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” and
“WMT” are used in this report to refer to Wound
Management Technologies, Inc. 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 WMT and
its wholly-owned subsidiaries: Wound Care Innovations, LLC a Nevada
limited liability company (“WCI”); Resorbable
Orthopedic Products, LLC, a Texas limited liability company
(“Resorbable); and Innovate OR, Inc.
(“InnovateOR”) formerly referred to as BioPharma
Management Technologies, Inc., a Texas corporation
(“BioPharma”). All intercompany accounts and
transactions have been eliminated.
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.
LOSS
PER SHARE
The Company
computes 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 loss per share when the effect is dilutive. Basic loss per
share is computed by dividing loss available to common stockholders
by the weighted average number of common shares available. Diluted
loss per share is computed similar to basic 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.
REVENUE
RECOGNITION
In accordance with
the guidance in “ASC” Topic No. 605, “Revenue
Recognition,” the Company recognizes revenue when (a)
persuasive evidence of an arrangement exists, (b) delivery has
occurred or services have been rendered, (c) the fee is fixed or
determinable, and (d) collectability is reasonable assured. Revenue
is recognized upon delivery. Revenue is recorded on the gross
basis, which includes handling and shipping, because the Company
has risks and rewards as a principal in the transaction based on
the following: (a) the Company maintains inventory of the product,
(b) the Company is responsible for order fulfillment, and (c) the
Company establishes the price for the product. The Company
recognizes royalty revenue in the period the royalty bearing
products are sold.
The Company
recognizes revenue based on bill and hold arrangements when the
seller has transferred to the buyer the significant risks and
rewards of ownership of the goods; the seller does not retain
effective control over the goods or continuing managerial
involvement to the degree usually associated with ownership; the
amount of revenue can be measured reliably; it is probable that the
economic benefits of the sale will flow to the seller; any costs
incurred or to be incurred related to the sale can be measured
reliably; it is probable that delivery will be made; the goods are
on hand, identified, and ready for delivery; the buyer specifically
acknowledges the deferred delivery instructions; and the usual
payment terms apply.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
The Company
establishes an allowance for doubtful accounts to ensure accounts
receivable are not overstated due to uncollectibility. 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
$10,735 and
$6,461 in 2016 and 2015, respectively. The allowance for doubtful
accounts at December 31, 2016 was $21,947 and the amount at
December 31, 2015 was $20,388.
INVENTORIES
Inventories are
stated at the lower of cost or net realizable value, with cost
computed on a first-in, first-out basis. Inventories consist of
finished goods, powders, gels and the related packaging supplies.
The Company recorded inventory obsolescence expense of $152,547 in
2016 and $133,747 in 2015. The allowance for obsolete and slow
moving inventory had a balance of $153,023 and $150,135 at December
31, 2016 and December 31, 2015, respectively.
PROPERTY
AND EQUIPMENT
Property and
equipment is recorded at cost. Depreciation is computed utilizing
the straight-line method over the estimated economic life of the
asset, which ranges from five to ten years. As of December 31,
2016, fixed assets consisted of $76,267 including furniture and
fixtures, computer equipment, phone equipment and the Company
websites. As of December 31, 2015, fixed assets consisted of
$73,239 including furniture and fixtures, computer equipment, phone
equipment and the Company websites. The depreciation expense
recorded in 2016 was $9,852 and the depreciation expense recorded
in 2015 was $8,999. The balance of accumulated depreciation was
$41,328 and $31,477 at December 31, 2016 and December 31, 2015,
respectively.
INTANGIBLE
ASSETS
Intangible assets
as of December 31, 2016 and 2015 consisted of a patent acquired in
2009 with a historical cost of $510,310. The intangible asset is
being amortized over its estimated useful life of 10 years using
the straight-line method. Amortization expense recognized was
$51,031 during 2016 and 2015.
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, 2016 and 2015.
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.
At December 31,
2016 and 2015, the Company’s financial instruments consist of
the derivative liabilities related to stock purchase warrants which
were valued using the Black-Scholes Option Pricing Model, a level 3
input.
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.”
The following table
sets forth by level within the fair value hierarchy the
Company’s financial assets and liabilities that were
accounted for at fair value as of December 31, 2016 and
2015.
Recurring Fair Value Measure
|
|
|
|
|
Liabilities
|
|
|
|
|
Derivative
Liabilities as of December 31, 2016
|
$
-
|
$
-
|
$
44
|
$
44
|
Derivative
Liabilities as of December 31, 2015
|
$
-
|
$
-
|
$
310
|
$
310
|
DERIVATIVES
The Company entered
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.
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
There were various
accounting standards and interpretations issued during 2016 and
2015, none of which are expected to have a material impact on the
Company’s financial position, operations or cash
flows.
NOTE
3 - GOING CONCERN
The Company has
continuously incurred losses from operations, however, the
operating loss in 2016 includes a significant nonrecurring expense
in the amount of $818,665, primarily a non-cash loss on the
issuance of warrants for services valued at $758,665. Without this
non-cash expense, operating income was $342,918 for 2016. See NOTE
4 below for a discussion of this expense. On December 31, 2016, the
Company has a working capital balance of $601,654. The Company has
adopted a robust operating plan for 2017 that projects existing
cash and future cash to be generated from operations will satisfy
our foreseeable working capital, debt repayment and capital
expenditure requirements for at least the next twelve months.
However, minimal funding may be required at certain times during
the year due to the timing of significant expenditures such as
inventory purchases. The Company believes it will be able to obtain
such funding, if required during 2017. We will also monitor our
cash flow; assess our business plan; and make expenditure
adjustments accordingly.
Based upon the
Company's current ability to obtain additional financing or equity
capital and to achieve profitable operations, it is not appropriate
at this time to continue using the going concern
basis.
NOTE
4 – OTHER SIGNIFICANT TRANSACTIONS
Evolution
Partners LLC Letter Agreement
On April 26, 2016,
the Company entered into a letter agreement with Evolution Venture
Partners LLC (“EVP”) to serve as a strategic adviser
together with Middlebury Securities, LLC (“Middlebury”)
to serve as the exclusive placement agent to the Company in
connection with the pursuit and execution of a “Financing
Transaction” or “Strategic Transaction”. A
Financing Transaction is defined as a single transaction or a
series of related transactions, a private or public offering or
issuance of equity securities or indebtedness of the Company for
cash, assumption or incurrence of indebtedness, securities or other
consideration with any party. A Strategic Transaction is defined as
any acquisition, business combination, transfer or other
disposition or any other corporate transaction involving the
assets, intellectual property, securities or businesses of the
Company, whether by way of a merger or consolidation, license,
divestiture, reorganization, recapitalization or restructuring,
issuance of indebtedness, tender or exchange offer, negotiated
purchase, leveraged buyout, minority investment or partnership,
joint venture, collaborative venture or otherwise with any party. A
Strategic Transaction does not include any transaction identified
or sourced internally by the Company or the Company’s Board
of Directors and entered into in the Company’s ordinary
course of business.
The initial term of
the agreement is for a period of one (1) year from the execution of
the agreement (the “Term”); provided, however, that
such initial term will be extended for successive six (6) month
periods unless terminated by written notice by either party.
Furthermore, in the event within twelve (12) months following the
expiration of the Term (such period, the “Tail Period”)
the Company closes a Strategic Transaction or Financing Transaction
with a person or entity contacted by EVP on behalf of the Company
during the Term, then the Company shall pay and deliver to EVP all
fees, expenses and warrants as though such transaction were
consummated during the Term.
As compensation for
these services, EVP received a one-time consulting fee of $60,000
plus a warrant to purchase up to 60 million shares of the common
stock of the Company, (which number of shares was approximately 23%
of the Company’s outstanding capital stock, calculated on a
fully diluted basis, on the agreement date). The total amount of
this expense was $818,665, consisting of the cash fee of $60,000
and the fair value of the warrants vested on the agreement dated
recognized of $758,665, and is recognized in 2016 as “Other
administrative expenses” in the Consolidated Statement of
Operations.
The terms and
conditions upon which the Warrant may be exercised, and the Shares
covered thereby may be purchased, are as follows:
The exercise period
of the Warrant is the period beginning on the date that the Warrant
vests as provided below and ending at 5:00 p.m., Dallas, Texas
time, on April 26, 2021, (the “Exercise Period”). EVP
may only purchase shares that have vested (“Vested
Shares”), which shares shall vest as follows:
20% of the shares
were vested on the agreement date;
20% of the shares
will vest and become exercisable upon the consummation by the
Company of one or more Financing Transactions with gross proceeds
of at least $5,000,000; it being agreed and understood that such
gross proceeds will exclude capital invested or loaned to the
Company by current investors, members of the Board or management of
the Company and/or their respective affiliates (collectively,
“Inside Investors”), but not to the extent third- party
investors do not participate in such Financing Transaction in order
to accommodate participation by the Inside Investors;
20% of the shares
will vest and become exercisable upon the consummation by the
Company of a Strategic Transaction (other than an Acquisition of
the Company and other than a distribution agreement);
20% of the shares
shall vest and become exercisable upon the Company’s
execution of a material distribution agreement which constitutes a
Strategic Transaction, which materiality threshold will be mutually
agreeable to the Company and EVP / Middlebury;
20% of the shares
shall vested and become exercisable upon the Company’s hiring
of an executive officer or other key employee, which executive
officer or key employee was identified by Service Provider or
Service Provider played a meaningful role in such person’s
hire as requested by the Company in writing, and only if, the
Company and EVP / Middlebury mutually agree that such hire will
materially enhance the Company; and
All non-vested
shares will vest and become exercisable upon the consummation of an
acquisition of the Company.
The agreement
further provides that in the event the Company closes a Strategic
Transaction during the Term, or closes a Strategic Transaction
during the Tail Period with a person or entity contacted by EVP on
behalf of the Company during the Term, the Company shall pay to EVP
a cash fee equal to five percent (5%) of the transaction value of
the Strategic Transaction. Furthermore, in the event the Company
closes a Financing Transaction during the Term, or closes a
Financing Transaction during the Tail Period with a person or
entity contacted by EVP on behalf of the Company during the Term,
the Company shall pay to EVP a cash fee equal to: (i) five percent
(5%) of the amount of the gross proceeds from the equity sold in a
Financing Transaction; and (ii) three percent (3%) of the amount of
the gross proceeds from the debt sold in a Financing
Transaction.
As of this date,
there are no Financing Transactions or Strategic Transactions being
considered by the Company and no such transactions have
occurred.
Shipping
and Consulting Agreement
On September 20,
2013, the Company entered into a Shipping and Consulting Agreement
with WellDyne Health, LLC (“WellDyne”). Under the
agreement, WellDyne agreed to provide certain storage, shipping,
and consulting services, and was granted the right to conduct
online resale of certain of the Company’s products to U.S.
consumers. The agreement provided for an initial term of 3
years.
Effective June 1,
2015, the Company and WellDyne entered into an amendment to the
Agreement, pursuant to which the Agreement was amended to, among
other things: (a) eliminate certain administrative services being
performed by WellDyne under the Agreement, (b) revise the terms of
the administrative fee payable to WellDyne under the Agreement, and
(c) provide for termination of the Agreement, effective as of
September 19th of a given year, by written notice by either party
delivered before June 15th of such year.
On June 4, 2015,
the Company delivered written notice to WellDyne, terminating the
Agreement pursuant to Section Five thereof and the termination was
effective September 19, 2015.
Brookhaven
Medical, Inc. Agreement
On October 11,
2013, the Company, together with certain of its subsidiaries,
entered into a term loan agreement (the “Loan
Agreement”) with Brookhaven Medical, Inc.
(“BMI”), pursuant to which BMI made a loan to the
Company in the amount of $1,000,000 under a Senior Secured
Convertible Promissory Note (the “First BMI Note”). In
connection with the Loan Agreement, the Company and BMI also
entered into a letter of intent contemplating (i) an additional
loan to the Company (the “Additional Loan”) of up to
$2,000,000 by BMI (or an outside lender), and (ii) entrance into an
agreement and plan of merger (the “Merger Agreement”)
pursuant to which the Company would merge with a subsidiary of BMI,
subject to various conditions precedent.
The First BMI Note
carries an interest rate of 8% per annum, and all unpaid principal
and accrued but unpaid interest under the First BMI Note is due and
payable on the later of (i) October 10, 2014, or (ii) the first
anniversary of the date of the Merger Agreement. The First BMI Note
may be prepaid in whole or in part upon ten days’ written
notice, and all unpaid principal and accrued interest under the
Note may be converted, at the option of BMI, into shares of the
Company’s Series C Convertible Preferred Stock (“Series
C Preferred Stock”) at a conversion price of $70.00 per
share. The Company’s obligations under the First BMI Note are
secured by all the assets of the Company and its
subsidiaries.
On October 15,
2013, BMI agreed to make the Additional Loan pursuant to a Secured
Convertible Drawdown Promissory Note (the “Second BMI
Note”), which allows the Company to drawdown, as needed, an
aggregate of $2,000,000, subject to an agreed upon drawdown
schedule or as otherwise approved by BMI. In connection with the
Second BMI Note, the Company, its subsidiaries, and BMI entered
into an additional loan agreement as well as an additional security
agreement.
The Second BMI Note
carries an interest rate of 8% per annum, and (subject to various
default provisions) all unpaid principal and accrued but unpaid
interest under the Second BMI Note is due and payable on the later
of (i) October 15, 2014, or (ii) the first anniversary of the date
of the Merger Agreement. The Second BMI Note may be prepaid in
whole or in part upon ten days’ written notice, and all
unpaid principal and accrued interest under the Second BMI Note may
be converted, at the option of BMI, into shares of the
Company’s Series C Convertible Preferred Stock at a
conversion price of $70.00 per share at any time prior to the
Maturity Date.
In December of
2013, the Company and Brookhaven Medical, Inc. announced their
mutual decision not to proceed with the proposed merger but to
pursue other business relationships between the two
companies.
On October 15,
2014, the Company and Brookhaven Medical, Inc. executed an
amendment extending the due date of the notes to April 15, 2015.
The Company evaluated the modification under ASC 470 and determined
that it does not qualify as an extinguishment of debt.
On June 15, 2015,
Wound Management Technologies, Inc. (the “Company”),
together with certain of its subsidiaries, entered into a term loan
agreement (the “Loan Agreement”) 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 proceeds
of the Notes were used to pay off all outstanding unpaid principal
and accrued but unpaid interest under the Senior Secured
Convertible Promissory Note issued to Brookhaven Medical, Inc.
pursuant to a loan agreement dated October 11, 2013, (as described
in the Company’s Current Report on Form 8-K filed October 16,
2013, the “Brookhaven Note”). The Notes each carry an
interest rate of 10% per annum, and (subject to various default
provisions) all unpaid principal and accrued but unpaid interest
under the Notes is due and payable on June 15, 2018.The Notes may
be prepaid in whole or in part upon ten days’ written notice,
and all unpaid principal and accrued interest under the Notes may
be converted, at the option of SRT and HRT, into shares of the
Company’s Series C Convertible Preferred Stock at a
conversion price of $70.00 per share at any time prior to
maturity.”).
NOTE
5 – NOTES PAYABLE
CONVERTIBLE
NOTES PAYABLE – RELATED PARTIES
Funds are advanced
to the Company from various related parties. Other shareholders
fund the Company as necessary to meet working capital requirements
and is a summary of outstanding convertible notes due to related
parties, including accrued interest separately recorded, as of
December 31, 2016 and 2015:
|
|
|
|
|
|
|
Related
Party
|
|
Nature
of Relationship
|
|
Term
of the agreement
|
|
|
|
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
unsecured, bears interest at 10% per annum, matures June 18, 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.
|
$
600,000
|
$
96,164
|
$
32,877
|
|
|
|
|
|
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
unsecured, bears interest at 10% per annum, matures June 18, 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.
|
$
600,000
|
$
96,164
|
$
32,877
|
|
|
|
|
|
Total
|
|
|
|
|
$
1,200,000
|
$
192,328
|
$
65,754
|
On June 15, 2015,
the Company used proceeds from the above mentioned notes (with The
James W. Stuckert Revocable Trust (“SRT) and The S. Oden
Howell Revocable Trust (“HRT”) to pay off the
negotiated outstanding unpaid principal to $1,100,000, accrued but
unpaid interest and recognized $100,000 forgiveness of related
party convertible debt under the Senior Secured Convertible
Promissory Note issued to Brookhaven Medical, Inc. pursuant to a
loan agreement dated October 11, 2013. The gain was accounted for
as a capital transaction in 2015.
NOTES
PAYABLE
The following is a
summary of amounts due to unrelated parties, including accrued
interest separately recorded, as of December 31, 2016 and
2015:
|
|
|
|
|
|
|
|
|
|
|
|
March 4, 2011 Note
Payable
|
|
223,500 note
payable; (i) interest accrues at 13% per annum; (ii) maturity date
of September 4, 2011; (iii) $20,000 fee due at maturity date with a
$1,000 per day fee for each day the principal and interest is late.
This note is currently the subject of litigation (see Note 12
"Legal Proceedings")
|
$
223,500
|
$
223,500
|
$
147,374
|
$
117,915
|
|
|
|
|
|
|
Third Quarter 2012
Secured Subordinated Promissory Notes
|
|
Three
notes in the aggregate principal amount of $110,000; (i) interest
accrues at 5% per annum; (ii) maturity date of October 12, 2012;
(iii) after the maturity date interest shall accrue at 18% per
annum and the company shall pay to the note holders on a pro rata
basis, an amount equal to twenty percent of the sales proceeds
received by the Company and its subsidiary, WCI, from the sale of
surgical powders, until such time as the note amounts have been
paid in full. As of December 31, 2016, all of these notes remain
due.
|
$
104,571
|
$
110,000
|
$
8,200
|
$
67,558
|
|
|
|
|
|
|
September 28, 2012
Promissory Note
|
|
$51,300 note
payable (i) interest accrues at 10% per annum; (ii) original
maturity date of December 31, 2012; (iii) default interest rate of
15% per annum. As of December 31, 2016, $11,300 of this note
remains due.
|
$
11,300
|
$
11,300
|
$
19,510
|
$
14,748
|
|
|
|
|
|
|
Quest Capital
Investors, LLC
|
|
Furniture purchase
agreement in the original amount of $11,700 with $300 payments due
each month. Secured by fixed assets of the Company.
|
$
300
|
$
3,900
|
$
-
|
$
-
|
|
|
|
|
|
|
May 28, 2015
Promissory Note
|
|
$96,000 note
payable (i) interest accrues at 10% per annum; (ii) original
maturity date of May 28, 2016; (iii) amended maturity date of June
30, 2017
|
$
74,667
|
$
96,000
|
$
-
|
$
2,420
|
|
|
|
|
|
|
June 26, 2015
Convertible Promissory Note
|
|
$ 200,000 note
payable which accrued interest at 5% per annum. The note was due
September 26, 2016. The note was convertible, into common shares of
the Company at the option of the Company at a rate equal to 90% of
the volume weighted average price of the company's common stock for
the 5 trading days preceding the date of conversion. As of December
31, 2016, the note is paid in full.
|
$
-
|
$
170,000
|
$
-
|
$
4,674
|
|
|
|
|
|
|
Total
|
|
|
$
414,338
|
$
614,700
|
$
175,083
|
$
207,315
|
On June 26, 2015,
the Company entered into an Exchange Agreement with Tonaquint,
Inc., a Utah corporation (“Tonaquint”), under which
Tonaquint was issued a convertible promissory note (the
“Note”) in exchange for the surrender of common stock
warrants originally issued by the Company to Tonaquint pursuant to
a Securities Purchase Agreement dated June 21, 2011. The Note in
the original principal amount of $200,000, carried a 5% rate of
interest, and matured on September 26, 2016. The Note provided for
an initial cash installment payment of $10,000, with subsequent
monthly cash installment payments beginning in December of 2015.
Each such monthly installment payment could have been made, at the
Company's option, in shares of common stock. Subject to certain
conditions, the number of shares issuable in lieu of cash
installment payments was to be determined based on a conversion
price equal to 90% of the five-day volume weighted average trading
price of the Company's common stock. The surrendered warrants were
accounted for as derivatives with a fair value of $1,693 on the
date of the exchange.
This resulted in a
loss on the issuance of debt for warrants of $198,307 during the
year ended December 31, 2015. The Company paid a total of $178,552
in cash under this note during the year ended December 31, 2016. In
September 2016, the Company paid the final $10,000 in principal and
$8,552 in accrued interest.
During each of the
years ended December 31, 2016 and 2015, the Company paid a total of
$3,600 to Quest Capital as part of the furniture purchase agreement
in the original amount of $11,700.
During the year
ended December 31, 2015, the Company paid the final $40,620
principal and $14,861 in accrued interest due on the MAH Holding
note. (MAH Holding is controlled by a former major stockholder of
the Company).
During the year
ended December 31, 2016, the Company paid $26,762 principal and
$49,559 in accrued interest for three of the non-related party
notes. In June and July of 2016, two of the parties' notes were
amended and they agreed to forgive a portion of the accrued
interest in the amounts of $22,943 and $7,649 for a total of
$30,592.
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
from 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.
The activity for
the intangible accounts is summarized below:
|
|
|
Patent
|
$
510,310
|
$
510,310
|
Accumulated
amortization
|
(369,974
)
|
(318,944
)
|
Patent,
net of accumulated amortization
|
140,336
|
191,366
|
|
|
|
Total
intangibles, net of accumulated amortization
|
$
140,336
|
$
191,366
|
The amount
amortized for the year ended December 31, 2016 and 2015 was $51,030
and $51,031, respectively.
NOTE
7 – CUSTOMERS AND SUPPLIERS
WCI had two
significant customers which accounted for approximately 18% and 14%
of the Company’s sales in 2016 and had two significant
customers which accounted for approximately 28% and 14% of the
Company’s sales in 2015. The loss of the sales generated by
these customers would have a significant effect on the operations
of the Company.
The Company
purchases all inventory from one vendor. If this vendor became
unable to provide materials in a timely manner and the Company was
unable to find alternative vendors, the Company's business,
operating results and financial condition would be materially
adversely affected.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
ROYALTY
AGREEMENTS
Effective January
3, 2008, WCI entered into separate exclusive license agreements
with both Applied Nutritionals, LLC (“Applied”) and its
founder George Petito (“Petito”), pursuant to which WCI
obtained the exclusive world-wide license to make products
incorporating intellectual property covered by a patent related to
CellerateRX products. The licenses are limited to the human health
care market, (excluding dental and retail) for external wound care
(including surgical wounds), and include any new product
developments based on the licensed patent and processes and any
continuations. The term of these licenses expires in
2018.
In consideration
for the licenses, WCI agreed to pay Applied and Petito, (in the
aggregate), the following royalties, beginning January 3, 2008: (a)
an advance royalty of $100,000; (b) a royalty of 15% of gross sales
occurring during the first year of the license; (c) an additional
advance royalty of $400,000 on January 3, 2009; plus (d) a royalty
of 3% of gross sales for all sales occurring after the payment of
the $400,000 advance royalty. In addition, WCI must maintain a
minimum aggregate annual royalty payment of $375,000 for 2009 and
thereafter if the royalty percentage payments made do not meet or
exceed that amount. The amounts listed in the two preceding
sentences are the aggregate of amounts paid/owed to Applied and
Petito) and the Company has paid the minimum aggregate annual
royalty payments each year since 2008, including both 2016 and
2015. The total unpaid royalties as of December 31, 2016 and 2015,
is $276,916 and $323,062, respectively.
On September 29,
2009, the Company entered into an Asset Purchase Agreement (the
“Asset Purchase Agreement”), by and among the Company,
RSI-ACQ, LLC, a wholly-owned subsidiary of the Company (RSI),
Resorbable Orthopedic Products, LLC (“Resorbable”) and
Resorbable’s members, pursuant to which, RSI acquired
substantially all of Resorbable’s assets, in exchange for (i)
500,000 shares of the Company’s common stock, and (ii) a
royalty equal to eight percent (8%) of the net revenues generated
from products sold by the Company or any of its affiliates, which
products are developed from or otherwise utilize any of the
patented technology acquired from Resorbable. The royalty is paid
to Barry Constantine Consultant LLC and one of the principals of
the LLC is Barry Constantine whom is a contract employee of the
Company and holds the position of Director of R&D.
PREPAIDS
FROM INVENTORY CONTRACTS
In October of 2015,
WCI entered into a contract with the manufacturer of the
CellerateRX product to purchase $217,512 of product. Payment in the
amount of $108,014 was made in October of 2015 with the remaining
balance of $109,498 paid in 2016 and before receipt of product.
This amount was recorded as an asset in the “Prepaid and
Other Assets” account at December 31, 2015 based on the
contractual obligation of the parties.
In November of
2016, ROP entered into a contract with the contract manufacturer of
HemaQuell® product to purchase $13,787 of product. This amount
was recorded as an asset in the “Prepaid and Other
Assets” account at December 31, 2016, based on the
contractual obligation of the parties.
OFFICE
LEASES
The Company’s
corporate office is located at 16633 Dallas Parkway, Suite 250,
Addison, TX 75001. The lease was entered into in November of 2013.
The lease expires on April 30, 2017 and requires base rent payments
of $5,737 per month for months 1-17, $5,866 for months 18-29, and
$5,995 for months 30-41.
In March of 2017,
the Company executed a new office lease for office space located at
1200 Summit Ave., Suite 414, Fort Worth, TX 76102 and will be
relocating our corporate offices there. The lease is to be
effective upon completion of leasehold improvements (sometime in
April 2017) and end on the last day of the fiftieth (50th) full
calendar month following the effective date. Monthly base rental
payments are as follows: months 1-2, $0; months 3-14, $7,250;
months 15-26, $7,401; months 27-38, $7,552; and months 39-50,
$7,703.
PAYABLES
TO RELATED PARTIES
As of December 31,
2016 and 2015, the Company had outstanding payable to related
parties totaling $93,655 and $21,099, respectively. The payables
are unsecured, bear no interest and due on demand
NOTE
9 – STOCKHOLDERS’ EQUITY
PREFERRED
STOCK
There are currently
5,000,000 shares of Series A Preferred Stock authorized, with no
shares of Series A Preferred Stock issued or outstanding as of
December 31, 2016 and 2015.
Effective June 24,
2010, the Company filed a Certificate of Designations, Number,
Voting Power, Preferences and Rights of Series B Convertible
Redeemable Preferred Stock (the “Certificate”) with the
Texas Secretary of State, designating 7,500 shares of Series B
Preferred Stock, par value $10.00 per share (the “Series B
Shares”). The Series B Shares rank senior to shares of all
other common and preferred stock with respect to dividends,
distributions, and payments upon dissolution. Each of the Series B
Shares is convertible at the option of the holder into shares of
common stock as provided in the Certificate. There were no Series B
Shares issued or outstanding as of December 31, 2016 and
2015.
On October 11,
2013, the Company filed a Certificate of Designations, Number,
Voting Power, Preferences and Rights of Series C Convertible
Preferred Stock (the “Certificate of Designations”),
under which it designated 100,000 shares of Series C Preferred
Stock, par value $10.00. The Series C Preferred Stock is entitled
to accruing dividends (payable, at the Company’s options, in
either cash or stock) of 5% per annum until October 10, 2016, and
3% per annum until October 10, 2018.
The Series C
Preferred Stock is senior to the Company’s common stock and
any other currently issued series of the Company’s preferred
stock upon liquidation, and is entitled to a liquidation preference
per share equal to the original issuance price of such shares of
Series C Preferred Stock together with the amount of all accrued
but unpaid dividends thereon. Each of the Series C Shares is
convertible at the option of the holder into 1,000 shares of common
stock as provided in the Certificate. Additionally, each holder of
Series C Preferred Stock shall be entitled to vote on all matters
submitted for a vote of the holders of Common Stock a number of
votes equal to the number of full shares of Common Stock into which
such holder’s Series C shares could then be converted. As of
December 31, 2016 and December 31, 2015, there were 85,646 and
80,218 shares of Series C Preferred Stock issued and outstanding,
respectively.
On November 13,
2013, the Company filed a Certificate of Designations, Number,
Voting Power, Preferences and Rights of Series D Convertible
Preferred Stock (the “Certificate of Designations”),
under which it designated 25,000 shares of Series D Preferred
Stock. Shares of Series D Preferred Stock are not entitled to any
preference with respect to dividend or upon liquidation, and will
automatically convert (at a ratio of 1,000-to-1) into shares of the
Company’s common stock, par value $0.001 upon approval of the
Company’s stockholders (and filing of) and amendment to the
Company’s Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100,000,000 to
250,000,000. As of December 31, 2016 and December 31, 2015 there
were 0 shares of Series D Preferred Stock issued and outstanding.
On September 3, 2014, the company increased its authorized common
stock to 250,000,000 shares. As a result, all outstanding Series D
preferred shares were converted to common stock.
On May 30, 2014,
the Company filed a Certificate of Designations, Number, Voting
Power, Preferences and Rights of Series E Convertible Preferred
Stock (The “Certificate of Designations”), under which
it designated 5,000 shares of Series E Preferred Stock. Shares of
Series E Preferred Stock are not entitled to any preference with
respect to dividends or upon liquidation, and will automatically
convert (at a ratio of 1,000 shares of Common Stock for every one
share of Series E Preferred Stock) into shares of the
Company’s common stock, $0.001 par value upon approval of the
Company’s stockholders (and filing of) and amendment to the
Company’s Certificate of Incorporation increasing the number
of authorized shares of Common Stock from 100,000,000 to
250,000,000. As of December 31, 2016, there were no shares of
Series E Preferred Stock issued and outstanding.
During the year
ended December 31, 2015, the company issued 11,310 shares of Series
C preferred stock to Directors of the Company for cash proceeds of
$750,000.
During the year
ended December 31, 2016, the company issued 6,428 shares of Series
C preferred stock to Directors of the Company for cash proceeds of
$450,000.
The Series C
preferred stock earned dividends of $261,716 and $268,772 for the
years ended December 31, 2016 and December 31, 2015, respectively.
As of the date of this filing, no Series C preferred stock
dividends have been declared or paid.
During the year
ended December 31, 2013, the Company granted an aggregate of 15,000
shares of Series D preferred stock to employees and nonemployees
for services. 13,000 of the shares were granted to employees and
vest immediately upon grant, 1,000 of the shares were granted to an
employee and vest in equal tranches over three years through
October 1, 2016 and 1,000 of the shares were granted to a
nonemployee and vest in equal tranches over three years through
September 15, 2016. The aggregate fair value of the awards was
determined to be $1,046,669 of which $925,787 was previously
recognized, $79,318 was recognized during the year ended December
31, 2014, $6,628 less net forfeitures of $19,173 was recognized
during the year ended December 31, 2015, $8,109 was recognized
during the year ended December 31, 2016 and all shares have vested,
no further expense to be recognized.
During the year
ended December 31, 2014, the Company granted an aggregate of 1,000
shares of Series D preferred stock to two employees according to
the terms of their employment agreements. The shares vest in equal
annual amounts over three years and the aggregate fair value of the
awards was determined to be $120,000. During the years ended
December 31, 2016 and 2015, $6,806 and $25,193 was expensed. Net
forfeitures of $17,135 was recognized during the year ended
December 31, 2016. A total of 667 shares are vested and no further
expense is to be recognized.
On September 3,
2014, the Company increased its authorized common stock to
250,000,000 shares. Accordingly, the 16,545 outstanding shares of
Series D preferred stock were automatically converted into
16,545,000 common shares.
The Company
evaluated the Series C and Series D preferred stock under FASB ASC
815 and determined that they do not qualify as derivative
liabilities. The
Company then
evaluated the Series C and Series D preferred stock for beneficial
conversion features under FASB ASC 470-30 and determined that none
existed.
COMMON
STOCK
On September 3,
2014, the Company held its annual meeting of stockholders. The
stockholders approved an amendment to the Company’s Articles
of Incorporation to increase the authorized shares of common stock
of the Company from 100,000,000 to 250,000,000.
On March 5, 2015,
the Company issued 100,000 shares of common stock which vested
immediately valued at $5,970 according to the terms of a service
agreement.
Under the award,
the nonemployee was also granted an aggregate of 800,000 additional
shares which vest in tranches of 300,000, 250,000 and 250,000 upon
the achievement of certain revenue targets. No expense was
recognized for these additional shares during the year ended
December 31, 2016.
On March 10, 2015,
the Company issued 374,264 shares of common stock in conversion of
357 shares of Series C Preferred stock and $1,036 of related
dividends.
On May 19, 2015,
the Company issued 100,000 shares of common stock which vested
immediately valued at $10,000 according to the terms of a service
agreement.
On May 19, 2015,
the Company issued 250,000 shares of common stock which vested
immediately valued at $23,000 according to the terms of an
employment agreement.
On June 19, 2015,
the Company issued 642,330 shares of common stock in conversion of
600 shares of Series C Preferred stock and $2,963 of related Series
C dividends.
On July 15, 2015,
the Company issued 100,000 shares of common stock which vested 60
days after their grant date of May 15, 2015 valued at $9,800
according to the terms of a service agreement.
On December 31,
2015, the Company issued 594,168 shares of common stock in
conversion of 546 shares of Series C Preferred stock and $3,372 of
related Series C dividends.
During the year
ended December 31, 2015, an aggregate of 333,334 common shares were
issued upon the vesting of previously granted stock awards and the
Company recorded a net reversal of $4,187 of stock-based
compensation related to the amortization of stock awards to
employees and nonemployees net of reversal of the unvested portion
of forfeited awards.
During the year
ended December 31, 2015, an aggregate of 666,600 shares of fully
vested common stock under previously issued under stock awards and
was returned and cancelled. The share cancellation was recognized
at par value.
On March 31, 2016
the Company issued 1,098,904 shares of common stock in conversion
of 1,000 shares of Series C Preferred stock and $6,924 of related
dividends.
On October 26,
2016, the Company issued 1,150,000 shares of common stock valued at
$57,500 to employees. During the year ended December 31, 2016, an
aggregate of 499,967 common shares were issued upon the vesting of
previously granted stock awards and the Company recorded a net
reversal of $2,220 of stock-based compensation related to the
amortization of stock awards to employees and nonemployees net of
reversal of the unvested portion of forfeited awards.
On
October 26, 2016, the Company agreed to grant three tranches of
shares of common stock, 250,000, 250,000, and 250,000 to a sales
consultant which are to be earned upon meeting specific performance
measures agreed upon. The measures include achieving three specific
sales targets per month for 3 consecutive months. The first one of
these was earned January 31
st
, 2017, and 250,000
shares were granted in March 2017.
During the year
ended December 31, 2016, an aggregate of 166,667 shares of fully
vested common stock under previously issued stock awards was
returned and cancelled. The share cancellation was recognized at
par value.
WARRANTS
At December 31,
2016, there were 67,246,300 warrants outstanding with a weighted
average exercise price of $0.12. At December 31, 2015, there were
9,736,844 warrants outstanding with a weighted average exercise
price of $0.19.
A summary of the
status of the warrants granted at December 31, 2016 and 2015 and
changes during the years then ended is presented
below:
For the Year Ended December 31, 2016
|
|
|
Weighted Average Exercise Price
|
Outstanding
at beginning of period
|
9,736,844
|
$
0.19
|
Granted
|
60,000,000
|
0.12
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
(2,490,544
)
|
0.60
|
Outstanding
at end of period
|
$
67,246,300
|
$
0.23
|
|
For the Year Ended December 31, 2015
|
|
|
Weighted Average Exercise Price
|
Outstanding
at beginning of period
|
10,936,844
|
$
0.37
|
Granted
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
(800,000
)
|
0.62
|
Expired
|
(400,000
)
|
0.55
|
Outstanding
at end of period
|
9,736,844
|
$
0.19
|
The following table
summarizes the outstanding warrants as of December 31,
2016:
|
|
|
|
|
|
|
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
|
Weighted-Average Exercise Price
|
$
0.06
|
4,500,000
|
2
|
$
0.06
|
4,500,000
|
$
0.06
|
0.08
|
550,000
|
1
|
0.08
|
550,000
|
0.08
|
0.09
|
625,000
|
1
|
0.09
|
625,000
|
0.09
|
0.12
|
60,000,000
|
4
|
0.12
|
12,000,000
|
0.12
|
0.15
|
1,571,300
|
1
|
0.15
|
1,571,300
|
0.15
|
$
0.06 -.15
|
67,246,300
|
4
|
$
0.12
|
19,246,300
|
$
0.12
|
The following table
summarizes the outstanding warrants as of December 31,
2015:
|
|
|
|
|
|
|
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
|
Weighted-Average Exercise Price
|
$
0.06
|
4,500,000
|
3
|
$
0.06
|
4,500,000
|
$
0.06
|
0.08
|
550,000
|
2
|
0.08
|
550,000
|
0.08
|
0.09
|
625,000
|
2
|
0.09
|
625,000
|
0.09
|
0.15
|
1,571,300
|
2
|
0.15
|
1,571,300
|
0.15
|
0.44
|
1,515,544
|
1
|
0.44
|
1,515,544
|
0.44
|
0.60
|
975,000
|
1
|
0.60
|
975,000
|
0.60
|
$
0.06 -.60
|
9,736,844
|
2
|
$
0.19
|
9,736,844
|
$
0.19
|
STOCK
OPTIONS
A summary of the
status of the stock options granted for the years ended December
31, 2016 and 2015, and changes during the period then ended is
presented below:
For the Year Ended December 31, 2016
|
|
|
Weighted Average Exercise Price
|
Outstanding
at beginning of period
|
1,093,500
|
$
0.15
|
Granted
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
1,093,500
|
$
0.23
|
|
|
|
For the Year Ended December 31, 2015
|
|
|
Weighted Average Exercise Price
|
Outstanding
at beginning of period
|
943,500
|
$
0.15
|
Granted
|
150,000
|
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
1,093,500
|
$
0.15
|
(a) On January 1,
2015, the Company granted three tranches of options, 25,000,
25,000, and 100,000 which vest upon meeting specific performance
measures agreed upon. The measures include achieving three specific
sales targets per month for 3 consecutive months. The exercise
price and expiration date of each tranche will be set upon
achieving the targets. As of the date of this filing the
performance measures have not been met. As a result, the exercise
price is undetermined and these options are excluded from the
calculation of weighted average remaining life.
The following table
summarizes the outstanding options as of December 31,
2016:
|
|
|
|
Stock Options Outstanding
|
Stock Options Exercisable
|
|
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
|
Weighted-Average Exercise Price
|
$
0.15
|
943,500
|
1.75
|
$
0.15
|
943,500
|
$
0.15
|
(a
)
|
150,000
|
-
|
-
|
-
|
-
|
$
0.15
|
1,093,500
|
1.63
|
$
0.15
|
943,500
|
$
0.15
|
The following table
summarizes the outstanding options as of December 31,
2015:
|
|
|
|
Stock Options Outstanding
|
Stock Options Exercisable
|
|
|
Weighted-Average Remaining Contract Life
|
Weighted- Average Exercise Price
|
|
Weighted-Average Exercise Price
|
$
0.15
|
943,500
|
1.63
|
$
0.15
|
943,500
|
$
0.15
|
(a
)
|
150,000
|
-
|
-
|
-
|
-
|
$
0.15
|
1,093,500
|
1.63
|
$
0.15
|
943,500
|
$
0.15
|
(a) On January 1,
2015, the Company granted three tranches of options, 25,000,
25,000, and 100,000 which vest upon meeting specific performance
measures agreed upon. The measures include achieving three specific
sales targets per month for 3 consecutive months. The exercise
price and expiration date of each tranche will be set upon
achieving the targets. As of the date of this filing the
performance measures have not been met. As a result, the exercise
price is undetermined and these options are excluded from the
calculation of weighted average remaining life.
NOTE
10 – DERIVATIVE LIABILITIES
During 2016 and
2015, the Company had outstanding common stock warrants that
contained anti-dilution provisions including provisions for the
adjustment of the exercise price if the Company issues common stock
or common stock equivalents at a price less than the exercise
price. In addition, the Company also had outstanding convertible
notes payable to various lenders that were convertible at discounts
ranging from 30% to 50% of the fair market value of the
Company’s common stock.
As of December 31,
2016, the Company did not have a sufficient number of common shares
authorized to fulfill the possible exercise of all outstanding
warrants and the conversion of all outstanding convertible notes
payable. As a result, the Company determined that the warrants and
the embedded beneficial conversion features of the debt instruments
do not qualify for equity classification. Accordingly, the warrants
and conversion options are treated as derivative liabilities and
are carried at fair value. As of December 31, 2016, some of the
outstanding common stock warrants with the anti-dilution provision
remained outstanding.
The Company
estimates the fair value of the derivative warrant liabilities by
using the Black-Scholes Option Pricing Model and the derivative
liabilities related to the conversion features in the outstanding
convertible notes using the Black-Scholes Option Pricing Model
assuming maximum value, a Level 3, input, with the following
assumptions used:
Year
|
|
2016
|
|
2015
|
|
Dividend
yield:
|
|
0%
|
|
0%
|
|
Expected
volatility
|
|
146.67 to
110.19%
|
|
133.81
to 167.50%
|
|
Risk
free
interest
rate
|
|
0.00
to 1.07%
|
|
.13%
to 1.07%
|
|
Expected
life
(years)
|
|
0.00
to 0.56
|
|
0.00
to 1.57
|
|
The following table
sets forth the changes in the fair value of derivative liabilities
for the years ended December 31, 2016 and 2015:
Balance, December 31, 2014
|
$
(1,708
)
|
Derivative
warrants exchanged for debt
|
1,693
|
Loss
on change in fair value of derivative
liabilities
|
(325
)
|
Balance, December 31, 2015
|
(310
)
|
Loss
on change in fair value of derivative
liabilities
|
266
|
Balance, December 31, 2016
|
$
(44
)
|
The aggregate gain
(loss) on derivative liabilities for the years ended December 31,
2016 and December 31, 2015 was $266 and ($295),
respectively.
NOTE
11 – INCOME TAXES
The Company
accounts for income taxes in accordance with ASC Topic No. 740,
“Income Taxes.” This standard requires the Company to
provide a net deferred tax asset or liability equal to the expected
future tax benefit or expense of temporary reporting differences
between book and tax accounting and any available operating loss or
tax credit carry forwards.
A 100% valuation
allowance has been provided for all deferred tax assets, as the
ability of the Company to generate sufficient taxable income in the
future is uncertain.
The unexpired net
operating loss carry forward at December 31, 2016 is approximately
$34,650,000 with various expiration dates between 2018 and 2036 if
not utilized. All tax years starting with 2013 are open for
examination.
Non-current
deferred tax asset:
|
|
|
34%
of Net operating loss carry forwards
|
$
11,781,690
|
$
11,776,321
|
Valuation
allowance
|
(11,781,690
)
|
(11,776,321
)
|
Net
non-current deferred tax asset
|
-
|
-
|
Reconciliations of
the expected federal income tax benefit based on the statutory
income tax rate of 34% to the actual benefit for the years ended
December 31, 2016 and 2015 are listed below.
|
|
|
Expected
federal income tax benefit
|
$
141,354
|
$
450,287
|
Change
in valuation allowance
|
(5,369
)
|
(808,294
)
|
Goodwill
amortization
|
142,386
|
142,386
|
Derivative
gain
|
90
|
(67,524
)
|
Other
|
(1,720
)
|
298,303
|
Stock-based
compensation
|
(276,741
)
|
(15,158
)
|
Income
tax expense (benefit)
|
$
0
|
$
0
|
The Company has no
tax positions at December 31, 2016 and 2015 for which the ultimate
deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility.
The Company
recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. During the
years ended December 31, 2016 and 2015, the Company recognized no
interest and penalties.
NOTE
12 – LEGAL PROCEEDINGS
Ken Link v. Wound Management Technologies,
Inc., et al.
On November 14, 2011, Ken Link instituted
litigation against Wound Management Technologies, Inc. and Scott A.
Haire in the District Court of Tarrant County Texas, Cause No.
342-256486-11 of the 342nd Judicial District, alleging default
under the terms of a certain promissory note executed by Wound
Management Technologies, Inc. and guaranteed by Scott A. Haire. Ken
Link asserted at that point in time that the unpaid balance of the
note, including accrued interest as of December 4, 2011 was the sum
of $355,292, Mr. Link asserted that he was entitled to receive
200,000 shares of the Company’s common stock. Mr. Link is
also seeking attorney’s fees. Mr. Link is also seeking
interest at 13% per annum, plus $1,000 per day. We have disputed
the claim, because we believe the contract is tainted by usury, and
therefore, a usury counterclaim will more than offset the unpaid
balance of the promissory note.
The note, in the
original principal amount of $223,500, required the payment of
interest accrued at 13% per annum, an additional one-time charge of
$20,000 due on maturity, the issuance of 200,000 shares of stock as
interest, and a $1,000 per day late fee for each day the principal
and interest is late. It is our contention that these sums make the
contract usurious and the usury claims more than offset the amount
of the unpaid indebtedness. Furthermore, we have filed an action
for recovery of damages for usury under the Texas Finance Code for
a note which was previously executed by the Company and payable to
Ken Link, which was in fact paid to Mr. Link in full. In addition,
Wound Management is seeking recovery of attorney’s fees
pursuant to the usury provisions of the Texas Finance Code. While
the amount of the promissory note remains unpaid, the counterclaims
more than offset the maximum amount that could be asserted on the
promissory note. The case was set for trial for the week of October
21, 2013, but after three (3) days of trial before a jury, the
judge declared a mistrial. The case was subsequently reset for
trial for the week of December 1, 2014 and the judge again declared
a mistrial. The case is currently set for trial the week of May 15,
2017. Subsequent to October 21, 2013, Ken Link amended his
pleadings and alleges that Wound Management Technologies, Inc.
never intended to pay the $223,500 promissory note and sought
damages for fraud and the loss of the benefit of the bargain
relating to the shares of stock, plus interest as set forth in the
note, exemplary damages, and attorney's fees. On September 4, 2015,
Ken Link again amended his pleadings once again seeking the sums he
says are owed to him that were advanced to him in the amount of
$223,500. It is unclear if he is suing on the note or not, but it
appears he is. We are taking steps to vigorously defend this
matter, however, we are unable at this time to determine the
ultimate outcome of this matter or determine the effect it may have
on our business, financial condition or result of
operations.
Wound Management Technologies, Inc. v. Fox Lake
Animal Hospital, PSP:
Wound Management Technologies, Inc.
instituted litigation in Cause No. 96-263918-13 in the 96th
District Court of Tarrant County, Texas against Fox Lake Animal
Hospital, PSP and Bohdan Rudawksi, Trustee of the Fox Lake Animal
Hospital, PSP. The cause of action asserts that the loan
transaction between Wound Management Technologies, Inc. and Fox
Lake Animal Hospital PSP involved the collection of illegal
usurious interest for the reason that while the face amount of the
promissory note is $39,000, but the loan actually loaned for a
6-month period was $25,000, resulting in an interest rate in excess
of the maximum rate permitted by the Texas Finance Code. Wound
Management Technologies, Inc. is seeking to recover the penalties
authorized by the Texas Finance Code, together with the
attorney’s fees. Fox Lake Animal Hospital and Bohdan
Rudawski, Trustee have filed a counterclaim where they allege there
were misrepresentations by Wound Management Technologies, Inc. that
would be excuse them from having to pay penalties under the Texas
Finance Code for charging usurious interest. Fox Lake Animal
Hospital and Bohdan Rudawski, Trustee further claim that actions
asserted violates the Federal Securities Exchange Act and alleged
fraud and fraud in the inducement in entering into the promissory
note. In the opinion of counsel, the counterclaim is without merit.
Wound Management Technologies, Inc. will pursue this case to final
judgment.
Wound Management Technologies, Inc. v. Bohdan
Rudawski:
Wound Management Technologies, Inc. instituted
litigation in Cause No. 352-263856-13 in the 352nd District Court
of Tarrant County, Texas against Bohdan Rudawksi. The case has been
postponed until September of 2016. The cause of action asserts that
the loan transaction between Wound Management Technologies, Inc.
and Bohdan Rudawski involved the collection of illegal usurious
interest for the reason that while the face amount of the
promissory note is $156,000, but the loan actually loaned for a
6-month period was $100,000, charging an effective interest rate of
over 100% which violates the provisions of the Texas Finance Code.
Wound Management Technologies, Inc. is seeking to recover the
penalties authorized by the Texas Finance Code, together with the
attorney’s fees. Bohdan Rudawski has filed an answer and
alleges there was not an absolute obligation to repay the note,
attempting to defeat the usury claim. Bohdan Rudawski has further
asserted that the claims violate the Federal Securities Exchange
Act and allege fraud of inducement in entering into the promissory
note. In the opinion of counsel, that counter-claim is without
merit. Wound Management Technologies, Inc. will pursue this case to
final judgment.
The 352nd Judicial
District Court entered an order in December, 2016 consolidating the
Bohdan Rudawski case and the Fox Lake Animal Hospital case into the
352nd Court case. This case is currently set for trial for the week
of June 19, 2017.
Wound Management Technologies, Inc. v. Bohdan
Rudawski:
Wound Management Technologies, Inc. instituted
litigation in Cause No. 352-263856-13 in the 352nd District Court
of Tarrant County, Texas against Bohdan Rudawksi. The case has been
postponed until September of 2016. The cause of action asserts that
the loan transaction between Wound Management Technologies, Inc.
and Bohdan Rudawski involved the collection of illegal usurious
interest for the reason that while the face amount of the
promissory note is $156,000.00, but the loan actually loaned for a
6 month period was $100,000.00, charging an effective interest rate
of over 100% which violates the provisions of the Texas Finance
Code. Wound Management Technologies, Inc. is seeking to recover the
penalties authorized by the Texas Finance Code, together with the
attorney’s fees. Bohdan Rudawski has filed an answer and
alleges there was not an absolute obligation to repay the note,
attempting to defeat the usury claim. In the opinion of counsel,
that claim is without merit. Wound Management Technologies, Inc.
will pursue this case to final judgment.
NOTE
13 – CAPITAL LEASE OBLIGATION
In December 2014,
the Company entered into a Capital Lease agreement for the purchase
of a phone system. The agreement required a down payment of $2,105
and 36 monthly payments of $375. The Company recorded an asset of
$13,512 and a capital lease obligation of $13,512. Aggregate
payments under the capital lease were $4,733 and $4,504 during 2016
and 2015, respectively. At December 31, 2016, a total lease
liability of $3,766 remained which will be due in full during
2017.
NOTE
14 -- SUBSEQUENT EVENTS
In accordance with
applicable accounting standards for the disclosure of events that
occur after the balance sheet date but before the financial
statements are issued, all significant events or transactions that
occurred after December 31, 2017, are outlined below:
On March 9, 2017,
the Company issued 150,000 shares of common stock to each of the
Company’s four Board Directors, (a total of 600,000 shares
valued at $42,000).
On March 10, 2017,
the Company issued 250,000 shares of common stock valued at $17,500
to a contract consultant upon achievement of specified revenue
targets which occurred January, 31, 2017.
On March 10, 2017,
the Company issued 715 shares of Series C preferred stock in
exchange for cash in the amount of $50,050.