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EX-32.1 - CERTIFICATION - WOUND MANAGEMENT TECHNOLOGIES, INC.wndm_ex321.htm
EX-31.2 - CERTIFICATION - WOUND MANAGEMENT TECHNOLOGIES, INC.wndm_ex312.htm
EX-32.2 - CERTIFICATION - WOUND MANAGEMENT TECHNOLOGIES, INC.wndm_ex322.htm
EX-31.1 - CERTIFICATION - WOUND MANAGEMENT TECHNOLOGIES, INC.wndm_ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2015

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) No.)
 
(I.R.S. Employer Identification
        
16633 Dallas Parkway, Suite 250, Addison, Texas 75001
(Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code: (972) 218-0935

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  [X] 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  [X] 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.
[X] 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).
[X] 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.  [ ]

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 
o
Accelerated filer 
o
Non-accelerated filer 
o
Smaller reporting company    x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015 based on the $0.09 closing price as of such date was approximately $9,652,252.   As of April 14, 2016, 108,373,720 shares of the Issuer’s $.001 par value common stock were issued and 108,369,631 were outstanding.

 
 

 

WOUND MANAGEMENT TECHNOLOGIES, INC.
Form 10-K
For the Year Ended December 31, 2015
 
    Page
     
  Letter from the President 1
     
ITEM 1.
BUSINESS 1
2
     
ITEM 1A.
RISK FACTORS
4
     
ITEM 1B.
UNRESOLVED STAFF COMMENTS
10
     
ITEM 2.
DESCRIPTION OF PROPERTY
10
     
ITEM 3.
LEGAL PROCEEDINGS
10
     
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 12
14
     
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
 
   
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
16
 
   
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
17
 
   
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
18
     
ITEM 9A.
CONTROLS AND PROCEDURES
18
     
ITEM 9B.
OTHER INFORMATION
18
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
18
     
ITEM 11.
EXECUTIVE COMPENSATION
22
     
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
24
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
26
     
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
27
     
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
28
 
 
 

 
 
LETTER FROM THE PRESIDENT

Dear Shareholders:

As we look ahead into 2016, we’d like to reflect on our accomplishments of this past year.  Our distributor and rep base has continued to solidify and expand.  By year end we hired four direct Regional Sales Managers to help support and grow accounts in the surgical and wound care markets.

We have built a strong foundation from which we will continue to grow.  The Company remains on a growth trajectory that is being fueled by the advancement of our CellerateRX® products in the hospital and out patient wound care markets.  We have streamlined our operations and attracted great talent to the Company to help us execute on sales.

The global wound care market is expected to reach $18 billion by 2019.  The diabetic and obese populations are big drivers to this increase as well as the aging population.  Although the United States dominates the wound care market, there are increases in market size in the rest of the world driven by the same factors.  CellerateRX® Activated Collagen® has proved to provide an economic and efficient solution to healing wounds. It is now registered and being sold in several countries and is in the process of being registered in others.

Our expanded salesforce is having increased success with our surgical product line, supported by champions from a variety of surgeons in specialties including trauma, orthopedic, neurology, colorectal, vascular, plastic surgery and general surgery.  We continue to add to our numerous case studies and testimonials that show how CellerateRX has closed wounds and how it has been able to save limbs.

In addition to growing sales based on our CellerateRX® product line, we have added additional revenue based on our “resorbable bone wax” patent that the Company acquired in 2009. In 2014 our Resorbable Orthopedic Products subsidiary began collecting royalties on a commercial license for a bone void filler product based on this patent.  In February 2016 we received FDA 510(k) clearance for a new product, HemaQuell™, a resorbable bone wax product that is a tamponade to control bleeding from bones during surgery, resorbing within two to seven days. We are now working with key opinion leaders to schedule first cases using HemaQuell and our sales team will commercialize HemaQuell in 2016.

With all of that said, we are extremely pleased to report another year of growth with 28% revenue growth year over year.  We expect the momentum to continue into 2016 as we focus our efforts and our sales team continues to expand and grow.  Our focus is solidly on sales and growth.
 

 
Deborah J. Hutchinson
   
 
President 
 
 
1

 

PART I

Item 1.   BUSINESS
 
Background
 
Wound Management Technologies, Inc. (“WMT” or the “Company”) was organized on December 14, 2001, as a Texas corporation under the name eAppliance Innovations, Inc.  In June of 2002, MB Software Corporation, a public corporation formed under the laws of Colorado, merged with the Company (which at the time was a wholly owned subsidiary of MB Software Corporation), and the Company changed its name to MB Software Corporation as part of the merger.  In May of 2008, the Company changed its name to Wound Management Technologies, Inc.
 
Wound Care Innovations, LLC (“WCI”), a wholly-owned subsidiary of the Company, is a rapidly growing provider of the patented CellerateRX® product in the wound care market, which is quickly expanding, particularly with respect to diabetic wound applications.  As a result of aging populations and the increase of diabetes around the globe, treatment of wounds in diabetic patients is one of the most serious issues faced in healthcare today. In 2012 WCI expanded its CellerateRX product line to include CellerateRX Surgical products and the company believes that this line will be a key factor in our growth.
 
Product, Patent, License and Royalty Agreements
 
CellerateRX is cleared by the FDA as a medical device for use on all acute and chronic wounds, except third degree burns, and is ready for distribution in both gel and powder form.  Manufacturing of these products is conducted by Applied Nutritionals, LLC (“Applied Nutritionals”), which owns the CellerateRX trademark.  WMT has incurred no research and development costs related to CellerateRX during the last two fiscal years.  As of September of 2015. Warehousing, shipping, and physical inventory management were brought back in-house  to the corporate office located in Addison, TX and Pac-Soucee, LLC of Rochester, NY and no longer  outsourced to Farris Laboratories, Inc. of Fort Worth, TX and WellDyne Health, LLC.
 
Effective November 28, 2007, we entered into separate exclusive license agreements with both Applied Nutritionals and its founder George Petito, pursuant to which WCI obtained the exclusive worldwide license to certain patented technologies and processes related to CellerateRX.  WCI had been marketing and selling CellerateRX during the previous four years under the terms of a distribution agreement with Applied Nutritionals that was terminated in 2005.  The new licenses are limited to the human health care market 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 extends through the life of the licensed patent which expires in 2018.
 
In consideration for the licenses, WCI agreed to pay Applied Nutritionals and Mr. Petito the following royalties, beginning January 3, 2008 (amounts listed are the aggregate of amounts paid/owed to Applied Nutritionals and Mr. Petito): (a) an advance royalty of $100,000; (b) a royalty of fifteen percent (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 three percent (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 payments made do not meet or exceed that amount.
 
Product marketing, sales and distribution
 
CellerateRX is available without a prescription and the wound care products are currently approved for reimbursement under Medicare Part B.  The diabetic care and long term care markets, as well as the professional medical markets, are a major focus of our marketing efforts due to the prevalence of diabetic and pressure ulcers. We believe that these products are unique in composition, applicability and clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. In 2012 the company added the CellerateRX Surgical product line to broaden the product line. The unique collagen benefits, biocompatibility with other therapies, low price point, and performance are attracting increased business in hospitals and surgery centers.
 
 
2

 
 
CellerateRX wound care and surgical products are sold via independent distributors, distributor organizations, healthcare distributors, representatives and through inside sales activities.  The surgical products are sold through a growing network of surgical product distributors who are credentialed to demonstrate the products in surgical settings.  WCI has increased its presence at wound care, podiatry and surgical trade shows and meetings throughout the country.
 
In September 2013 the Company entered into a Shipping and Consulting Agreement with WellDyne Health, LLC, (“WellDyne”) under which all CellerateRX orders are taken by and fulfilled by WellDyne. In addition, WellDyne provides guidance and advice for the sale and marketing of CellerateRX products and programs. On June 4, 2015, the Company delivered written notice to WellDyne, terminating the Agreement pursuant to Section Five thereof, such termination to be effective as of September 19, 2015. The termination of this agreement contributed to the bottom line of the company beginning the fourth quarter of 2015 and will continue to affect all preceding months materially.
 
WCI continues to work with international parties to expand the distribution of CellerateRX outside of the US. In 2013 WCI engaged a new distributor to market the products in several countries in the Middle East, and received registration and an initial order for Saudi Arabia.  CellerateRX is also registered in South Africa and in 2014 registration was achieved in Nigeria and in Mexico.  Registration efforts have continued for a CE mark and in February 2014 the company agreed to work with new parties on achieving this.
 
Staffing
 
As of April 14, 2016, the Company and its subsidiaries have a staff of 10, with 9 full-time employees, 1 part-time employee and 2 contractors.
 
Competition
 
The wound care market is served by a number of large, multi-product line companies offering a suite of products to the market.  CellerateRX products compete with all primary dressings, some prescription drug therapies and other medical devices.  Manufacturers and distributors of competitive products include: Smith & Nephew, Systagenix, Healthpoint, Medline, Integra and Biocore.  Many of our competitors are significantly larger than we are and have more financial and personnel resources than we do.  Consequently, we will be at a competitive disadvantage in marketing and selling our products in the marketplace.  We believe, however, that the patented molecular form of collagen used in CellerateRX allows our products to outperform currently available non-active dressings, reduce the cost of wound management, and replace a variety of other products with a single primary dressing.
 
New products, markets and Services
 
In September 2009 the Company acquired a patent (7,074,425) from Resorbable Orthopedics, LLC, (“ROP”) for a resorbable bone wax and delivery system for orthopedic bone void fillers (see Note 9 “Intangible Assets”) and established the Resorbable Orthopedic Products, LLC subsidiary. The patent offers innovative, safe and effective resorbable orthopedic products that are complementary to the already existing CellerateRX products.  The bone wax and delivery system address issues such as bone wax granuloma and the cost-effective delivery of materials that manage bone wound healing.  The resorbable orthopedic products covered by the patent are (a) a resorbable orthopedic hemostat (resorbable bone wax) used to stop blood flow, (b) a delivery system for osteogenic/osteoinductive orthopedic products (bone void fillers), and (c) the formula as a delivery system for bone growth factors.
 
The Company received 510(k) approval for the resorbable orthopedic hemostat in February 2016. We are in the process of preparing for a market launch in 2016. The company is also exploring a relationship with an international distributor to market this product outside the US and to obtain CE approval for the product.
 
On November 8, 2011 ROP executed a development and license agreement with BioStructures, LLC.  The agreement licensed certain bone wax rights to BioStructures, LLC to develop products in the field of bone remodeling, based on Resorbable’s patent number 7,074,425 (see Note 9 “Intangible Assets”) for use in the human skeletal system.  The license agreement with BioStructures, LLC excludes the fields of (1) a resorbable hemostat (resorbable bone wax), (2) a resorbable orthopedic hemostat (bone wax) and antimicrobial dressing, and (3) veterinary orthopedic applications.  According to the terms of the agreement, BioStructures, LLC paid an initial fee of $100,000 for a 24 month period in which to develop royalty bearing products based on the Company’s patent.   The agreement entitles the Company to additional fees upon the regulatory clearance of the products, fees for a commercial license for each regulatory cleared product, and a 3% royalty on related product sales over the life of the patent, which expires in 2023.
 
 
3

 

In January 2014, BioStructures received 510(K) approval (K132071) for their first product under the ROP license, an innovative bioactive bone graft putty and bone graft extender and paid ROP the regulatory milestone fee of $50,000.  In February 2014, ROP granted a commercial license to BioStructures according to the terms of the development and license agreement, and accordingly BioStructures paid ROP a $100,000 fee and in December 2014 BioStructures paid the minimum 2014 royalty of $102,000. In November of 2015 Bioventus acquired BioStructures interests and negotiated down the royalty percentage to be paid from 3% to 1.5% for 2016, 2017 and then from 3% to 2% for product royalty on sales of these products over the life of the patent with certain minimums to remain constant. In March 2016, Bioventus paid the minimum 2015 royalty of $201,000 to ROP.

Available Information

The Company electronically files reports with the Securities and Exchange Commission (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.wmgtech.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.
 
We expect to incur losses in the future and may not achieve or maintain profitability
 
We have incurred net losses since we began our current operations in 2004.  (see “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations”).  We expect to make significant investments in our sales and marketing programs resulting in a substantial increase in our operating expenses.  Consequently, we will need to generate significant additional revenue to achieve and maintain profitability in the future.  We may not be able to generate sufficient revenue from sales of our products to become profitable.  Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis.  In addition to funding operations through increased revenue, we anticipate that we will need to raise additional capital before reaching profitability.  We cannot predict when we will operate profitably, if at all.  If we fail to achieve or maintain profitability, our stock price may decline.
 
We have a limited operating history with which you can evaluate our current business model and prospects
 
We acquired WCI in August of 2004, and we have not been profitable to date.  Although we have seen our sales increase since the acquisition, we cannot predict if or when we may become profitable.  Even if we become profitable in the future, we cannot accurately predict the level of or our ability to sustain profitability.  Because we have not yet been profitable and cannot predict any level of future profitability, you bear the risk of a complete loss of your investment in the event our business plan is unsuccessful.
 
·
Because our products are still at a relatively early stage of commercialization, it is difficult for us to forecast the full level of market acceptance that our solution will attain;
 
 
4

 
 
·
Competitors may develop products that render our products obsolete or noncompetitive or that shorten the life cycles of our products. Although we have had initial success, the market may not continue to accept our wound care products;
 
·
We may not be able to attract and retain a broad customer base; and
 
·
We may not be able to negotiate and maintain favorable strategic relationships.
 
Failure to successfully manage these risks could harm our business and cause our stock price to fall.  Furthermore, to remain competitive, we will need to add to our current product line, and we may not succeed in creating and marketing new products.  A decline in demand for or in the average price of our wound care products would have a direct negative effect on our business and could cause our stock price to fall.

WCI products are manufactured only by Applied Nutritionals
 
Applied Nutritionals holds the patent to, and is currently the sole source of the WCI products we offer for sale (the “WCI Products”), which WCI Products make up a substantial portion of our business.  Our growth and ability to meet customer demands depends in part on our ability to obtain timely deliveries of the WCI Products from our manufacturer.  We may in the future experience a shortage of the WCI Products as a result of manufacturing process issues or capacity problems at our supplier or strong demand for the ingredients constituting WCI Products.
 
If shortages or delays persist, the cost to manufacture the WCI Products may increase or the WCI Products may not be available at all.  We may also encounter shortages if we do not accurately anticipate our needs.  We may not be able to secure enough WCI Products at reasonable prices or of acceptable quality to meet our or our customer’s needs.  Accordingly, our revenues could suffer and our costs could increase until other sources can be developed.  There can be no assurance that we will not encounter these problems in the future.
 
The fact that we do not own our manufacturing facilities could have an adverse impact on the supply of the WCI Products and on operating results.  In the event that Applied Nutritionals is not able to fulfill orders for WCI Products, we may temporarily be prevented from marketing and selling the WCI Products until we are able to locate a substitute manufacturer.
 
The patent on the CellerateRX products expires in 2018.
 
CellerateRx products currently benefit from the protection of a patent that will expire in 2018. Upon expiration of the patent, such products may become subject to increased competition resulting from the marketing of generic products, and the Company’s performance may suffer as a result.
 
The markets in which we compete are intensely competitive, which could adversely affect our revenue growth
 
The market for wound care products is intensely competitive among a vast array of medical devices, drugs and therapies.  Many of our existing and potential competitors have better brand recognition, longer operating histories and larger customer bases. These competitors are very well capitalized and will continue to compete aggressively.
 
Most companies providing wound care products are able to offer customers multiple products.  By doing so, they effectively offset the cost of customer acquisition and support across several revenue sources.  In 2012 the Company began to broaden our market with the addition of a surgical product line.  In 2014 the surgical product line saw increased sales and the Company is hopeful that it will continue to grow to strengthen our ability to succeed. While the Company got its ROP product line underway in 2013 it received royalties from its sales in 2014.  The Company plans to market and/or license more ROP products in 2015.
 
Further, although our wound care products have performed well in customer evaluations, we are a relatively unknown entity with a relatively unknown brand in a market significantly controlled by companies with a much larger customer base.  We may not, even with strong customer accounts, be able to establish the credibility necessary to secure large national customers.
 
Product liability exposure
 
 
5

 
 
Although we have contractual indemnity from the manufacturer of CellerateRX for liability claims related to the products, there is risk of exposure in the event that the use of any other product we sell in the future results in injury.  We do not have, and do not anticipate obtaining, contractual indemnification from parties supplying raw materials or marketing the products we sell.  In any event, such indemnification, if obtained, would be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party.  In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial condition.
 
Federal regulations and changes in reimbursement policies
 
Healthcare services are heavily reliant upon health insurance reimbursement.  Although many current insurance plans place much of the financial risk on providers of care (allowing them to choose whatever products/therapies are most cost effective) under prospective payment structures, much of our business is related to Medicare-eligible populations.  Although our wound care products are currently eligible for reimbursement under Medicare Part B, adjustments to our reimbursement amounts or a change in Medicare’s reimbursement policies could have an adverse effect on our ability to pursue market opportunities in this area.
 
If we cannot meet our future capital requirements, our business will suffer
 
We may need additional financing to continue operating our business.  We may need to raise additional funds in the future through public or private debt or equity financings in order to:
 
·
fund operating losses;
 
·
increase sales and marketing to address the market for wound care, surgical and ROP products;
 
·
take advantage of opportunities, including more rapid expansion or acquisitions of complementary products or businesses;
 
·
hire, train and retain employees;
 
·
develop new products; and/or
 
·
respond to economic and competitive pressures.
 
If our capital needs are met through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced.  Our future success may be determined in large part by our ability to obtain additional financing, and we can give no assurance that we will be successful in obtaining adequate financing on favorable terms, if at all.  If adequate funds are not available, or are not available on acceptable terms, our operating results and financial condition may suffer.
 
Our operating results may fluctuate
 
We are an emerging company.  As such, our quarterly revenue and results of operations are difficult to predict. We have experienced fluctuations in revenue and operating results from quarter to quarter and anticipate that these fluctuations will continue until the Company reaches critical mass and the market becomes more stable.  These fluctuations are due to a variety of factors, some of which are outside of our control, including:
 
·
the fact that we are a relatively young company;
 
·
our ability to attract new customers and retain existing customers;
 
·
the length and variability of our sales cycle, which makes it difficult to forecast the quarter in which our sales will occur;
 
·
the amount and timing of operating expense relating to the expansion of our business and operations;
 
 
6

 
 
·
the development of new wound care products or product enhancements by us or our competitors;
 
·
actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our financial statements; and
 
·
how well we execute our strategy and operating plans.
 
As a consequence, operating results for a particular future period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations and financial condition.
 
Our revenues for a particular period are difficult to predict; a shortfall in revenues may harm our operating results
 
As a result of a variety of factors discussed in this report, our revenues for a particular quarter are difficult to predict.  Our net sales may grow at a slower rate than we anticipate, or may decline.  We plan our operating expense levels based primarily on forecasted revenue levels.  These expenses and the impact of long-term commitments are relatively fixed in the short term.  A shortfall in revenue could lead to operating results being below expectations as we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
 
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 weaken, our revenues and gross margins could be adversely affected.  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 revenues and gross margins.
 
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:
 
·
in some instances, we compete with some of our resellers through our direct sales, which may lead these channel partners to use other suppliers that do not directly sell their own products; also
 
·
some of our resellers may have insufficient financial resources and may not be able to withstand changes in business conditions.
 
Our proprietary rights may prove difficult to enforce
 
We rely on patents, copyrights, trademarks and trade secret laws to establish and maintain proprietary rights in our technology and products.  Our exclusive license agreement for our collagen based CellerateRX products specifically limits our exclusive rights to the worldwide human healthcare market and specifically excludes the veterinary, nutritional and injectibles markets.  There can be no assurance that our other proprietary rights will not be challenged, invalidated or circumvented or that our rights will in fact provide competitive advantages to us.  In addition, the laws of some foreign countries may not protect our proprietary rights as well as the laws of the United States.  The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States.  If we are unable to protect our proprietary rights (including aspects of products protected other than by patent rights) in a market, we may find ourselves at a competitive disadvantage to others who need not incur the substantial expense, time and effort required to create the innovative products necessary to be successful.
 
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 claims assertions, particularly in the United States.  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, operating results and financial condition could be materially and adversely affected.
 
 
7

 
 
Failure to retain and recruit key personnel would harm our ability to meet key objectives
 
Our success will depend in large part on our ability to attract and retain skilled executive, managerial, sales and marketing personnel.  Competition for these personnel is intense in the market today.  Volatility or lack of positive performance in our stock price may also adversely affect our ability to attract and retain key employees.  The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring required personnel, particularly executive management and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions.
 
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.
 
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 officers and board members 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 management 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 and other corporate transactions.  This concentration of control could be disadvantageous to other stockholders with interests different from those of our officers, directors, and principal stockholders; e.g., our officers and principal stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders.  In addition, 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.
 
Additionally, our Series B, Series C, and Series D Preferred Stock votes with the common stock on an as converted basis of 1,000 shares of common stock to 1 share of preferred stock.  This means each preferred share exercises substantially greater voting power than each share of common stock.
 
Our Articles and Bylaws may delay or prevent a potential takeover of the company
 
Our Articles of Incorporation, as amended, and Bylaws, as amended, 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.  The Bylaws limit when shareholders may call a special meeting of shareholders.  The Articles also allow the Board of Directors to fill vacancies, including newly created directorships.
 
 
8

 
 
Volatility of our stock price
 
Our operating results have varied on a quarterly basis during our operating history, and we expect to experience significant fluctuations in future quarterly operating results. These fluctuations have been and may in the future be caused by numerous factors, many of which are outside of our control. We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and that you should not rely upon them as an indication of future performance. Also, it is likely that our operating results could be below the expectations of public market analysts and investors. This could adversely affect the market price of our common stock.
 
In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many small companies, in particular, and that have often been unrelated to the operating performance of these companies.  These factors, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future.
 
Liquidity of our Common Stock
 
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 an active and liquid public market for the shares of the common stock will continue in the future.    In addition, future sales of large amounts of common stock could adversely affect the market price of our common stock and 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.  These factors could also have a negative impact on the liquidity of our common stock and our ability to raise funds through future stock offerings.
 
No Dividend payments
 
We have not paid and do not currently intend to pay dividends, which may limit the current return you may receive on your investment in our common stock.   Future dividends on our common stock, if any, will depend on our future earnings, capital requirements, financial condition and other factors. We currently intend to retain earnings, if any, to increase our net worth and reserves. Therefore, we do not anticipate that any holder of common stock will receive any cash, stock or other dividends on our shares of common stock at any time in the near future.  You should not expect or rely on the potential payment of dividends as a source of current income.
 
“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, as 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 for 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 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 make a special written determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions 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.
 
 
9

 
 
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, monthly statements have to be sent 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 required 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 for our securities may decrease, with a corresponding decrease in the price of our securities. 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 securities.

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”, 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
 
As a smaller reporting company, we are not required to provide this information.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
The Company's corporate office is located at 16633 Dallas Parkway, Suite 250, Addison, TX 75001.  The lease was entered into after the expiration of the Company’s old lease with Keystone Exploration, LTD in November of 2013.  The lease expires on April 30, 2017 and requires base rent payment of $5,736.79 per month for months 1-17, $5,865.71 for months 18-29, and $5,994.63 for months 30-41.
 
ITEM 3. 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 June 6, 2016.  Subsequent to October 21, 2013, Ken Link amended his pleadings and alleges that Wound Management Technologies, Inc. never intended to pay the $223,500.00 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 $223,500.00. 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.
 
 
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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 case has been postponed until September of 2016.  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 $39,000.00, but the loan actually loaned for a 6 month period was $25,000.00, 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 Rudwaski, 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 $156,000.00, 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.

Beeleve, LLC. v. Wound Management Technologies, Inc.  Beeleve, LLC instituted litigation against Wound Management Technologies, Inc. in Cause DC-14-13541 of the 95th District Court of Dallas County, Texas, on one certain promissory note. That matter has been resolved to the satisfactory of Wound Management Technologies, Inc. and an Agreed Order of Dismissal with prejudice has been entered.

ITEM 4.  MINE SAFETY DISCLOSURES
 
This item is not applicable.

 
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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
 
2015
March 31, 2015
  $ 0.060     $ 0.060  
 
June 30, 2015
  $ 0.090     $ 0.090  
 
September 30, 2015
  $ 0.070     $ 0.060  
 
December 31, 2015
  $ 0.090     $ 0.070  
2014
March 31, 2014
  $ 0.139     $ 0.099  
 
June 30, 2014
  $ 0.125     $ 0.010  
 
September 30, 2014
  $ 0.106     $ 0.072  
 
December 31, 2014
  $ 0.090     $ 0.055  

Record Holders
 
As of December 31, 2015, there were 2,142 shareholders of record holding shares of common stock issued, of which a total of 4,089 shares are held as treasury stock.  As of December 31, 2015 there were 107,274,816 shares of common stock issued and 107,270,727 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 are 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 the operation and expansion of our business.
 
Tabular Disclosure of Equity Compensation Plans
 
None.
 
Recent Sales of Unregistered Securities
 
Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the previous 2 years ended December 31, 2015 not previously disclosed.  The securities bear a restrictive legend and no advertising or public solicitation was involved.
 
 
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During the year ended December 31, 2014, the Company issued an aggregate of 32,179 shares of Series C preferred stock for cash proceeds of $2,252,510.

In February of 2014, the Company issued 350 shares of Series D preferred stock to a nonemployee for services rendered.  The shares vest immediately and were recorded at their fair value of $42,000

In July of 2014, the Company issued 750 shares of Series D preferred stock valued at $75,000 to a nonemployee for services rendered.  The shares vest immediately and were recorded at their fair value of $75,000.

In September, 2014 the Company granted 556 shares of Series D preferred stock valued at $50,040 to a contractor according to the terms of his service agreement. In December, 2014, the contractor returned 111 shares of Series D preferred stock in exchange for cash amount of $9,990. The remaining Series D shares were not yet issued as of the date of this filing.

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.

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 year ended December 31, 2014, $65,178 was expensed and $54,822 remains to be expensed over the remaining vesting period.  The Series D shares were not yet issued as of the date of this filing.

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.

In January of 2014, the Company issued 1,087,762 common shares for the conversion of notes payable and accrued interest in the amounts of $90,000 and $3,728, respectively.

During the year ended December 31, 2014, the Company issued 500,000 shares of common stock valued at $60,000 to company directors and 1,650,000 shares of common stock for services valued at $162,550.

On March 5, 2015, the Company granted 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 twelve months ended December 31, 2015.

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 granted 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 awarded 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.

During twelve months ended December 31, 2015, the Company recorded an aggregate reversal of $10,456 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 twelve months ended December 31, 2015, the Company issued an aggregate of 333,334 shares of fully vested common stock under previously granted stock awards.
 
 
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On December 29, 2015, the Company issued 594,168 shares of common stock in conversion of 546 shares of Series C Preferred stock and $3,377 of related Series C dividends.

As further described in the notes accompanying the financial statements filed herewith:

The issuances described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration.  In addition to any noted exemption below, we relied upon Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”).  The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities. The shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions.  We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.

ITEM 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
 
Our primary focus is developing and marketing products for the advanced wound care market, as pursued through our wholly-owned subsidiary, Wound Care Innovations, LLC (“WCI”), which brings a unique mix of products, procedures and expertise to the wound care arena and surgical wounds.  The patented collagen fragments (CRX) of CellerateRX are a fraction of the size of the native collagen molecules and particles found in other products, uniquely delivering the benefits of collagen to the body immediately.

After completing evidence-based studies, WCI has identified opportunities for growth with emphasis on the following areas:
 
·
Brand recognition in the medical community
 
·
Products for surgical wounds
 
·
WCI continues to work with international parties to expand the distribution of CellerateRX outside of the US. In 2013 WCI engaged a new distributor to market the products in several countries in the Middle East, and received registration and an initial order for Saudi Arabia. As of January 2014, the company is working on adding registrations in two more countries in this region.  CellerateRX is also registered in South Africa and in 2014 has received registration with a distribution partner in Nigeria and in Mexico.  Registration efforts have continued for a CE mark and in February 2014 the company agreed to work with new parties on achieving this.
 
In September 2009, the Company acquired a patent for resorbable bone wax and bone void filler products, which offer a solution to the problem of bone wound healing in a cost effective manner.  Our FDA submittal for our new Bone Wax approval by the FDA is in process. In 2011 we executed a development and license agreement with BioStructures, LLC to develop certain products in the field of bone remodeling. In January 2014, BioStructures received 510(K) approval (K132071) for their first product under the ROP license, an innovative bioactive bone graft putty and bone graft extender. In February 2014, ROP granted a Commercial License to BioStructures according to the terms of the development and license agreement.
 
 
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Preparing for the future expanding role of our products, we are studying the feasibility of three other markets where CellerateRX formulas could have great sales potential: dental, dermatology / plastic surgery and sunburn relief. We are committed to the completion of our feasibility studies and plan to launch a product into at least one of these areas in 2014 in conjunction with a strategic partner.

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 United States. 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 which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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, 2015 Compared to Year ended December 31, 2014

Revenues.  The Company generated revenues for the year ended December 31, 2015 of $3,372,188 compared to revenues of $2,632,643 for the year ended December 31, 2014, or a 28% increase in revenues.  The increase in revenues is the result of the Company’s focused sales and marketing strategy.  The Company also received a total of $201,000 from the development and license agreement the Resorbable Orthopedic Products, LLC subsidiary (ROP) executed with BioStructures, LLC in 2011. The 2015 and 2014 revenue from the ROP and Biostructures deal included $201,000 in annual royalties required by the agreement in 2015 and 2014.
 
Cost of goods sold. Cost of goods sold for the year ended December 31, 2015 were $891,971 compared to cost of goods sold of $803,631 for the year ended December 31, 2014, or a 11% increase in cost of goods sold.   In 2015, the Company was better able to control inventory and costs associated with inventory.  Additionally, although the Company’s revenue from product sales increased significantly, the Company did not yet exceed the sales threshold needed to increase the minimum annual royalty of $375,000.
 
General and administrative expenses. (“G&A"). G&A expenses for the year ended December 31, 2015 were $3,385,169 compared to G&A expenses of $3,835,095 for the year ended December 31, 2014, or a 12% decrease in G&A expenses.  In 2015 the Company was successful in controlling general and administrative costs while still growing sales.  The largest component of this savings was due to negotiating and terminating the Shipping and Marketing Agreement with Welldyne in 2015.
 
Interest Expense. Interest expense was $176,892 for the year ended December 31, 2015 compared to $293,896 for the year ended December 31, 2014, or a decrease of 40%.  The Company paid off or converted most of its interest bearing debt into stock in 2013 and the first quarter of 2014.  The debt remaining in 2015 has lower interest rates resulting in an overall decrease in interest expense for the year 2015.
 
Net loss. We had a net loss for the year ended December 31, 2015, of $1,340,454 compared with a net loss of $2,278,177 for the year ended December 31, 2014, or a decrease in loss of 41%.  The Company was able to reduce net loss in 2015 by increasing revenue from product sales and licensing and development agreements.  The Company also significantly reduced general and administrative and interest expenses.

 
15

 
 
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 generated approximately $867,120 for the year ended December 31, 2015, and approximately $2,174,010 for the year ended December 31, 2014.
 
We will need to raise additional capital in fiscal year 2016 to fund our business plan and support our operations. As our prospects for funding, if any, develop during the fiscal year, we will assess our business plan and make adjustments accordingly. The report of our independent auditors with regard to our financial statements for the fiscal year ended December 31, 2015, includes a going concern qualification.  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, requiring us to modify our business plan, curtail various aspects of our operations or cease operations.
 
As of December 31, 2015, we had total current assets of $1,158,670, including cash of $182,337 and inventories of $409,778.  As of December 31, 2014, we had total current assets of $1,210,527, including cash of $523,441 and inventories of $402,530.
 
As of December 31, 2015, we had total current liabilities of $1,459,094 including $614,700 of notes payable and convertible notes payable to unrelated parties. Our current liabilities also include $323,062 of current year royalties payable, which were paid in full during March of 2016.  As of December 31, 2014, we had total current liabilities of $2,315,115 including $1,592,920 of notes payable and convertible notes payable to related and unrelated parties. Our current liabilities also included $324,286 of current year royalties payable.
 
As of December 31, 2015, our current liabilities also included derivative liabilities of $310 compared to derivative liabilities of $1,708 at December 31, 2014. At December 31, 2015, our derivative liabilities consisted of 410,000 outstanding common stock purchase warrants.  At December 31, 2014, our derivative liabilities consisted of 910,000 outstanding common stock purchase warrants and convertible promissory notes, net of unamortized discounts in the amount of $10,494.
 
For the year ended December 31, 2015, net cash used in operating activities was $1,202,890 compared to $1,686,685 in 2014.
 
We used $5,334 in investing activities in the year ended December 31, 2015 compared to $8,447 in the year ended December 31, 2014.
 
For the year ended December 31, 2015, net cash provided by financing activities was $867,120 compared to $2,174,020 in 2014.
 
Off-Balance Sheet Arrangements
 
None.
 
Contractual Commitments
 
Royalty Agreement
 
Pursuant to the agreement with the CellerateRX founder, George Petito, the Company is obligated to pay royalties to Petito and Applied Nutritionals, as described in “Item 1. Product, Patent, License and Royalty Agreement.”  At December 31, 2015 the amount of royalties due but unpaid was $323,062.  The Company paid this amount in full on March 30, 2016.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide this information.
 
 
16

 

 
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
F-1
   
Consolidated Balance Sheets
F-2
   
Consolidated Statements of Operations
F-3
   
Consolidated Statements of Changes in Stockholders’ Deficit.
F-4
   
Consolidated Statements of Cash Flows
F-5
   
Notes to the Consolidated Financial Statements
F-6
 
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Wound Management Technologies, Inc.
Fort Worth, Texas

We have audited the accompanying consolidated balance sheets of Wound Management Technologies, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wound Management Technologies, Inc. and its subsidiaries as of December 31, 2015 and 2014 and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring net losses and has a working capital deficit and an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
April 14, 2016
 
 
F-1

 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
AS OF DECEMBER 31, 2015 AND 2014
 
             
   
December 31, 2015
   
December 31, 2014
 
ASSETS
           
CURRENT ASSETS:
           
   Cash
  $ 182,337     $ 523,441  
   Accounts Receivable, net of allowance for bad debt of $20,388 and $18,462
    251,546       278,261  
   Royalties Receivable
    201,000       -  
   Inventory, net of allowance for obsolescence of $150,135 and $46,007
    409,778       402,530  
   Prepaid and Other Assets
    114,009       6,295  
Total Current Assets
    1,158,670       1,210,527  
                 
LONG-TERM ASSETS:
               
   Property Plant and Equipment, net of accumulated depreciation of $31,477 and $22,477
    41,762       45,428  
   Intangible Assets, net of accumulated depreciation of $318,944 and $267,913
    191,366       242,397  
Total Long-Term Assets
    233,128       287,825  
                 
TOTAL ASSETS
  $ 1,391,798     $ 1,498,352  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
CURRENT LIABILITIES:
               
   Accounts Payable
  $ 222,351     $ 210,266  
   Accounts Payable - Related Parties
    21,099       -  
   Accrued Royalties and Dividends
    323,062       324,286  
   Capital Lease Obligation
    4,504       4,504  
   Accrued Interest
    273,068       181,431  
   Derivative Liabilities
    310       1,708  
   Notes Payable
    444,700       392,920  
   Convertible Notes Payable
    170,000       -  
   Convertible Notes Payable - Related Party, net of unamortized discounts of $0 and $50,837
    -       1,200,000  
Total Current Liabilities
    1,459,094       2,315,115  
                 
LONG-TERM LIABILITIES
               
    Convertible Notes Payable - Related Parties
    1,200,000       -  
    Capital Lease Obligation
    3,973       8,633  
Total Long-Term Liabilities
    1,203,973       8,633  
                 
TOTAL LIABILITIES
    2,663,067       2,323,748  
                 
STOCKHOLDERS' DEFICIT
               
Series A Preferred Stock, $10 par value, 5,000,000 shares authorized; none  issued and outstanding
    -       -  
Series B Convertible Preferred Stock, $10 par value, 7,500 shares authorized; none  issued and outstanding
    -       -  
Series C Convertible Preferred Stock, $10 par value, 100,000 shares authorized; 80,218 issued and outstanding as of December 31, 2015 and 70,411 issued and outstanding as of December 31, 2014
    802,180       704,110  
Series D Convertible Preferred Stock, $10 par value, 25,000 shares authorized; none issued and outstanding
    -       -  
Series E Convertible Preferred Stock, $10 par value, 5,000 shares authorized; none issued and outstanding
    -       -  
Common Stock: $.001 par value; 250,000,000 shares authorized; 107,274,816 issued and 107,270,727 outstanding as of December 31, 2015 and 92,902,320 issued and 92,898,231 outstanding as of December 31, 2014
    107,274       105,447  
   Additional Paid-in Capital
    44,615,321       43,820,636  
   Treasury Stock
    (12,039 )     (12,039 )
   Accumulated Deficit
    (46,784,005 )     (45,443,550 )
Total Stockholders' Deficit
    (1,271,269 )     (825,396 )
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 1,391,798     $ 1,498,352  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-2

 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
 
             
   
2015
   
2014
 
             
REVENUES
  $ 3,372,188     $ 2,632,643  
                 
COST OF GOODS SOLD
    891,970       803,631  
                 
GROSS PROFIT
    2,480,218       1,829,012  
                 
GENERAL AND ADMINISTRATIVE EXPENSES:
               
General and Administrative Expenses
    3,385,168       3,835,095  
Depreciation / Amortization
    60,031       56,446  
LOSS FROM OPERATIONS
    (964,981 )     (2,062,529 )
                 
OTHER INCOME (EXPENSES):
               
Change in fair value of  Derivative Liabilities
    (295 )     78,145  
Interest Income
    20       103  
Loss on issuance of debt for warrants
    (198,307 )     -  
Interest Expense
    (176,892 )     (293,896 )
                 
NET LOSS
    (1,340,455 )     (2,278,177 )
                 
Series C Preferred Stock Dividends
    (268,772 )     (233,792 )
                 
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
  $ (1,609,227 )   $ (2,511,969 )
                 
Basic and diluted net loss per share of common stock
  $ (0.02 )   $ (0.03 )
                 
Basic and diluted weighted average number of common shares outstanding
    106,695,782       87,943,837  
                 
The accompanying notes are an integral part of these consolidated financial statements.
         
 
 
F-3

 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
 
                                                                   
    Preferred Stock Series C Shares     $10.00 Par Value Amount     Preferred Stock Series D Shares     $10.00 Par Value Amount     Common Stock Shares     $0.001 Par Value Amount     Additional Paid-In Capital                       Total Stockholders' Deficit  
                                Treasury Stock Shares     Treasury Stock Amount     Accumulated Deficit      
                                             
Balance at December 31, 2013
    38,232     $ 382,320       15,000     $ 150,000       85,664,558     $ 85,664     $ 40,090,878       (4,089 )   $ (12,039 )   $ (43,165,373 )   $ (2,468,550 )
Issuance of Common stock for:
                                                                                       
Debt
    -       -       -       -       1,087,762       1,088       92,640       -       -       -       93,728  
Conversion of Series D Preferred Stock
    -       -       (16,545 )     (165,450 )     16,545,000       16,545       148,905       -       -       -       -  
Services
    -       -       -       -       2,150,000       2,150       220,400       -       -       -       222,550  
Issuance of Preferred stock for:
                                                                                       
Services
    -       -       1,656       16,560       -       -       150,480       -       -       -       167,040  
Subscription Agreements
    32,179       321,790       -       -       -       -       1,930,720       -       -       -       2,252,510  
Cash paid for return of Preferred stock
    -       -       (111 )     (1,110 )     -       -       (8,880 )     -       -       -       (9,990 )
Resolution of derivative liabilities due to debt conversion
    -       -       -       -       -       -       132,417       -       -       -       132,417  
Resolution of warrant derivative liabilities due to removal of convertible debt
    -       -       -       -       -       -       918,580       -       -       -       918,580  
Amortization of Series D Preferred stock awards
    -       -       -       -       -       -       144,496       -       -       -       144,496  
Net Loss
    -       -       -       -       -       -       -       -       -       (2,278,177 )     (2,278,177 )
Balance at December 31, 2014
    70,411     $ 704,110       -     $ -       105,447,320     $ 105,447     $ 43,820,636       (4,089 )   $ (12,039 )   $ (45,443,550 )   $ (825,396 )
Issuance of Common stock for:
                                                                                       
Services
    -       -       -       -       216,734       216       48,553       -       -       -       48,769  
Conversion of Series C Preferred Stock
    (1,503 )     (15,030 )     -       -       1,503,000       1,503       13,527       -       -       -       -  
Series C Dividend
    -       -       -       -       107,762       108       (108 )     -       -       -       -  
Issuance of Preferred stock for:
                                                                                       
Cash
    11,310       113,100       -       -       -       -       636,900       -       -       -       750,000  
Recognition of vesting stock
    -       -       -       -       -       -       (4,187 )     -       -       -       (4,187 )
Fogiveness of related party convertible debt
    -       -       -       -       -       -       100,000       -       -       -       100,000  
Net Loss
    -       -       -       -       -       -       -       -       -       (1,340,455 )     (1,340,455 )
Balance at December 31, 2015
    80,218     $ 802,180       -     $ -       107,274,816     $ 107,274     $ 44,615,321       (4,089 )   $ (12,039 )   $ (46,784,005 )   $ (1,271,269 )
                                                                                         
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

   
2015
   
2014
 
             
Cash flows from operating activities:
           
Net loss
  $ (1,340,455 )   $ (2,278,177 )
Adjustments to reconcile net loss to net cash used in operating activities
         
Depreciation and amortization
    60,031       56,446  
Amortization of discounts and deferred financing costs
    -       141,869  
Bad debt expense
    6,461       20,273  
Inventory obsolescence
    133,747       83,420  
Series D preferred stock issued for services
    -       311,536  
Common stock issued for services
    44,582       222,550  
Loss on issuance of debt for warrants
    198,307       -  
Loss (gain) on change in fair value of derivative liabilities
    295       (78,145 )
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
    20,256       (76,985 )
(Increase) decrease in royalties receivable
    (201,000 )     -  
(Increase) decrease in inventory
    (140,995 )     (178,448 )
(Increase) decrease in employee advances
    -       3,620  
(Increase) decrease in prepaids and other assets
    (107,714 )     69,908  
Increase (decrease) in accrued royalties and dividends
    -       (50,714 )
Increase (decrease) in accounts payable
    33,183       18,100  
Increase (decrease) in accrued liabilities
    (1,224 )     (260 )
Increase (decrease) in accrued interest payable
    91,637       48,322  
Net cash flows used in operating activities
    (1,202,889 )     (1,686,685 )
                 
Cash flows from investing activities:
               
Payments made on capital lease obligation
    -       (375 )
Purchase of property and equipment
    (5,334 )     (8,072 )
Net cash flows used in investing activities
    (5,334 )     (8,447 )
                 
Cash flows from financing activities:
               
Borrowings on debt
    96,000       -  
Payments on debt
    (74,220 )     (23,600 )
Borrowings on convertible debt with related parties
    1,200,000       -  
Payments on convertible debt
    (1,100,000 )     (44,900 )
Payments made on capital lease obligation
    (4,660 )     -  
Cash proceeds from sale of series C preferred stock
    750,000       2,252,510  
Cash paid for return of Series D preferred stock
    -       (9,990 )
Net cash flows provided by financing activities
    867,120       2,174,020  
                 
Net increase (decrease) in cash
    (341,103 )     478,888  
                 
Cash and cash equivalents, beginning of period
    523,441       44,553  
Cash and cash equivalents, end of period
  $ 182,338     $ 523,441  
                 
Cash paid during the period for:
               
Interest
  $ 85,255     $ 103,705  
Income taxes
    -       -  
                 
Supplemental non-cash investing and financing activities:
               
Common stock issued for conversion of debt
  $ -     $ 93,728  
Common stock issued for conversion of series D preferred stock
    -       40,000  
Common stock issued for conversion of series C preferred stock
    15,030       -  
Common stock issued for conversion of series C preferred stock dividend
    108       -  
Issuance of vested stock
    333       -  
Issuance of convertible debt for warrants
    200,000       -  
Forgiveness of related party convertible debt
    100,000       -  
Resolution of warrant derivative liabilities due to removal of convertible debt
    -       918,580  
Resolution of derivative liabilities due to debt conversions
    -       132,417  
Debt discounts due to derivative liabilities
    -       90,000  
Reclass of related party debt to unrelated party debt
    -       115,620  
Reclass of related party interest payable to unrelated party interest payable
    -       47,061  
Capital lease obligation
    -       13,512  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-5

 
 
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” 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.
 
 
F-6

 

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. During the years ended December 31, 2015 and 2014, aggregate revenue recognized under bill and hold transactions was $275,000 and $0, respectively.Allowance for Doubtful Accounts
 
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 $6,461 and $20,273 in 2015 and 2014, respectively. The allowance for doubtful accounts at December 31, 2015 was $20,388 and the amount at December 31, 2014 was $18,462.

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 powders, gels and the related packaging supplies.  The Company recorded inventory obsolescence expense of $133,747 in 2015 and $83,420 in 2014. The allowance for obsolete and slow moving inventory had a balance of $150,135 and $46,007 at December 31, 2015 and December 31, 2014, 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, 2014, fixed assets consisted of $67,905 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 2015 was $8,999 and the depreciation expense recorded in 2014 was $5,415.  The balance of accumulated depreciation was $31,477 and $22,477 at December 31, 2015 and December 31, 2014, respectively.

Intangible Assets
 
Intangible assets as of December 31, 2015 and 2014 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 2015 and 2014.

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, 2015 and 2014.
 
 
F-7

 

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, 2014, the Company’s financial instruments consist of the derivative liabilities related to stock purchase warrants and the conversion features of certain outstanding notes payable.  The derivative liabilities related to stock purchase warrants were valued using the Black-Scholes Option Pricing Model and the derivative liabilities related to the conversion features in the outstanding convertible notes were valued using the Black-Scholes Option Pricing Model assuming maximum value. These are level 3 inputs.

At December 31, 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, 2015 and 2014.

Recurring Fair Value Measure
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities
                   
  Derivative Liabilities as of December 31, 2015
  $ -     $ -     $ 310     $ 310  
  Derivative Liabilities as of December 31, 2014
  $ -     $ -     $ 1,708     $ 1,708  

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.
 
 
F-8

 
 
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 2015 and 2014, 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, has a working capital deficit, and has a significant accumulated deficit. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. These conditions raise substantial doubt about its ability to continue as a going concern.

In this regard, management is proposing to raise any necessary additional funds through loans or through additional sales of its common stock.   There is no assurance that the Company will be successful in raising additional capital to support the financial needs of the Company or that the Company will ever produce profitable operations.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
 
F-9

 

NOTE 4 – OTHER SIGNIFICANT TRANSACTIONS

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 has 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 19 th of a given year, by written notice by either party delivered before June 15 th of such year.

On June 4, 2015, the Company delivered written notice to WellDyne, terminating the Agreement pursuant to Section Five thereof, such termination to be effective as of 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.
 
 
F-10

 

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 expenses.
 
The following is a summary of outstanding convertible notes due to related parties, including accrued interest separately recorded, as of December 31, 2015:

Related party
Nature of relationship
Terms of the agreement
 
Principal amount
   
Accrued Interest
 
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     $ 32,877  
                     
James W. Stuckert Revocable
Trust (“SRT)
Mr. James 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       32,877  
Total
      $ 1,200,000     $ 65,754  
 
 
F-11

 
 
The following is a summary of outstanding convertible notes due to related parties, including accrued interest separately recorded, as of December 31, 2014:

Related party
Nature of relationship
Terms of the agreement
 
Principal Amount
   
Accrued Interest
 
Brookhaven Medical, Inc. (“BMI”) Convertible
Note #1
Former Director of the Company is CEO of BMI
Note in the principal amount of $1,000,000 which accrues interest at 8% per annum.  The note is due June 15, 2015.  The note may be converted, at the option of BMI, into shares of the Company’s Series C Preferred Stock at a conversion price of $70.00 per share.  Secured by assets of the Company.
  $ 1,000,000     $ 16,877  
                     
Brookhaven Medical, Inc. (“BMI”) Convertible
Note #2
Former Director of the Company is CEO of BMI
Note payable which accrues interest at 8% per annum and allows the Company to drawdown, as needed, an aggregate of $2,000,000, subject to an agreed upon schedule.  The note is due June 15, 2015.  The note may be converted, at the option of BMI, into shares of the Company’s Series C Preferred Stock at a conversion price of $70.00 per share.  Secured by assets of the Company.
    200,000       3,375  
                     
 
Total
    $ 1,200,000     $ 20,252  

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, 2015:
 
 
F-12

 

Note Payable
Terms of the agreement
 
Principal Amount
   
Discount
   
Principal Net of Discount
   
Accrued Interest
 
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     $ 117,915  
                                   
Third Quarter 2012 Secured Subordinated Promissory Notes
Seventeen notes in the original aggregate principal amount of $1,055,000; (i) 5% interest due on maturity date; (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 March 31, 2015 three of these notes remain due.
    110,000       -       110,000       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 March 31, 2014 $11,300 of this note remains due.
    11,300       -       11,300       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.
    3,900       -       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:
    96,000       -       96,000       2,420  
June 26, 2015 Convertible Promissory Note
Note payable which accrues interest at 5% per annum.  The note is due September 26, 2016.  The note may be converted, 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.
    170,000       -       170,000       4,674  
                                   
Total
    $ 614,700       -     $ 614,700     $ 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 is in the original principal amount of $200,000, carries a 5% rate of interest, and matures on September 26, 2016. The Note provides 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 may be 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 is 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 $30,000 in cash under this note during the year ended December 31, 2015.

During the year ended December 31, 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 a total of $40,620 towards the MAH Holding note described below (MAH Holding is controlled by a former major stockholder of the Company).

The following is a summary of amounts due to unrelated parties, including accrued interest separately recorded, as of December 31, 2014:
 
 
F-13

 

Note Payable
Terms of the agreement
 
Principal Amount
   
Discount
   
Principal Net of Discount
   
Accrued Interest
 
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     $ 88,456  
                                   
MAH Holding, LLC
 
 
Unsecured note with interest accrued at 10% per annum, due on demand. This note is currently the subject of litigation  (see Note 12 "Legal Proceedings”)
    40,620       -        40,620        14,861  
                                   
Third Quarter 2012 Secured Subordinated Promissory Notes
Seventeen notes in the original aggregate principal amount of $1,055,000; (i) 5% interest due on maturity date; (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 March 31, 2014 three of these notes remain due, of which two are with unrelated parties in the aggregate principal amount of $110,000.
    110,000       -       110,000       47,483  
                                   
September 28, 2012 Promissory Note
$51,300 note payable (i) interest accrues at 10% per annum; (ii) maturity date of December 31, 2012; (iii) default interest rate of 15% per annum.  As of March 31, 2014 $11,300 of this note is was past due.
    11,300       -       11,300       10,379  
                                   
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.
    7,500       -       7,500       -  
                                   
Total
    $ 392,920       -     $ 392,920     $ 161,179  

In January of 2014, the Company paid $20,000 in principal on the September 28, 2012 Promissory Note in the original amount of $51,300 and the final $5,000 in principal and $5,000 in accrued interest due on the Second Quarter 2012 Convertible Note in the original amount of $25,000.

In January of 2014, the Company converted $90,000 of principal and $3,728 of accrued interest payable related to the two July 16, 2013 promissory notes into 1,087,762 shares of common stock.

In March of 2014, the Company paid the final $39,900 in principal and $1,995 in accrued interest due on the May 30, 2012 Convertible note.

During the year ended December 31, 2014, 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, 2014, aggregate amortization of debt discounts and deferred financing costs was $140,837 and $1,032, respectively.
 
 
F-14

 

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:
 
   
2015
   
2014
 
Patent
  $ 510,310     $ 510,310  
Accumulated amortization
    (318,944 )     (267,913 )
Patent, net of accumulated amortization
    191,366       242,397  
                 
Total intangibles, net of accumulated amortization
  $ 191,366     $ 242,397  

The amount amortized for the year ended December 31, 2015 and 2014 was $51,031 and $51,031, respectively.

NOTE 7 – CUSTOMERS AND SUPPLIERS

WCI had two significant customers which accounted for approximately 28% and 14% of the Company’s sales in 2015 and had two significant customers which accounted for approximately 27% and 10% of the Company’s sales in 2014.  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 November 28, 2007, WCI entered into separate exclusive license agreements with Applied Nutritionals, LLC (“Applied”) and its founder George Petito, pursuant to which WCI obtained the exclusive world-wide license to make products incorporating intellectual property covered by a patent related to CellerateRX products.

In consideration for the licenses, WCI agreed to pay to Applied the following royalties, beginning January 3, 2008: (a) an upfront royalty of $100,000; (b) a royalty of fifteen percent (15%) of gross sales occurring during the first year of the license; (c) an additional upfront royalty of $400,000, which was paid October, 2009; plus (d) a royalty of three percent (3%) of gross sales for all sales occurring after the payment of the $400,000 upfront royalty. In addition, WCI must maintain a minimum aggregate annual royalty payment of $375,000 for 2009 and thereafter if the royalty payments made do not meet or exceed that amount.  The total unpaid royalties as of December 31, 2015 and 2014 is $323,062 and $324,286, respectively.

On March 30, 2016 the Company made payment in the amount of $323,062 to Applied Nutritionals.

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 Dr. Barry Constantine whom is an employee and hold the position of Director of R&D.
 
 
F-15

 
 
Inventory Contract
 
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. The Company did not have any contractual obligations to purchase product as of December 31, 2014.
 
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.

The Company also leased real property which it uses for its marketing staff in Denver, Colorado.  The lease was a 12 month lease expiring on November 30, 2014 and required base rent payment of $300 per month.  As of December 2014, the lease was month-to-month with a required base rent of $300 per month.  As of February 28, 2015 the lease was ended.

Payables to Related Parties
 
As of December 31, 2015 and 2014, the Company had outstanding payable to related parties totaling $21,099 and $0, 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, 2015 and 2014.

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, 2015 and 2014.

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, 2015 and December 31, 2014 there were 80,218 and 70,411 shares of Series C Preferred Stock issued and outstanding, respectively.
 
 
F-16

 

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, 2015 and December 31, 2014 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, 2015 there were no shares of Series E Preferred Stock issued and outstanding.

During the year ended December 31, 2014, the Company issued an aggregate of 32,179 shares of Series C preferred stock for cash proceeds of $2,252,510.

During the year ended December 31, 2015, the company issued 11,310 shares of Series C preferred stock for cash proceeds of $750,000.

The Series C preferred stock earned dividends of $268,772 and $233,792 for the years ended December 31, 2015 and December 31, 2014, 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, and. $15,764 will be recognized over the remaining vesting periods.

In February of 2014, the Company issued 350 shares of Series D preferred stock to a nonemployee for services rendered.  The shares vest immediately and were recorded at their fair value of $42,000

In July of 2014, the Company issued 750 shares of Series D preferred stock valued at $75,000 to a nonemployee for services rendered.  The shares vest immediately and were recorded at their fair value of $75,000.

In September, 2014 the Company granted 556 shares of Series D preferred stock valued at $50,040 to a contractor according to the terms of his service agreement. In December, 2014, the contractor returned 111 shares of Series D preferred stock in exchange for cash amount of $9,990.

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 year ended December 31, 2015 and 2014, $25,193 and $65,178 was expensed, respectively, and $9,671 remains to be expensed over the remaining vesting period.

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.
 
 
F-17

 

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.

On May 28, 2015, the Company issued 4,166 shares of Series C preferred stock in exchange for cash amount of $250,000.

On September, 14, 2015, the Company issued 3,572 shares of Series C preferred stock in exchange for cash amount of $250,000.

On December, 14, 2015, the Company issued 3,572 shares of Series C preferred stock in exchange for cash amount of $250,000.

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.

In January of 2014, the Company issued 1,087,762 common shares for the conversion of notes payable and accrued interest in the amounts of $90,000 and $3,728, respectively.

During the year ended December 31, 2014, the Company issued 500,000 shares of common stock valued at $60,000 to company directors and 1,650,000 shares of common stock for services valued at $162,550.

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, 2015.

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.
 
 
F-18

 

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.

Warrants
 
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, 2015 and 2014 and changes during the years then ended is presented below:

For the Year Ended December 31, 2014
 
   
Shares
   
Weighted Average Exercise Price
 
Outstanding at beginning of period
    15,670,143     $ 0.37  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Expired
    (4,733,299       0.68  
Outstanding at end of period
    10,936,844     $ 0.23  
   
For the Year Ended December 31, 2015
 
   
Shares
   
Weighted Average Exercise Price
 
Outstanding at beginning of period
    10,936,844     $ 0.23  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (800,000 )     0.75  
Expired
    (400,000 )     0.49  
Outstanding at end of period
    9,736,844     $ 0.19  

The following table summarizes the outstanding warrants as of December 31, 2015:

     
As of December 31, 2015
   
As of December 31, 2015
 
     
Warrants Outstanding
   
Warrants Exercisable
 
Range of Exercise Prices
   
Number Outstanding
   
Weighted-Average Remaining Contract Life
   
Weighted- Average Exercise Price
   
Number Exercisable
   
Weighted-Average Exercise Price
 
$ 0.06       4,500,000       2.8     $ 0.06       4,500,000     $ 0.06  
  0.08       550,000       2.2       0.08       550,000       0.08  
  0.09       625,000       2.3       0.09       625,000       0.09  
  0.15       1,571,300       1.6       0.15       1,571,300       0.15  
  0.44       1,515,544       0.6       0.44       1,515,544       0.44  
  0.60       975,000       0.7       0.60       975,000       0.60  
$ 0.06-0.60       9,736,844       2.0     $ 0.23       9,736,844     $ 0.19  

The following table summarizes the outstanding warrants as of December 31, 2014:
 
 
F-19

 

     
As of December 31, 2014
   
As of December 31, 2014
 
     
Warrants Outstanding
   
Warrants Exercisable
 
Range of Exercise Prices
   
Number Outstanding
   
Weighted-Average Remaining Contract Life
   
Weighted- Average Exercise Price
   
Number Exercisable
   
Weighted-Average Exercise Price
 
$ 0.06       4,500,000       3.8     $ 0.06       4,500,000     $ 0.06  
  0.08       550,000       3.2       0.08       550,000       0.08  
  0.09       625,000       3.3       0.09       625,000       0.09  
  0.15       1,571,300       2.6       0.15       1,571,300       0.15  
  0.25       120,000       0.8       0.25       120,000       0.25  
  0.40       3,000,000       0.6       0.40       300,000       0.40  
  0.44       1,515,544       1.6       0.44       1,515,544       0.44  
  0.50       370,000       1.3       0.50       370,000       0.50  
  0.60       975,000       1.7       0.60       975,000       0.60  
  0.75       120,000       0.8       0.75       120,000       0.75  
  1.00       290,000       1.4       1.00       290,000       1.00  
$ 0.06-1.00       10,936,844       2.8     $ 0.23       10,936,844     $ 0.23  

Stock Options

A summary of the status of the stock options granted for the years ended December 31, 2015 and 2014, and changes during the period then ended is presented below:

For the Year Ended December 31, 2015
 
   
Options
   
Weighted Average Exercise Price
 
Outstanding at beginning of period
    943,500     $ 0.15  
Granted
    150,000    
(a)
 
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.
 
For the Year Ended December 31, 2014
 
   
Options
   
Weighted Average Exercise Price
 
Outstanding at beginning of period
    943,500     $ 0.15  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Expired
    -       -  
Outstanding at end of period
    943,500     $ 0.15  

The following table summarizes the outstanding options as of December 31, 2015:
 
 
F-20

 

     
As of December 31, 2015
   
As of December 31, 2015
 
     
Stock Options Outstanding
   
Stock Options Exercisable
 
Exercise Price
   
Number Outstanding
   
Weighted-Average Remaining Contract Life
   
Weighted- Average Exercise Price
   
Number Exercisable
   
Weighted-Average Exercise Price
 
$ 0.15       953,500       1.63       0.15       943,500     $ 0.15  
(a)
      150,000       -       -       -       -  
$ 0.15