quotation systems for broker-dealers to trade securities not listed on a national exchange. The following table sets forth the high and low sales price information of the Company’s common stock for the quarterly periods indicated as reported by NASDAQ.

 

YEAR	QUARTER ENDING	HIGH	LOW
2018	March 31, 2018	$0.750	$0.041
	June 30, 2018	$0.076	$0.043
	September 30, 2018	$0.100	$0.057
	December 31, 2018	$0.074	$0.020
2017	March 31, 2017	$0.100	$0.038
	June 30, 2017	$0.100	$0.058
	September 30, 2017	$0.078	$0.048
	December 31, 2017	$0.070	$0.046

 

Record Holders

 

As of April 1, 2019, there were 2,136 shareholders of record holding shares of common stock issued, of which a total of 4,089 shares are held as treasury stock. As of April 1, 2019, there were 236,646,512 shares of common stock issued and 236,642,423 shares of common stock outstanding.

 

The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There is no redemption or sinking fund provisions applicable to the common stock.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund our operations and the expansion of our business.

 

Recent Sales of Unregistered Securities

 

Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the year ended December 31, 2017, and 2018, not previously disclosed:

On March 9, 2017, the Company issued 150,000 shares of common stock to each of the Company’s directors (four directors at the time, for a total of 600,000 shares valued at $42,000).

On March 10, 2017, the Company issued 250,000 shares of common stock valued at $18,500 to a contract consultant upon achievement of specified revenue targets.

On July 31, 2017, the Company issued 937,556 shares of common stock for the conversion of 800 shares of Series C Convertible Preferred Stock and $9,629 of related Series C dividends.

On November 22, 2017, the Company issued 1,200,000 shares of common stock valued at $84,000 for settlement of debt.

On November 22, 2017, the Company issued 750,000 shares of common stock to a contract consultant upon termination of contract. There was no incremental increase in the fair value of the modified stock-based compensation award as of the modification date and accordingly, no additional compensation cost was recognized. See Note 4 in the notes to the Company’s consolidated financial statements below for discussion of the contract termination.

On February 19, 2018, the Company issued 22,651,356 shares of common stock upon conversion of two related party promissory notes in the aggregate principal amount of $1,200,000 plus $385,594 of accrued interest.

 

  

The issuances described above were made in private transactions in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act of 1933. The investors were not solicited through any form of general solicitation or advertising, 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. 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 6. SELECTED FINANCIAL DATA

 

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

  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related footnotes that appear in this document.

 

Organizational Overview

 

The Company’s primary focus is developing and marketing products for the advanced wound care and surgical tissue repair markets. In particular, CellerateRX’s unique Activated Collagen® fragments (CRa®) are a fraction of the size of the native collagen molecules and particles found in other products, which results in a more immediate delivery of the benefits of collagen to the body.

 

The Company’s exclusive license to sell and distribute CellerateRX products in the human health care market (excluding dental and retail) expired on February 27, 2018. The license agreements permitted the Company to continue to sell and distribute products through August 27, 2018. Subsequent to the expiration of the license agreement between the Company and Applied Nutritionals, LLC, a CGI affiliate acquired an exclusive license to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico. The Company and CGI entered into definitive agreements on August 27, 2018, that continued operations to market CellerateRX through Cellerate, LLC, a newly formed entity in which the Company and CGI each have a 50% ownership interest.

 

While the Company had significant influence over the operations of Cellerate, LLC, the Company did not have a controlling interest. CGI had the controlling vote in the event of a deadlocked vote by the Board of Managers of Cellerate, LLC. Therefore, the Company’s investment in Cellerate, LLC is reported using the equity method of accounting. Beginning September 1, 2018, the Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMTI’s Statement of Operations. Cellerate, LLC’s unaudited Balance Sheet and unaudited Statement of Operations is included as an exhibit to the Financial Statements of WMTI (see Exhibit 99.1).

 

On March 15, 2019, the Company executed and closed an agreement with CGI to acquire the remaining 50% equity interest in Cellerate, LLC not then owned by the Company. After closing the acquisition, the Company owns 100% of Cellerate, LLC, and as a wholly owned subsidiary will report its financial results on a consolidated basis beginning March 15, 2019. The Company acquired the remaining 50% equity interest in Cellerate, LLC in exchange for the issuance to an affiliate of CGI of 1,136,815 shares of the Company’s newly created Series F Convertible Preferred Stock (the “Series F Preferred Stock”). For more information, see Subsequent Events (Note 12) in the notes to the consolidated financial statements.

 

The Company acquired a patent in 2009 for a resorbable bone hemostat and delivery system for orthopedic bone void fillers and in the fourth quarter of 2017 began selling HemaQuell® Resorbable Bone Hemostat. The Company has also licensed the patent to a third party to market a bone void filler product for which the Company receives a 3% royalty on product sales over the life of the patent, which expires in 2023 with annual minimum royalties of $201,000.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates. We believe the footnotes to the consolidated financial statements provide the description of the significant accounting policies necessary in fully understanding and evaluating our consolidated financial condition and results of operations.

 

 

Results of Operations

 

Comparison of Year ended December 31, 2018 Compared to Year ended December 31, 2017

 

As discussed above, the Company’s investment in Cellerate, LLC is reported using the equity method of accounting. As a result, the Company’s financial statements for the four-month period of September 1, 2018 through December 31, 2018 do not include revenues, cost of goods sold, or operating expenses related to the operations of Cellerate, LLC.

 

The Company and CGI agreed to provide Cellerate, LLC with certain professional services needed to conduct the affairs of Cellerate, LLC. The Company and CGI are reimbursed by Cellerate, LLC for services performed, consistent with historical costs to provide the services. The Company also receives reimbursement for office lease and other overhead costs dedicated to supporting Cellerate, LLC’s activities. These reimbursements from Cellerate, LLC are recognized by the Company as reductions of selling, general and admirative expenses.

 

Revenues. The Company generated revenues for the year ended December 31, 2018 of $5,837,839 compared to revenues of $6,304,741 for the year ended December 31, 2017. The lower revenues in 2018 were due to the adoption of the equity method of accounting effective September 1, 2018, which resulted in no reported product revenues for the four-month period ending December 31, 2018. Revenues in both 2018 and 2017 include $201,000 in annual royalties from the Company’s patent license to a third party to sell a bone void filler product. Cellerate, LLC revenues totaled $3,006,320 for the four-month period ending December 31, 2018.

 

Cost of goods sold. Cost of goods sold for the year ended December 31, 2018 were $507,418 compared to cost of goods sold of $806,038 for the year ended December 31, 2017. The lower cost of goods sold was due to the adoption of the equity method of accounting during the last four months of 2018 as discussed above. Cellerate, LLC’s cost of goods sold totaled $377,421 during the four-month period ending December 31, 2018.

 

Selling, general and administrative (“SG&A”) expenses. SG&A expenses for the year ended December 31, 2018 were $5,735,834 compared to $5,275,402 for the year ended December 31, 2017. The higher expenses in 2018 were primarily due to sales force expansion, additional corporate infrastructure, higher product development costs, and one-time costs associated with the formation of Cellerate, LLC. Cellerate, LLC’s SG&A expenses were $2,519,469 during the four-month period ending December 31, 2018.

 

Interest expense. Interest expense was $86,587 for the year ended December 31, 2018, compared to $126,825 for the year ended December 31, 2017, or a decrease of 32%. The lower interest expense in 2018 was due to early conversion to common stock of Related Party notes during the first quarter of 2018. Cellerate, LLC did not incur interest expense in 2018.

 

Net income / loss. We had a net loss for the year ended December 31, 2018, of $600,574 compared with net income of $331,309 for the year ended December 31, 2017. The decrease in net income was primarily due to one-time costs associated with the Cellerate, LLC transaction, higher SG&A related to expansion of our sales force, higher product development costs, and additional investment in our corporate infrastructure. Cellerate, LLC had net income of $19,903 for the four-month period ending December 31, 2018.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are our cash and cash equivalents, and cash generated from operations. Cash and cash equivalents consist primarily of cash on deposit with banks. Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities consumed approximately $145,000 for the year ended December 31, 2017. No financing activities occurred in 2018.

 

In December 2018, Cellerate, LLC executed agreements with Cadence Bank, N.A. which provided Cellerate, LLC access to a revolving line of credit up to a maximum principal amount of $1,000,000. The line of credit is intended to support short-term working capital requirements of Cellerate, LLC.

 

We monitor our cash flow, assess our business plan, and make expenditure adjustments accordingly. If appropriate, we may pursue limited financing including issuing additional equity and/or entering into certain debt. Although we have successfully funded our operations to date by attracting additional equity investors, there is no assurance that our capital raising efforts will be able to attract additional necessary capital for our operations. If we are unable to obtain additional funding for operations at any time now or in the future, we may not be able to continue operations as proposed. This would require us to modify our business plan, curtail various aspects of our operations or cease operations.

 

As of December 31, 2018, we had total current assets of $978,484 including cash of $731,849. As of December 31, 2017, we had total current assets of $2,037,360, including cash of $463,189 and inventories of $711,397.

 

As of December 31, 2018, we had total current liabilities of $404,004 including $21,313 of current year royalties payable, which were paid in full during February of 2019. As of December 31, 2017, we had total current liabilities of $2,115,324 including $1,200,000 of notes payable to related parties. Current liabilities as of December 31, 2017, also included $244,422 of royalties payable, which were paid in full during January and February of 2018.

 

 

For the year ended December 31, 2018, net cash provided by operating activities was $277,142 compared to net cash used in operating activities of $139,862 in 2017.

 

We used $8,482 in investing activities in the year ended December 31, 2018, compared to $85,875 in the year ended December 31, 2017.

 

Off-Balance Sheet Arrangements

 

None.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm	17
Consolidated Balance Sheets	18
Consolidated Statements of Operations	19
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)	20
Consolidated Statements of Cash Flows	21
Notes to the Consolidated Financial Statements	22

 

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of Wound Management Technologies, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Wound Management Technologies, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company's auditor since 2014.

Houston, Texas

April 1, 2019

  

 

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018, AND 2017

 

	December 31,	December 31,
	2018	2017
Assets
Current assets
Cash	$731,849	$463,189
Accounts receivable, net of allowance for bad debt of $40,550 and $28,910	164,459	786,250
Royalty receivable	50,250	50,250
Inventory, net of allowance for obsolescence of $0 and $144,996	-	711,397
Prepaid and other assets	31,926	26,274
Total current assets	978,484	2,037,360
Long-term assets:
Property, plant and equipment, net of accumulated depreciation of $70,116 and $56,951	52,827	63,211
Intangible assets, net of accumulated amortization of $500,023 and $434,999	52,266	117,291
Equity method investment (Cellerate, LLC)	1,958,463	-
Total long-term assets	2,063,556	180,502
Total assets	$3,042,040	$2,217,862
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$54,179	$225,462
Accounts payable - Related Parties	63,288	60,000
Accrued royalties and payables	34,214	244,422
Accrued bonus and commissions	241,849	46,534
Deferred rent	10,474	13,920
Accrued interest	-	324,986
Convertible notes payable - Related Parties	-	1,200,000
Total current liabilities	404,004	2,115,324
Long-term liabilities
Convertible notes payable	1,500,000	-
Accrued interest	25,978	-
Total long-term liabilities	1,525,978	-
Total liabilities	1,929,982	2,115,324
Shareholders' equity
Series C Convertible Preferred Stock, $10 par value, 100,000 shares authorized; none issued and outstanding as of December 31, 2018 and 85,646 issued and outstanding as of December 31, 2017	-	855,610
Common Stock: $.001 par value; 250,000,000 shares authorized; 236,646,512 issued and 236,642,423 outstanding as of December 31, 2018 and 113,427,943 issued and 113,423,854 outstanding as of December 31, 2017	236,647	113,428
Additional paid-in capital	48,356,467	46,013,982
Treasury stock	(12,039)	(12,039)
Accumulated deficit	(47,469,017)	(46,868,443)
Total shareholders' equity	1,112,058	102,538
Total liabilities and shareholders' equity	$3,042,040	$2,217,862

 

The accompanying notes are an integral part of these consolidated financial statements.

 

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

	Years Ended
	December 31,
	2018	2017
Revenues	$5,837,839	$6,304,741
Cost of goods sold	507,418	806,038
Gross profit	5,330,421	5,498,703
Operating expenses
Selling, general and administrative expense	5,735,833	5,275,402
Depreciation and amortization	83,890	80,648
Bad debt expense	12,558	22,207
Total operating expenses	5,832,281	5,378,257
Operating income / (loss)	(501,860)	120,444
Other income / (expense)
Income from equity method investment – Cellerate, LLC	9,951	-
Gain on settlement of debt	-	286,873
Debt forgiveness	-	50,646
Change in fair value of derivative liability	-	44
Other income (expense)	(22,078)	125
Interest expense	(86,587)	(126,825)
Total other income / (expense)	(98,714)	210,863
Net income / (loss)	(600,574)	331,309
Series C Preferred stock inducement dividends	(103,197)	-
Series C preferred stock dividends	(28,061)	(139,006)
Net income/(loss) available to common shareholders	$(731,832)	$192,303
Basic net loss per share of common stock	$(0.00)	$0.00
Diluted net loss per share of common stock	$(0.00)	$0.00
Weighted average number of common shares outstanding, basic	217,163,538	111,381,832
Weighted average number of common shares outstanding, diluted	217,163,538	208,645,538

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

	Preferred Stock Series C Shares	$10.00 Par Value Amount	Common Stock Shares	$0.001 Par Value Amount	Additional Paid-In Capital	Treasury Stock Shares	Treasury Stock Amount	Accumulated Deficit	Total Stockholders' Equity (Deficit)
Balance at December 31, 2016	85,646	856,460	109,690,387	$109,690	$45,822,570	(4,089)	$(12,039)	$(47,199,752)	$(423,071)
Issuance of Common stock for:
Services	-	-	1,600,000	1,600	58,650	-	-	-	60,250
Conversion of Series C Preferred Stock	(800)	(8,000)	800,000	800	7,200	-	-	-	-
Series C Dividend	-	-	137,556	138	(138	-	-	-	-
Common stock issued for settlement of debt	-	-	1,200,000	1,200	82,800	-	-	-	84,000
Issuance of Preferred stock for:	-	-	-	-	-	-	-	-	-
Cash	715	7,150	-	-	42,900	-	-	-	50,050
Net income	-	-	-	-	-	-	-	331,309	331,309
Balance at December 31, 2017	85,561	855,610	113,427,943	$113,428	$46,013,982	(4,089)	$(12,039)	$(46,868,443)	$102,538
Issuance of Common stock for:
Services	-	-	-	-	-	-	-	-	-
Conversion of Series C Preferred Stock	(85,561)	(855,610)	85,560,522	85,561	770,049	-	-	-	-
Series C Dividend			15,006,691	15,007	(15,007	-	-	-	-
Common stock issued for conversion of debt			22,651,356	22,651	1,562,943	-	-	-	1,585,594
Recognition of stock option expense	-	-	-	-	24,500	-	-	-	24,500
Net loss	-	-	-	-	-	-	-	(600,574)	(600,574)
Balance at December 31, 2018	-	-	236,646,512	236,647	48,356,467	(4,089)	$(12,039)	$(47,469,017)	$1,112,058

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

	Twelve Months Ended
	December 31,
	2018	2017
Cash flows from operating activities:
Net income/(loss)	$(600,574)	$331,309
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	83,891	80,648
Additional interest expense on convertible debt	60,608	-
Gain on forgiveness of debt	-	(50,646)
Gain on settlement of debt	-	(286,873)
Recognition of vesting stock option expense	24,500	-
Income from equity method investment	(9,951)	-
Bad debt expense	12,558	22,207
Inventory obsolescence	-	57,483
Common stock issued for services	-	60,250
(Gain) loss on change in fair value of derivative liabilities	-	(44)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable	609,233	(64,413)
(Increase) decrease in royalties receivable	-	-
(Increase) decrease in inventory	262,886	(420,423)
(Increase) decrease in prepaids and other assets	(5,652)	(6,492)
Increase (decrease) in accrued royalties and dividends	(223,109)	(32,494)
Increase (decrease) in accounts payable	(171,283)	26,942
Increase (decrease) in accounts payable related parties	3,288	(33,655)
Increase (decrease) in accrued liabilities	204,770	60,454
Increase (decrease) in accrued interest payable	25,978	115,885
Net cash flows provided by (used in) operating activities	277,142	(139,862)
Cash flows from investing activities:
Purchase of property and equipment	(8,482)	(43,895)
Purchase of intangible assets	-	(41,980)
Net cash flows used in investing activities	(8,482)	(85,875)
Cash flows from financing activities:
Payments on capital lease obligation	-	(3,766)
Payments on debt	-	(190,838)
Cash proceeds from sale of series C preferred stock	-	50,050
Net cash flows (used in) provided by financing activities	-	(144,554)
Net increase (decrease) in cash	268,660	(370,291)
Cash and cash equivalents, beginning of period	463,189	833,480
Cash and cash equivalents, end of period	$731,849	$463,189
Cash paid during the period for:
Interest	$-	$10,937
Income taxes	-	-
Supplemental non-cash investing and financing activities:
Equity method investment	$1,948,511	$-
Common stock issued for Series C dividends	15,007	137
Common stock issued for conversion of Series C Preferred Stock	85,561	8,000
Common stock issued for conversion of related party debt and interest	1,585,594	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – NATURE OF OPERATIONS

 

Wound Management Technologies, Inc. was incorporated in the State of Texas in December 2001 as MB Software, Inc. In May 2008, MB Software, Inc. changed its name to Wound Management Technologies, Inc. The Company distributes collagen-based wound care products to healthcare providers such as physicians, clinics and hospitals.

 

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

The terms “the Company,” “we,” “us” “WMTI” and “WNDM” are used in this report to refer to Wound Management Technologies, Inc. and its wholly owned subsidiaries, unless the context suggests otherwise. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

 

PRINCIPLES OF CONSOLIDATION

 

The accompanying consolidated financial statements include the accounts of WMTI and its wholly-owned subsidiaries: WCI, LLC a Nevada limited liability company (“WCI”); Resorbable Orthopedic Products, LLC, a Texas limited liability company (“ROP”); and Innovate OR, Inc. (“IOR”) formerly referred to as BioPharma Management Technologies, Inc., a Texas corporation (“BioPharma”). All intercompany accounts and transactions have been eliminated. ROP and IOR were dissolved during the third quarter of 2018. All rights and obligations of each were assigned to its parent company WMTI.

WCI’s exclusive license to sell and distribute CellerateRX products in the human health care market (excluding dental and retail) expired on February 27, 2018. The license agreements permitted WCI to continue to sell and distribute products through August 27, 2018. Subsequent to the expiration of the license agreement between the Company and Applied, Nutritionals, LLC (“Applied”) an exclusive license was acquired by an affiliate of The Catalyst Group, Inc. (“CGI”) to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico. The Company and CGI entered into definitive agreements on August 27, 2018, that continued operations to market CellerateRX through Cellerate, LLC, a newly formed Texas Limited Liability Company in which the Company and CGI each have a 50% ownership interest.

While the Company had significant influence over the operations of Cellerate, LLC, the Company did not have a controlling interest. CGI had the controlling vote in the event of a deadlocked vote by the Board of Managers of Cellerate, LLC. Therefore, the Company’s investment in Cellerate, LLC is reported using the equity method of accounting. Beginning September 1, 2018, the Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMTI’s Statement of Operations. Cellerate, LLC’s unaudited Balance Sheet and unaudited Statement of Operations is included as an exhibit to the Financial Statements of WMTI (see Exhibit 99.1).

 

USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses during the reporting period. On a regular basis, management evaluates these estimates and assumptions. Actual results could differ from those estimates.

 

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

 

The Company considers all highly liquid debt investments purchased with an original maturity of three months or less to be cash equivalents. Marketable securities include investments with maturities greater than three months but less than one year. For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, and amounts due to related parties, the carrying amounts approximate fair value due to their short maturities.

 

INCOME / LOSS PER SHARE

 

The Company computes income/loss per share in accordance with Accounting Standards Codification “ASC” Topic No. 260, “Earnings per Share,” which requires the Company to present basic and dilutive income/loss per share when the effect is dilutive. Basic income/loss per share is computed by dividing income/loss available to common stockholders by the weighted average number of common shares available. Diluted income/loss per share is computed similar to basic income/loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

 

 The calculation of basic and diluted net loss per share for the years ended December 31, 2018 and 2017 are as follows:

 

	2018	2017
Basic net income (loss) per share:
Numerator:
Net income (loss)	$(600,574)	$331,309
Denominator:
Weighted-average common shares outstanding	217,163,538	111,381,832
Basic net income (loss) per share	$(0.00)	$0.00
Diluted net income (loss) per share:
Numerator:
Net income (loss)	$(600,574)	$331,309
Series C dividends		(139,006)
Diluted net income (loss)	$-	$192,303
Denominator:
Weighted-average common shares outstanding	217,163,538	111,381,832
Common stock warrants	-	694,834
Convertible debt	-	-
Preferred shares	-	96,568,871
Weighted average shares used in computing diluted net income (loss) per share	217,163,538	208,645,538
Diluted net income (loss) per share	$(0.00)	$0.00

 

The following table summarizes the potential shares of common stock that were excluded from the computation of diluted net loss per share for the years ended December 31, 2018 and 2017 as such shares would have had an anti-dilutive effect:

 

	2018	2017
Convertible debt	16,666,667	19,890,414

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018 using the modified retrospective method. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:

 

 

Product revenues are recognized when the products are delivered and title passes to the customer. Net revenues comprise gross revenues less customer discounts and allowances, actual and expected returns. Shipping charges billed to members are included in net sales.

 

The Company recognizes royalty revenue from a licensing agreement between BioStructures, LLC and the Company. The Company records revenue each calendar quarter as earned per the terms of the agreement which stipulates the Company will receive quarterly royalty payments of at least $50,250. To date, royalties related to this licensing agreement have not exceeded the annual minimum of $201,000 ($50,250 per quarter).  

 

 

The Company’s investment in Cellerate, LLC is reported using the equity method of accounting. Accordingly, Cellerate, LLC revenues are not recognized by the Company in its consolidated financial statements. Rather, the Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMTI’s Statement of Operations. Cellerate, LLC’s unaudited Balance Sheet and unaudited Statement of Operations is included as an exhibit to the Financial Statements of WMTI (see Exhibit 99.1). Management has evaluated the carrying amount of the Company’s equity investment in Cellerate, LLC and has determined there has been no triggering event that would require impairment of this investment.

 

Under the terms of the development and license agreement the Company executed with BioStructures, LLC (BioStructures) in 2011, royalties of 2.0% are recognized on sales of products containing the Company’s patented resorbable bone hemostasis. However, the minimum annual royalty due to the Company shall be $201,000 throughout the life of the patent which expires in 2023. These royalties are payable in quarterly installments of $50,250.

 

ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The Company establishes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectible accounts. Bad debt reserves are maintained based on a variety of factors, including the length of time receivables are past due and a detailed review of certain individual customer accounts. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. The Company recorded bad debt expense of $12,558 and $22,207 in 2018 and 2017, respectively. The allowance for doubtful accounts at December 31, 2018 was $40,550 and the amount at December 31, 2017 was $28,910. Accounts receivable written-off during 2018 totaled $918. Accounts recievable written-off during 2018 totaled $918.

 

INVENTORIES

 

As part of the formation of Cellerate, LLC, all WCI inventory was contributed to Cellerate, LLC on August 28, 2018. During 2017 and through August 28, 2018, inventories were 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, powders, gels and the related packaging supplies. The Company recorded inventory obsolescence expense of $0 in 2018 and $57,483 in 2017. The allowance for obsolete and slow-moving inventory had a balance of $0 and $144,996 at December 31, 2018 and December 31, 2017, respectively.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are recorded at cost. Depreciation is computed utilizing the straight-line method over the estimated economic life of the assets, which ranges from five to ten years. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is reflected in income for the period. As of December 31, 2018, fixed assets consisted of $122,943 including furniture and fixtures, computer equipment, phone equipment and the Company’s websites. As of December 31, 2017, fixed assets consisted of $120,162 including furniture and fixtures, computer equipment, phone equipment and the Company’s websites. The depreciation expense recorded in 2018 was $18,866 and the depreciation expense recorded in 2017 was $15,623. The balance of accumulated depreciation was $70,116 and $56,951 at December 31, 2018 and December 31, 2017, respectively. The Company paid $8,482 to acquire fixed assets during 2018.

  

INTANGIBLE ASSETS

 

As of December 31, 2018, intangible assets include a patent acquired in 2009 with a historical cost of $510,310. The patent is being amortized over its estimated useful life of 10 years using the straight-line method. In 2017, the Company put into service a business software. The costs to implement this software which totaled $41,980 are included in intangible assets and are being amortized over the initial term of the license which is three years. Amortization expense recognized was $65,024 during each of the years 2018 and 2017.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

Long-lived assets and certain identifiable intangibles to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, undiscounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. There was no impairment recorded during the years ended December 31, 2018 and 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.

 

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.

 

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 below in Note 6 “Intangible Assets.”

 

DERIVATIVES

 

The Company infrequently enters into derivative financial instruments to manage its funding of current operations. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately. There were no derivative liabilities as of December 31, 2017 or 2018.

 

INCOME TAXES

 

Income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all, of the deferred tax asset will not be realized.

  

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

 

The convertible feature of certain notes payable provides for a rate of conversion that is below the market value of the Company’s common stock. Such a feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). In accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. When applicable, the Company records the estimated fair value of the BCF in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the term of the notes using the effective interest method.

 

 

ADVERTISING EXPENSE

 

In accordance with ASC Topic No. 720-35-25-1, the Company recognizes advertising expenses the first time the advertising takes place. Such costs are expensed immediately if such advertising is not expected to occur.

 

SHARE-BASED COMPENSATION

 

The Company accounts for stock-based compensation to employees in accordance with FASB ASC 718. Stock-based compensation to employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite employee service period. The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments and is recognized as expense over the service period. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company’s common stock for common share issuances.

 

RECLASSIFICATIONS

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers which is to be effective for reporting periods beginning after December 15, 2017. The Company adopted ASC 606 effective January 1, 2018 and the adoption had no impact on the Company’s financial position, operations or cash flows.

In February 2016, the FASB issued ASC 842 Leases which is to be effective for reporting periods beginning after December 15, 2018. The Company adopted the pronouncement effective January 1, 2019 and the adoption is not expected to have a material impact on the Company’s financial position, operations or cash flows. As a result of the adoption, the Company will record lease assets of approximately $245,000 and a corresponding lease liability of the same amount in January 2019.

 

In March 2016, the FASB issued ASU 2016-07, which eliminates a requirement for the retroactive adjustment on a step by step basis of the investment, results of operations, and retained earnings as if the equity method had been effective during all previous periods that the investment had been held when an investment qualifies for equity method accounting due to an increase in the level of ownership or degree of influence. The cost of acquiring the additional interest in the investee is to be added to the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. The presentation of the Company’s financial statements is consistent with this guidance.

On June 20, 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company adopted the pronouncement effective January 1, 2019 and the adoption is not expected to have a material impact on the Company’s financial position, operations or cash flows.

NOTE 3 – ASC Topic 606, Revenue from Contracts with Customers

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018 using the modified retrospective method. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:

 

 

 

 

 

 

Details of this five-step process are as follows:

 

 

Identification of the contract with a customer

 

Customer purchase orders are generally considered to be contracts under ASC 606. Purchase orders typically identify specific terms of products to be delivered, create the enforceable rights and obligations of both parties, and result in commercial substance.

 

Performance obligations

 

The Company’s performance obligation is generally limited to delivery of the requested items to its customers at the agreed upon quantities and prices.

 

Determination and allocation of the transaction price

 

 

Recognition of revenue as performance obligations are satisfied

 

Product revenues are recognized when the products are delivered and title passes to the customer.

 

Disaggregation of Revenue

 

Revenue streams from product sales and royalties are summarized below for the twelve-months ended December 31, 2018 and 2017. All revenue was generated in the United States; therefore, no geographical disaggregation is necessary.

 

	Twelve months Ended
	December 31
	2018	2017
Product sales revenue	$5,636,839	$6,103,741
Royalty revenue	201,000	201,000
Total Revenue	$5,837,839	$6,304,741

 

NOTE 4 – OTHER SIGNIFICANT TRANSACTIONS

 

Evolution Partners LLC Letter Agreement and Termination Agreement

On October 10, 2017, Wound Management Technologies, Inc. (the “Company”) and Evolution Venture Partners LLC (“EVP”) entered into a termination agreement (the “Termination Agreement”) terminating, effective as of September 29, 2017, that certain letter agreement dated April 26, 2016, (the “Agreement”), by and between the Company, EVP, and Middlebury Securities, LLC (“Middlebury”). Middlebury terminated its charter on or about July 27, 2016, and therefore is not a party to the Termination Agreement. The Agreement had an initial term of one year (with an automatic six-month renewal term) and provided for:

· A $60,000 consulting fee payable upon execution of the Agreement, refundable only upon cancellation of the Agreement by EVP during the initial one-year term.

· A success fee in an amount equal to 5% of the transaction value of any strategic transaction.

· A selling fee equal to 3% of the gross proceeds of any debt financing transaction or 5% of the gross proceeds of any equity financing transaction.

· The issuance to EVP of a warrant (the “Warrant”) for the purchase of 60,000,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), at an exercise price of $0.12 per share.

The total amount of the consulting fee and warrant expense was $818,665 and is recognized in 2016 as “Other administrative expenses” in the Consolidated Statement of Operations.

As of the termination date, there were no Financing Transactions or Strategic Transactions (as defined in the Agreement) being considered by the Company and no such transactions occurred.

Pursuant to the Termination Agreement, EVP canceled the Warrant in exchange for the Company’s issuance to EVP of 750,000 shares of the Company’s Common Stock. There was no incremental increase in the fair value of the modified stock-based compensation award as of the modification date and accordingly, no additional compensation cost was recognized.

 

Cellerate, LLC

 

Effective August 28, 2018, the Company consummated definitive agreements that continued operations to market the Company’s principal products, CellerateRX® Hydrolyzed Collagen (CellerateRX), through a 50% ownership interest in a newly formed Texas limited liability company, Cellerate, LLC. The remaining 50% ownership interest is held by an affiliate of The Catalyst Group Inc. (CGI), which recently acquired an exclusive license to distribute CellerateRX products. Cellerate, LLC will conduct operations with an exclusive sublicense from a CGI affiliate to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico.

 

 

While the Company has significant influence over the operations of Cellerate, LLC, the Company does not have a controlling interest. CGI has the controlling vote in the event of a deadlocked vote by the Board of Managers of Cellerate, LLC. Therefore, the Company reports its investment in Cellerate, LLC using the equity method of accounting. The Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMTI’s Statement of Operations beginning September 1, 2018.

The definitive agreements related to the Cellerate, LLC transaction are summarized below. The full agreements are attached as exhibits to this filing.

 

Contribution Agreement

 

WCI, LLC (“WCI”), a wholly-owned subsidiary of the Company, transferred to Cellerate, LLC all of its existing inventories and certain trademarks and UPC numbers in exchange for its 50% ownership interest in Cellerate, LLC. The inventories had a net book value of $448,511 at the time of closing. Additionally, as part of the transaction, the Company issued a 30-month promissory note to CGI in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest is payable quarterly, but may be deferred at the Company’s election to the maturity of the Note. Outstanding principal and interest are convertible at CGI’s option into shares of WNDM common stock at a conversion price of $.09 per share.

 

The Company recorded its initial investment in Cellerate, LLC at cost, which was $1,948,511 as of the closing date. This included the $1,500,000 promissory note to CGI and inventories valued at $448,511 net of obsolescence. The trademarks and UPC numbers contributed to Cellerate, LLC had zero book value. For the four months ending December 31, 2018, the Company recognized $9,951 of income from its equity method investment in Cellerate, LLC, resulting in an investment balance of $1,958,463 as of December 31, 2018.

 

CGI transferred to Cellerate, LLC in exchange for its 50% ownership interest an exclusive sublicense to distribute CellerateRX into the wound care and surgical markets in the United States, Canada and Mexico. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by CGI or WCI on six-months' notice.

 

The foregoing summary of the Contribution Agreement does not purport to be complete and is qualified in its entirety by reference to the Contribution Agreement.

 

Operating Agreement

 

Cellerate, LLC’s Operating Agreement provides for the business and affairs of Cellerate, LLC to be managed by a Board of Managers consisting of two persons. CGI and WCI each has the right to appoint one person to the Board of Managers who serve indefinite terms until their resignation, removal or death. The Board of Managers act by a vote of the Managers, but in the event of a deadlocked vote, the vote of the CGI designated manager will be controlling, except (i) in the case of a transaction with a related party or affiliate (other than Cellerate, LLC) of the CGI designee or (ii) CGI transfers any portion of its ownership interest in Cellerate, LLC to a third party or more that 50% of CGI’s ownership is transferred to a third party. The initial Board of Managers is Mr. Ron Nixon as the CGI designee, and Mr. Michael Carmena as the WCI designee. The Board of Managers manages the general operations of Cellerate, LLC, subject however to a vote by members of Cellerate, LLC holding two-thirds of the membership interests in Cellerate, LLC to approve major actions of Cellerate, LLC.

 

When sufficient cash is available, distributions to Cellerate, LLC’s owners will be made at times and in amounts determined by a vote of the Board of Managers. Cellerate, LLC, however, will make distributions on an annual basis sufficient for each owner to pay such owner’s income taxes arising from its ownership interest in Cellerate, LLC.

 

The Operating Agreement contains restrictions on transfer of ownership interests with customary rights of first refusal, co-sale and buy/sell provisions applicable to each owner.

 

The foregoing summary of Cellerate, LLC’s Operating Agreement does not purport to be complete and is qualified in its entirety by reference to the Operating Agreement.

 

Sublicense Agreement

 

Cellerate, LLC has an exclusive sublicense to distribute CellerateRX® Activated Collagen® products into the wound care and surgical markets in the United States, Canada and Mexico. The wound care market comprises the care for external wounds, including the treatment of external, tunneled or undermined wounds. This would include pressure ulcers (Stages I-IV), venous stasis ulcers, diabetic ulcers, ulcers resulting from arterial insufficiency, surgical wounds, traumatic wounds, first and second-degree burns, superficial wounds, cuts, scrapes, skin tears, skin flaps and skin grafts. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by either party on six-months' notice. Cellerate, LLC pays specified royalties to Applied based on Cellerate, LLC’s annual net sales of CellerateRX.

 

 

The foregoing summary of the Sublicense Agreement does not purport to be complete and is qualified in its entirety by reference to the Sublicense Agreement.

 

Professional Services Agreement

 

The Company and CGI agreed to provide Cellerate, LLC with certain professional services needed to conduct the affairs of Cellerate, LLC through December 31, 2018. The Company and CGI were reimbursed on a monthly basis by Cellerate, LLC for services performed, consistent with historical costs to provide the services. The Company also received reimbursement for office lease and other overhead costs dedicated to supporting Cellerate, LLC’s activities. These reimbursements from Cellerate, LLC are recognized by the Company as reductions of selling, general and administrative expenses.

 

The foregoing summary of the Professional Services Agreement does not purport to be complete and is qualified in its entirety by reference to the Professional Services Agreement.

 

Promissory Note

 

As part of the transaction to form Cellerate, LLC, the Company issued a 30-month convertible promissory note to CGI in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest is payable quarterly, but may be deferred at the Company’s election to the maturity of the Note. Outstanding principal and interest are convertible at CGI’s option into shares of WNDM common stock at a conversion price of $.09 per share.

 

 NOTE 5 – NOTES PAYABLE

 

CONVERTIBLE NOTES PAYABLE – RELATED PARTIES

 

Funds are advanced to the Company from various related parties as necessary to meet working capital requirements. Below is a summary of outstanding convertible notes due to related parties, including accrued interest separately recorded, as of December 31, 2018 and 2017:

 

										Accrued Interest
Related Party		Nature of Relationship		Term of the agreement		Principal amount				2018				2017
S. Oden Howell Revocable Trust ("HRT")		Mr. S. Oden Howell, Jr. became a member of the Board of Directors in June of 2015		The note is secured, bears interest at 10% per annum, matures June 15, 2018, and is convertible into shares of the Company's Series C Convertible Preferred Stock at a conversion price of $70.00 per share at any time prior to maturity. As of December 31, 2018, the note is paid in full.		$	-			$	0			$	162,493
James W. Stuckert Revocable Trust ("SRT")		Mr. James W. Stuckert became a member of the Board of Directors in September of 2015		The note is secured, bears interest at 10% per annum, matures June 15, 2018, and is convertible into shares of the Company's Series C Convertible Preferred Stock at a conversion price of $70.00 per share at any time prior to maturity. As of December 31, 2018, the note is paid in full.		$	-			$	0			$	162,493
Total						$	-			$	0			$	324,986

 

 

  

On June 15, 2015, the Company entered into term loan agreements with The James W. Stuckert Revocable Trust (“SRT) and The S. Oden Howell Revocable Trust (“HRT”), pursuant to which SRT made a loan to the Company in the amount of $600,000 and HRT made a loan to the Company in the amount of $600,000 under Senior Secured Convertible Promissory Notes (the “Notes”). Both SRT and HRT are controlled by affiliates of the Company. The Notes each carried an interest rate of 10% per annum, and (subject to various default provisions) all unpaid principal and accrued but unpaid interest under the Notes were due and payable on June 15, 2018. The Notes provided that the Notes could be prepaid in whole or in part upon ten days’ written notice, and all unpaid principal and accrued interest under the Notes could be converted, at the option of SRT and HRT, into shares of the Company’s Series C Convertible Preferred Stock at a conversion price of $70.00 per share at any time prior to maturity.”). The Company’s obligations under the two notes were secured by all the assets of the Company and its subsidiaries.

 

On February 19, 2018, both Notes totaling $1,200,000 plus $385,594 of accrued interest were converted to 22,651,356 common shares of the Company's Common Stock. The accrued interest included $60,608 of additional interest expense recognized during the first quarter of 2018.

 

NOTES PAYABLE

 

The following is a summary of amounts due to unrelated parties, including accrued interest separately recorded, as of December 31, 2018 and 2017:

 

		Principal Amount		Accrued Interest
Note Payable	Terms of the agreement	2018	2017	2018	2017
August 27, 2018 Promissory Note	A $1,500,000 note payable (i) interest accrues at 5% per annum and compounds quarterly (ii) original maturity date of March 1, 2021	$1,500,000	-	$25,978	-
Total		$1,500,000	$-	$25,978	$-

During 2017, the WMTI reached an agreement to settle an outstanding payable with WellDyne Health, LLC, (“WellDyne”), a third party that had provided shipping and consulting services on behalf of the Company effective through September 19, 2015. As part of that settlement, WellDyne forgave $39,709 of the outstanding payable.

During 2017, the Company paid a total of $190,838 principal to three non-related party note holders and reached an agreement with them to forgive $10,937 in accrued interest. As a result, all three notes were paid in full. The Company also settled $223,500 note payable and $147,373 accrued interest in Common Stock, see note 11.

On August 27, 2018, as part of the partnership transaction with CGI to form Cellerate, LLC, the Company issued a 30-month promissory note to CGI in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest is payable quarterly but may be deferred at the Company’s election to the maturity of the Note. Outstanding principal and interest are convertible at CGI’s option into shares of WNDM common stock at a conversion price of $.09 per share.

NOTE 6 – INTANGIBLE ASSETS

 

Patent

 

On September 29, 2009, the Company entered into an Asset Purchase Agreement (the “Agreement”), whereby the Company acquired a patent in exchange for 500,000 shares of the Company’s common stock and the assumption of a legal fee payable in the amount of $47,595 which is related to the patent. Based on the guidance in ASC Topic No. 350-30, the patent was recorded as an intangible asset of $462,715, or approximately $.93 per share plus $47,595 for the assumed liability. The intangible asset is being amortized over an estimated ten-year useful life.

 

Software Implementation

 

In 2017, the Company put into service a business software. The costs to implement this software which totaled $41,980 are included in intangible assets and are being amortized over the initial term of the license which is three years.

 

 

The activity for the intangible assets is summarized below:

  

Cost	Patent	Software	Total
Balance at December 31, 2017	$510,310	$41,980	$552,290
Implementation costs
Balance at December 31, 2018	$510,310	$41,980	$552,290
Accumulated amortization
Balance at December 31, 2017	$421,006	$13,993	$434,999
Amortization expense	51,032	13,993	65,025
Balance at December 31, 2018	$472,038	$27,986	$500,024
Net carrying amount
Balance at December 31, 2017	$89,304	$27,987	$117,291
Balance at December 31, 2018	$38,272	$13,994	$52,266