WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The terms “WMT,” “we,” “the Company,” and “us” as used in this report refer to Wound Management Technologies, Inc. The accompanying unaudited condensed consolidated balance sheet as of September 30, 2012 and unaudited condensed consolidated statements of operations for the nine months ended September 30, 2012 and 2011 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management of WMT, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. These financial statements and notes should be read in conjunction with the financial statements for each of the two years ended December 31, 2011 and December 31, 2010, included in the Company’s Annual Report on Form 10-K. The accompanying consolidated balance sheet as of December 31, 2011 has been derived from the audited financial statements filed in our form 10-K and is included for comparison purposes in the accompanying balance sheet. Certain prior year amounts have been reclassified to conform to current year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WMT and its wholly-owned subsidiaries: Wound Care Innovations, LLC a Nevada limited liability company (“WCI”),; BioPharma Management Technologies, Inc., a Texas corporation (“BioPharma”); Resorbable Orthopedic Products, LLC, a Texas limited liability company (“Resorbable”); and Secure eHealth, LLC a Nevada limited liability company (“eHealth”). eHealth was purchased on February 1, 2010 and sold on December 29, 2011. The accounts of eHealth are included for the period it was under the control of the Company. All intercompany accounts and transactions have been eliminated.
Fair Value Measurements
As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
At September 30, 2012, the Company’s financial instruments consist of the derivative liabilities related to stock purchase warrants and the beneficial conversion features of certain outstanding debentures and notes payable. The derivative liability on stock purchase warrants was valued using the American Options Binomial Method, a Level 3 input. The fair value of the beneficial conversion features is calculated in accordance with ASC Topic No. 470-20-25-4. The change in fair value of the derivative liabilities is classified in other income (expense) in the statement of operations.
Our intangible assets have also been valued using the fair value accounting treatment and a description of the methodology used, including the valuation category, is described below in Note 6 “Intangible Assets.”
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 (the “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 condensed 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.
NOTE 2 - GOING CONCERN
The Company has current liabilities in excess of current assets and has a stockholders’ deficiency. The Company has had limited operations and has not been able to develop an ongoing, reliable source of revenue to fund its existence. The Company’s day-to-day expenses have been covered by proceeds obtained, and services paid by, the issuance of stock and notes payable. The adverse effect on the Company’s results of operations due to its lack of capital resources can be expected to continue until such time as the Company is able to generate additional capital from other sources. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
These unaudited interim condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The continuation of the Company as a going concern is dependent upon the success of the Company in obtaining additional funding and the success of its future operations. The ability of the Company to achieve these objectives cannot be determined at this time.
NOTE 3 - SIGNIFICANT TRANSACTIONS
Asset and Business Acquisitions
On February 1, 2010, the Company entered into a purchase agreement with VHGI Holdings, Inc. (“VHGI”), a Delaware corporation. The total purchase price of $500,000, which consisted of $100,000 in cash and a promissory note in the principal amount of $400,000 (the “WMT Note”), was paid for certain assets and liabilities. On December 29, 2011 all of these assets and liabilities were sold along with the eHealth subsidiary with the exception the $1,500,000 Senior Secured Convertible Promissory Note Receivable issued by Private Access, Inc. (the “Private Access Note” see Note 4 “Notes Receivable”).
Scott A. Haire, the Company's former Chief Financial Officer (“CFO”), also served as the Chairman and Chief Financial Officer of VHGI. Based on shares outstanding as of the Annual Report on Form 10-K filed by VHGI for the year ended December 31, 2011, Mr. Haire beneficially owns, individually and through H.E.B., LLC, a Nevada limited liability company (“HEB”) of which Mr. Haire is the managing member, 25% of the outstanding common stock of VHGI.
Distribution Agreement
As disclosed in our Form 8-K filing on April 14, 2011, Juventas, LLC (“Juventas”) purchased the exclusive right to sell the CellerateRX powder products in North America. This multi-year agreement had escalating sales requirements for Juventas to retain such exclusive rights. We received an ‘upfront’ non-refundable payment of $500,000 from Juventas for this exclusive right to distribute CellerateRX powder, which was recorded as revenue in the first quarter of 2011.
The Distribution Agreement was subsequently amended on November 23, 2011, at which point the Company and WCI entered into a Note Purchase Agreement pursuant to which they issued to Juventas a Convertible Secured Promissory Note in the amount of $500,000. In connection with the Note Purchase Agreement, the Company, WCI, and certain of their affiliates entered into a security agreement with Juventas, pursuant to which the Promissory Note was secured by all inventory of the Company and WCI (together with any proceeds of such inventory). Additionally, certain affiliates of the Company entered into guaranty agreements with Juventas with respect to amounts owed under the Promissory Note (the “Guarantees” and, collectively with the Distribution Agreement, the Promissory Note, the Security Agreement, and the Guarantees, the “Juventas Agreements”).
On March 20, 2012, the Company, Juventas, and certain other parties entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”), pursuant to which the Juventas Agreements were effectively terminated and all amounts owed and other claims thereunder were settled as more specifically set forth therein. As the result of the Settlement Agreement, the Company has reacquired its North American distribution rights, as well as the rights under certain sub-distribution agreements entered into by Juventas in respect of WCI’s CellerateRX Powder product.
In connection with the Settlement Agreement, the Company, WCI, and certain of their affiliates (collectively, the “Company Parties”), issued to Juventas a Secured Promissory Note in the principal amount of $930,000. The Company Parties also entered into a security agreement with Juventas pursuant to which the note was secured by all inventory of the Company Parties (together with any proceeds of such inventory), and certain affiliates of the Company entered into guaranty agreements with Juventas with respect to amounts owed under the note.
On March 20, 2012, the Company executed a secured promissory note payable to Juventas, LLC in the amount of $930,000 related to the Settlement Agreement. As of June 30, 2012, the principal balance of $930,000 and $20,791 of accrued interest remained due. In July 2012, the Company reached agreement with Juventas that upon payment of $880,000, all remaining principal of, and accrued interest on, the Juventas secured promissory note would be forgiven. The Company made such payment in July of 2012, at which point the note was cancelled.
Officers and Directors
On March 22, 2012 Robert Lutz, Jr. was appointed to the Board of Directors of the Company. In addition, Scott A. Haire resigned as Chairman of the Board of Directors and as Chief Executive Officer of the Company, and Deborah Jenkins Hutchinson resigned as President of the Company, and Mr. Lutz was elected as the new Chairman of the Board, Chief Executive Officer and President of the Company. Mr. Haire continued to serve as CFO and a Director until his resignation on May 25, 2012.
Ms. Jenkins Hutchinson remained a director of the Company. On February 9, 2012 Mr. Steve Evans resigned as a Director. On June 5, 2012, Mr. Gilbert Valdez resigned as a Director.
On March 23, 2012 Mr. Frank Wolfe, III joined the Company as VP of Sales. Mr. Wolfe was a member of the Juventas management team and has carried their sales initiatives forward for the Company.
Legal
SEC Complaint
On or about June 4, 2012, the United States Securities and Exchange Commission filed a Complaint against the Company and Scott A. Haire, a former officer and director of the Company, in the United States District Court for the Southern District of Florida. The Complaint alleges that from at least July through November 2009, the Company and Haire engaged in a fraudulent scheme and market manipulation involving the Company’s stock. The Complaint alleges that (a) Haire arranged to sell Company restricted stock to an FBI agent posing as the trustee of a pension fund and to pay that person a kickback for engaging in the transaction; and (b) Haire arranged to make payments to a fictitious person, putatively a broker, in exchange for the broker’s trading in company stock timed with Company press releases. The Complaint asserts claims for violations of Section 17(a) (1) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The Complaint seeks (a) a declaration that the Company and Haire committed those violations; (b) an injunction against the further commission of such violations; (c) disgorgement; (d) civil money penalties; (e) an order barring Haire from participating in any offering of a penny stock; and (f) an order barring Haire from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or that is require to tile reports pursuant to Section 15(d) of the Securities Exchange Act.
The Company, separate from Mr. Haire, is engaged in settlement discussions with the Securities and Exchange Commission concerning a potential settlement of the action against the Company. On September 14, 2012, the Company filed a Consent of Defendant with the SEC and has reached an agreement-in-principal with the staff of the Miami Regional Office of the SEC. To resolve the claims against it, the Company has consented to the entry of a permanent injunction against violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act involving the payment of undisclosed compensation to investment advisors, managers, and trustees or the manipulation of the price or volume of any security. As part of the settlement agreement the Company paid a $20,000 civil money penalty. The proposed settlement is subject to approval by the Commissioners of the SEC and the court in the enforcement action. Proceedings against Wound management in the enforcement action have been stayed to allow time for the approval process to proceed.
Litigation
On November 14, 2011, Ken Link instituted litigation against the Company and Scott A. Haire in the District Court of Tarrant County Texas, 342nd Judicial District alleging default under the terms of a certain promissory note executed by Wound Management Technologies, Inc. and guaranteed by Scott A. Haire. Ken Link asserts that the unpaid balance of the note, including accrued interest as of December 4, 2011 is the sum of $255,292 plus 200,000 shares of the Company’s common stock. We have disputed the claim and have asserted a counter claim that the transaction described in the Plaintiff’s original petition is usurious in violation of the provisions of the Texas Finance Code. Furthermore, we have filed an action for recovery of damages related to a note previously executed by the Company and Ken Link, which is also usurious under the Texas Finance Code. We further claim that the Plaintiff, who placed $223,500 of orders in 2011, is in breach of a Distribution Agreement with WCI. While we believe the claims made against the Company are without merit, and will vigorously defend against them, 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 results of operations.
Forbearance Agreement
On July 13, 2012, Tonaquint, Inc. (“Tonaquint”) filed suit against the Company and certain of its affiliates in connection with a Securities Purchase Agreement by and between Tonaquint and the Company under which Tonaquint purchased a Secured Convertible Promissory Note in the original principal amount of $560,000 (the “Note”). The suit alleges, among other things, a failure of the Company to make certain payments and to honor a conversion notice delivered pursuant to the Note. On August 17, 2012, Tonaquint and the Company entered into a forbearance agreement, pursuant to which Tonaquint agreed:
|
(i)
|
To refrain from exercising its rights under the Note through October 16, 2012, which date can, at the Company’s option, be extended for two consecutive periods of 30-days each,
|
|
(ii)
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To convert $20,000 in principal amount owed under the Note into shares of the Company’s Common Stock, the number of such shares to be determined as set forth in the Forbearance Agreement; and
|
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(iii)
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To accept as payment in full of the Note (in conjunction with the issuance of the Conversion Shares) a cash payment of $200,000 on or before October 16, 2012 (as such date may be extended at the Company’s option.)
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On August 21, 2012, the Company issued to Tonaquint, pursuant to the forbearance agreement, 166,667 shares of Common Stock in conversion of $20,000 of note principal. An additional 43,382 shares of Common Stock were issued on October 20, 2012, also in relation to the $20,000 conversion. On October 8, 2012, the Company paid Tonaquint $5,000 to extend the Forbearance Period to November 15, 2012.
Federal Payroll Tax Settlement Negotiations
The Company was delinquent in the payment of 2004-2005 tax liabilities with the Internal Revenue Service (the “IRS”). A tax lien was filed against the Company in December 2009. On January 28, 2012 the Company made payment in the amount of $122,223 to the IRS for the balance due for payroll tax liabilities from 2004-2005. Approximately $116,075 was applied to the outstanding tax liability while the remaining balance was applied to related fees and interest. Additional interest payments in the amount of $8,026 were made in the second quarter. As of the date of this filing the Company is in the process of attempting to settle the remaining obligation of approximately $208,142 related to fees and interest and the final amount due will be subject to negotiations with the IRS.
NOTE 4 – NOTES RECEIVABLE
Notes Receivable – Related Party
The following is a summary of amounts due from related parties, including accrued interest separately recorded, as of September 30, 2012:
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Related party
|
Nature of relationship
|
Terms of the agreement
|
Principal
amount
|
Accrued
Interest
|
| |
|
|
|
|
|
Secure eHealth
|
Secure eHealth was a 100% owned subsidiary of the
Company until December 2011. Scott Haire, former CFO
of Wound Management, is the managing member of
Secure eHealth.
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Unsecured line of credit with interest
accrued at rate of 1% per annum,
due on demand.
|
$ 293,233
|
$1,482
|
| |
|
|
|
|
|
Commercial Holding, AG
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Commercial Holding AG, LLC has provided previous
lines of credit to affiliates of WMT.
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Unsecured note with interest accrued
at rate of 10% per annum, due on demand.
|
200,000
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28,556
|
| |
|
|
|
|
|
TOTAL
|
|
|
$493,233
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$30,038
|
As of September 30, 2012, the Company has established an allowance for the related party notes receivable in the principal amount of $493,233 and the accrued interest of $30,038.
Notes Receivable
The Private Access Note is with an unrelated company and the loan of $1,500,000 accrues interest at 9% per annum from the day of purchase to the maturity date of July 31, 2013. As of September 30, 2012 the Company has accrued $514,021 interest and has established an allowance for this same amount. According to the terms of the Assignment and Assumption Agreement between VHGI, Private Access, Inc. (“Private Access”) and the Company, VHGI assigned all rights, title and interest in the Private Access Note, including the right to serve as collateral agent for the collateral pledged as security by Private Access, to the Company. Under the terms of the Security Agreement dated August 3, 2009, which was assigned to the Company by VHGI, the Company, and other investors hold pro rata security interests in all property of Private Access including its intellectual property.
The Company received five $50,000 secured notes, with the same unrelated party as part of the June 21, 2011 note payable and warrant purchase agreement (see note 5) for a total note receivable balance of $250,000. Each $50,000 5% secured note receivable had a maturity date 49 months from the initial funding. On April 25, 2012, the note holder elected to offset the $250,000 notes receivable and $10,729 in accrued interest receivable against the related note payable and accrued interest payable. Following the offset, the balance of the five secured notes receivable and the related accrued interest is zero.
NOTE 5 NOTES PAYABLE
Notes Payable – Related Parties
Funds are advanced to the Company from various related parties, including from Mr. Robert Lutz. Other shareholders fund the Company as necessary to meet working capital requirements and expenses. The following is a summary of amounts due to related parties, including accrued interest separately recorded, as of September 30, 2012:
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Related party
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Nature of relationship
|
Terms of the agreement
|
Principal
amount
|
Accrued
Interest
|
|
Lutz, Investments LP
|
Mr. Lutz is the CEO of the Company
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Convertible note payable due March 31,
2012. The note is convertible at $0.19
per share. As of September 30, 2012 the
note has not been converted and is past due.
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$200,000
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$9,511
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| |
|
|
|
|
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Mr. Robert Lutz
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Mr. Lutz is the CEO of the Company
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Unsecured $25,000 line of credit with interest
accrued at 10% per annum, due on demand.
Available line as of September 30, 2012 is $25,000.
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$0
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$4
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| |
|
|
|
|
|
MAH Holding, LLC
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MAH Holding, LLC has provided previous
lines of credit to affiliates of WMT.
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Unsecured note with interest accrued at 10% per
annum, due on demand.
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$91,920
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$5,586
|
| |
|
|
|
|
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Total
|
|
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$291,920
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$15,101
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Notes Payable
The following is a summary of amounts due to unrelated parties, including accrued interest separately recorded, as of September 30, 2012:
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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 3 "Significant
Transaction - Litigation")
|
223,500
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-
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223,500
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22,114
|
| |
|
|
|
|
|
|
Purchase Order
Financing
Agreement
|
$50,000 note payable (i) interest accrues at 10% per annum; (ii) proceeds
used to purchase inventory; (iii) lender will be reimbursed $25 per gram
as the inventory is sold. As of September 30, 2012 the lender is due
$3,325 of sales proceeds.
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50,000
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-
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50,000
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1,556
|
| |
|
|
|
|
|
|
August 3, 2012
Note Payable
|
$75,000 note payable; (i) interest accrues at 10% per annum; (ii) the
principal is due and payable as follows: (a) $10,000 each on August
15, 2012, August 30, 2012, September 15, 2012, September 30, 2012
and October 15, 2012; and (b) $25,000 on October 30, 2012 the maturity
date; (iii) the Company will issue to Lender five-year warrant to purchase
a total of 200,000 shares of common Stock at a price of $0.15 per share.
This note is paid in full as of October 31, 2012.
|
45,000
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-
|
45,000
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150
|
| |
|
|
|
|
|
|
Third Quarter
Secured
Subordinated
Promissory
Notes
|
Eighteen notes in the aggregate principal amount of $1,075,000;
(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 October 12, 2012 these notes remain due.
|
1,075,000
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-
|
1,075,000
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12,685
|
| |
|
|
|
|
|
|
June 21, 2011
Note
|
Convertible promissory note in the principal amount of $560,000
(i) interest accrues at 12% per annum; (ii) maturity date of June 2
1, 2015; (iii) upon closing the Company issued to the lender 100,000
shares of Common Stock valued at $60,000 and two warrants to
purchase 250,000 shares of common stock each, with exercise
prices of $0.50 $1.00; (iv) the debt is convertible at a 30% discount
on the fair market value of the stock. The Company measured
the fair value of the warrants and the beneficial conversion
feature of the note and recorded a discount against the principal
of the note. (see Note 3 "Significant Transaction - Forbearance
Agreement")
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200,000
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(4,822)
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195,178
|
-
|
|
May 10, 2012
Convertible Note
|
Convertible note payable in the principal amount of $53,000 accrues
interest at 8% per annum. The note is convertible into Common
Stock at a conversion price per share equal to 50% of the average
of the three lowest closing prices for the 10-day trading period before
conversion. The note matures February 14, 2013.
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53,000
|
(22,881)
|
30,119
|
1,673
|
| |
|
|
|
|
|
|
March 2012
Convertible Notes
|
Three convertible notes in the principal amount of $25,000, $50,000
and $100,000 respectively; (i) issued between March 3 and March
22, 2012; (ii) convertible at $0.19 per share; (iii) interest accrues at
5% per annum; (iv) interest accrues at 9% per annum after the due
dates between March 31 and June 30, 2012. As of the date of this
filing these notes are past due.
|
175,000
|
-
|
175,000
|
7,256
|
| |
|
|
|
|
|
|
Second Quarter
2012 Convertible
Notes
|
Two $25,000 notes; (i) issued on April 3 and April 23, respectively;
(ii) convertible at $0.19 per share; (iii) interest accrues at 5% per annum;
(iv) interest accrues at 9% per annum after the due dates of April 30
and June 30, 2012, respectively. On September 20, 2012, 222,420 shares
of Common Stock were issued in conversion of the April 23 note.
As of the date of this this filing the April 3 note is past due.
|
25,000
|
-
|
25,000
|
1,722
|
| |
|
|
|
|
|
|
May 30, 2012
Convertible Note
|
Note in the principal amount of up to $275,000 including an
approximate original issue discount of 10%; (i) maturity date
one year from the effective date (ii) convertible at the lesser
of $0.19 or a 30% discount on the fair market value of the
Company's common stock; (iv) one time interest charge of
5% will be applied if the note is not repaid with in the first 90 days.
|
55,000
|
(14,717)
|
40,283
|
2,750
|
| |
|
|
|
|
|
|
Total
|
|
1,901,500
|
(42,420)
|
1,859,080
|
27,791
|
Debentures
On March 30, 2010, the Company entered into a Securities Purchase Agreement and, pursuant to this agreement, a total of $1,000,000 in principal amount of convertible debentures (the “Debentures”), with a maturity date of March 2013, may be sold to investors. The Debentures may be converted into shares of Common Stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder may convert Debentures into, nor shall the Company issue to such holder, shares of Common Stock to the extent that the conversion would result in a holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of Common Stock. This ownership restriction may be waived, however, by a holder upon sixty-one (61) days prior written notice.
The Debentures may be redeemed by the Company at any time or from time to time at a price equal to (x) one hundred twenty percent (120%) of the principal amount of the Debenture if the Debenture is called for redemption prior to the expiration of six months from the issuance date, or one hundred thirty one percent (131%) if called for redemption thereafter, plus (y) interest accrued through the day immediately preceding the date of redemption.
During 2010, the Company issued Debentures in the aggregate principal amount of $695,000. In accordance with ASC Topic No. 470-20-25-4, a discount in the amount of $297,857 was calculated as the total value of the beneficial conversion feature, which is being amortized over the term of the debt. In April of 2012, 4 million shares of common stock were issued in conversion of $588,000 of these debentures and a pro-rata share of the related interest receivable.
On March 27, 2012, the Company entered into a Securities Purchase Agreement and sold $400,000 of convertible debentures with a maturity date of March 27, 2015, to an unrelated party for $360,000. The Debentures may be converted into Common Stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder may convert Debentures into, nor shall the Company issue to such holder, shares of common stock to the extent that the conversion would result in a holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of Common Stock. Additionally, the Securities Purchase Agreement entitled the purchaser to 200,000 shares of Common Stock
In accordance with ASC Topic No. 470-20-25-4, a discount in the amount of $171,429 was calculated as the total value of the beneficial conversion feature, which is being amortized over the term of the debt. Additionally, a discount of $35,676 was allocated to 200,000 shares of Common Stock based on the relative fair market value of the stock and convertible debt at the time of the agreement.
The unamortized discount balance of all debentures outstanding at September 30, 2012 is $219,431. At September 30, 2012, the total debenture balance, net of discount is $287,569. In addition, total debt issuance costs of $115,350 have been deferred and are being amortized over the term of the debt. The unamortized balance of deferred loan costs at September 30, 2012 is $15,320. Interest expense on the debentures accrues at 6% per annum. The balance of accrued interest payable at September 30, 2012 is $31,222.
NOTE 6 – INTANGIBLE ASSETS
On September 17, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), whereby BioPharma became a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger Agreement, 4,500,000 shares of the Company’s Common Stock were issued in exchange for all the outstanding common stock of BioPharma.
Prior to the Merger Agreement, BioPharma entered into a 50% joint venture with A&Z Pharmaceutical, LLC (“A&Z”) to form Pharma Technology International, LLC (“Pharma Tech”). A&Z is a privately held wholesale distributor of pharmaceuticals formed in 1997. A&Z’s customer base includes tertiary hospitals, medical institutions, and governmental agencies located in the United States, South America, Europe and the Middle East. The operations of Pharma Tech to date have been minimal.
Pharma Tech entered into a Distribution Agreement (the “Distribution Agreement”) to market, distribute and sell the WCI wound care products in the Middle East through existing A&Z distribution channels. The initial focus of the agreement was on sales of CellerateRX® and required Pharma Tech to sell a minimum of $500,000 of the product each year of the five year agreement to maintain the exclusive right to sell the product. The agreement covered 20 countries throughout the Middle East and Northern Africa. Pharma Tech placed orders with WCI during 2010 and 2011 for sales of the CellerateRX product in Lebanon; however, the minimum sales amount was not obtained. Our recent experience with international markets indicates that the sales process is much lengthier than anticipated. Pharma Tech continues to work through the government regulations regarding the sale of medical products and although other distributors are now able to sell the product, the sales pipeline already developed by Pharma Tech is expected to produce increased sales in years to come.
As part of the BioPharma acquisition, the formula for a shingles based product was obtained which is only at the idea stage and no determination has been made as to whether the formula can be developed cost effectively into a product. According to the guidance in ASC Topic No. 805-20-25-1, identifiable assets should be recognized separately from goodwill and there was no value assigned to this formula.
The BioPharma transaction has been accounted for as a business combination based on the guidance in ASC Topic No. 805. The financial statements of BioPharma have been consolidated with those of the Company and an intangible asset was recorded in the amount of $4,187,815 or approximately $.93 per common share issued on the date of acquisition. The value of the intangible asset assigned to the marketing contacts recorded by the Company is based on Level 3 input to our valuation methodology, which consists of models with significant unobservable market parameters. We utilized an undiscounted cash flow analysis based on sales projections from the Distribution Agreement adjusted for the associated costs. According to ASC Topic No. 805-20-55-27, a customer relationship acquired in a business combination that does not arise from a contract may be an identifiable asset separate from goodwill. The estimated useful life of the intangible asset was originally determined to be ten (10) years based on the automatic renewable five year term of the Distribution Agreement.
At December 31, 2011 the Company evaluated the asset for impairment. The estimated useful life of the marketing contacts was reduced to the original five (5) year term of the agreement because the minimum sales requirment was not reached in the first or second year of the agreement. The Company again utilized an undiscounted cash flow analysis based on actual sales in the first two years of the agreement resulting in an impairment of $3,208,372. The amount amortized for the period ended September 30, 2012 was $10,141 resulting in a balance of $4,160,771 in accumulated amortization as of September 30, 2012. The balance of the intangible asset, net of acumulated amorization was $27,044 as of this same date.
Patent
On September 29, 2009, the Company entered into an Asset Purchase Agreement (the “Agreement”), whereby the Company acquired a patent from Resorbable Orthopedic Products, LLC, a New Jersey limited liability company (“Resorbable NJ”) in exchange for 500,000 shares of 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 amount amortized for the period ended September 30, 2012 was $38,273. The balance of the intangible asset, net of accumulated amortization, was $357,217 as of September 30, 2012.
Upon closing of the asset sale by Resorbable NJ, the managers of this New Jersey limited liability company abandoned the name “Resorbable Orthopedic Products, LLC.” RSI-ACQ Acquisition, LLC, a Texas limited liability company owned by the Company and formed on August 24, 2009, assumed the name of “Resorbable Orthopedic Products, LLC” in Texas.
The activity for the intangible accounts is summarized below:
| |
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Patent
|
|
$ |
510,310 |
|
|
$ |
510,310 |
|
|
Accumulated amortization
|
|
|
(153,093 |
) |
|
|
(114,820 |
) |
|
Patent, net of accumulated amortization
|
|
|
357,217 |
|
|
|
395,490 |
|
| |
|
|
|
|
|
|
|
|
|
Marketing contacts
|
|
|
4,187,815 |
|
|
|
4,187,815 |
|
|
Accumulated Amortization
|
|
|
(4,160,771 |
) |
|
|
(4,150,630 |
) |
|
Marketing contacts, net of accumulated amortization
|
|
|
27,044 |
|
|
|
37,185 |
|
| |
|
|
|
|
|
|
|
|
|
Total intangibles, net of accumulated amortization
|
|
$ |
384,261 |
|
|
$ |
432,675 |
|
NOTE 7 - STOCKHOLDERS’ EQUITY
Preferred Stock
As of May 2008, all shares of Series A Preferred Stock of the Company were converted into shares of Common Stock. There are currently 5,000,000 shares of Preferred Stock authorized, with no shares of Series A Preferred Stock currently issued or outstanding.
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 75,000 shares of Series B Preferred Stock, par value $10.00 per share (the “Series B Preferred Stock”). The Series B Preferred Stock ranks 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 are currently no shares of Series B Preferred Stock issued or outstanding.
Common Stock
The Company is authorized to issue 100,000,000 shares of Common Stock, par value of $0.001 per share. These shares have full voting rights. As of September 30, 2012, there were 64,658,627 shares of Common Stock issued and 64,654,538 shares outstanding. At December 31, 2011, there were 58,754,110 shares of Common Stock issued and 58,750,021 shares outstanding. The Company holds 4,089 shares as treasury stock.
2011 Omnibus Long-Term Incentive Plan
On March 10, 2011, the Company adopted, subject to shareholder approval, the 2011 Omnibus Long-Term Incentive Plan (the “Plan”) to offer competitive long-term incentive compensation opportunities as well as to align the interests of the participants with those of the Company’s shareholders. Under the Plan, stock options, stock appreciation rights, restricted shares, and performance shares were to be awarded at the discretion of the Compensation Committee to selected officers, employees, consultants and eligible directors of the Company. In order for the Plan to become effective, shareholder approval had to be obtained on or before March 08, 2012. Shareholder approval was not obtained and any awards made prior to the effective date have been terminated.
Warrants
A summary of the status of the warrants granted for the nine month period ended September 30, 2012 and for the year ended December 31, 2011 and changes during the periods then ended is presented below:
|
For the Year Ended December 31, 2011
|
|
For the Nine Months Ended September 30, 2012
|
|
| |
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding at beginning of period
|
|
|
3,230,369 |
|
|
$ |
1.07 |
|
Outstanding at beginning of period
|
|
|
8,938,668 |
|
|
$ |
0.82 |
|
|
Granted
|
|
|
5,708,299 |
|
|
|
0.68 |
|
Granted
|
|
|
6,189,800 |
|
|
|
0.20 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
160,000 |
|
|
|
1.00 |
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
Expired
|
|
|
- |
|
|
|
- |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
Outstanding at end of period
|
|
|
8,938,668 |
|
|
$ |
0.82 |
|
Outstanding at end of period
|
|
|
14,968,468 |
|
|
$ |
0.56 |
|
| |
|
|
As of September 30, 2012
|
|
|
As of September 30, 2012
|
|
| |
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
| |
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Range of
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Exercise Prices
|
|
|
Outstanding
|
|
|
Contract Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
0.001 |
|
|
|
299,769 |
|
|
|
0.3 |
|
|
$ |
0.001 |
|
|
|
299,769 |
|
|
$ |
0.001 |
|
| |
0.15 |
|
|
|
5,389,800 |
|
|
|
4.9 |
|
|
|
0.15 |
|
|
|
5,389,800 |
|
|
|
0.15 |
|
| |
0.25 |
|
|
|
200,000 |
|
|
|
3.1 |
|
|
|
0.25 |
|
|
|
200,000 |
|
|
|
0.25 |
|
| |
0.40 |
|
|
|
1,299,999 |
|
|
|
2.5 |
|
|
|
0.40 |
|
|
|
1,299,999 |
|
|
|
0.40 |
|
| |
0.50 |
|
|
|
2,694,450 |
|
|
|
1.7 |
|
|
|
0.50 |
|
|
|
2,694,450 |
|
|
|
0.50 |
|
| |
0.60 |
|
|
|
975,000 |
|
|
|
4.2 |
|
|
|
0.60 |
|
|
|
975,000 |
|
|
|
0.60 |
|
| |
0.75 |
|
|
|
200,000 |
|
|
|
3.1 |
|
|
|
0.75 |
|
|
|
200,000 |
|
|
|
0.75 |
|
| |
1.00 |
|
|
|
2,909,450 |
|
|
|
1.6 |
|
|
|
1.00 |
|
|
|
2,909,450 |
|
|
|
1.00 |
|
| |
2.00 |
|
|
|
1,000,000 |
|
|
|
0.3 |
|
|
|
2.00 |
|
|
|
1,000,000 |
|
|
|
2.00 |
|
| $ |
0.001- 2.00 |
|
|
|
14,968,468 |
|
|
|
3.0 |
|
|
$ |
0.56 |
|
|
|
14,968,468 |
|
|
$ |
0.56 |
|
NOTE 8 – DERIVATIVE LIABILITIES
Beginning in 2008, the Company issued stock purchase warrants to various lenders and investors as part of note payable agreements and stock subscription agreements. These warrants were immediately exercisable and some contained provisions for cashless exercise under certain circumstances. The warrants ranged in term from three to five years and had expiration dates ranging from December 31, 2012 to December 31, 2016. The warrants also contained anti-dilution provisions including provisions for the adjustment of the exercise price if the Company issues shares of Common Stock or Common Stock equivalents at a price less than the exercise price. As of September 30, 2012, the Company had outstanding warrants entitling the holders to purchase 14,968,468 shares of Common Stock upon exercise.
In addition, beginning in 2010, the Company issued convertible debentures and notes payable to various lenders. These debentures and notes were convertible at discounts ranging from 30% to 50% of the fair market value of the Common Stock. In accordance with ASC Topic No. 470-20-25-4, the Company recorded the intrinsic value of the embedded beneficial conversion feature present in the convertible instruments by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. As of September 30, 2012, the Company had outstanding convertible debt in the principal amount of $533,722 and outstanding convertible debentures in the principal amount of $507,000.
As of December 31, 2011, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all outstanding debentures and convertible notes payable. As a result, the Company determined that the warrants and the embedded beneficial conversion features of the debt instruments did not qualify for equity classification. Accordingly, the warrants and beneficial conversion features are treated as derivative liabilities and are carried at fair value.
The Company estimates the fair value of the derivative warrant liabilities by using the American Option Binomial Model, a Level 3 input, with the following assumptions used:
|
Dividend yield:
|
1%
|
|
Expected volatility
|
283.86% to 549.88%
|
|
Risk free interest rate
|
.31% to 1.04%
|
|
Expected life (years)
|
1.00 to 5.00
|
The following table sets forth the changes in the fair value of derivative liabilities for the year ended December 31, 2011 and the nine months ended September, 2012:
|
Balance, December 31, 2010
|
|
$ |
(2,310,983 |
) |
|
Change in Fair Value of Warrant Derivative Liability
|
|
|
1,237,803 |
|
|
Change in Fair Value of Beneficial Conversion Derivative Liability
|
|
|
(763,098 |
) |
|
Adjustments to Warrant Derivative Liability
|
|
|
(2,749,453 |
) |
|
Adjustment to Beneficial Conversion Derivative Liability
|
|
|
(260,599 |
) |
|
Adjustment to Debenture Derivative Liability
|
|
|
(571,195 |
) |
|
Balance, December 31, 2011
|
|
$ |
(5,417,525 |
) |
|
Change in Fair Value of Warrant Derivative Liability
|
|
|
1,079,850 |
|
|
Change in Fair Value of Beneficial Conversion Derivative Liability
|
|
|
261,554 |
|
|
Change in Fair Value of Debenture Derivative Liability
|
|
|
477,792 |
|
|
Adjustments to Warrant Derivative Liability
|
|
|
(237,161 |
) |
|
Adjustment to Beneficial Conversion Derivative Liability
|
|
|
838,718 |
|
|
Adjustment to Debenture Derivative Liability
|
|
|
355,310 |
|
|
Balance, September 30, 2012
|
|
|
(2,641,462 |
) |
| |
|
|
|
|
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company’s corporate office is located in Fort Worth, Texas. During the first quarter of 2012 the space was leased by HEB and the Company reimbursed HEB for the cost of the space. In the second quarter of 2012 the Company signed its own lease for approximately 1150 square feet of rentable area. The lease, which expires in November 2013, requires base rent payment of $2,065 per month.
During the first quarter of 2012 the company reimbursed HEB for the cost of accounting and administrative services provided to the Company by employees of HEB. Additionally, the Company paid HEB for the actual costs of health benefits provided to Company employees through HEB. In the second quarter of 2012 the Company transitioned to its own health care plan and contracted its own accounting and administrative staff.
NOTE 10 – RESTATEMENT
The Company has restated its financial statements for period ended September 30, 2011. The significant changes made are further described and summarized below.
The Company had not previously recorded the derivative liabilities associated with convertible debt, debentures, and warrants issued in the third quarter of 2011. The Company has restated its financial statements for the period ended September 30, 2011 to record these corrections.
The following tables highlight the significant areas of change:
| |
|
Three Months Ended September 30, 2011
|
|
| |
|
As Previously
|
|
|
|
|
|
|
|
| |
|
Reported
|
|
|
Restated
|
|
|
|
|
| |
|
September 30,2011
|
|
|
September 30, 2011
|
|
|
Change
|
|
|
Total Assets
|
|
$ |
7,777,050 |
|
|
$ |
7,777,050 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$ |
(2,964,209 |
) |
|
$ |
(8,222,286 |
) |
|
$ |
(5,258,077 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
$ |
(4,812,841 |
) |
|
$ |
(445,236 |
) |
|
$ |
5,258,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(1,066,016 |
) |
|
$ |
(337,837 |
) |
|
$ |
728,179 |
|
|
Income (Loss) available to common stockholders
|
|
$ |
(1,066,016 |
) |
|
$ |
(337,837 |
) |
|
$ |
728,179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Loss per Share
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
| |
|
Nine Months Ended September 30, 2011
|
|
| |
|
As Previously
|
|
|
|
|
|
|
|
| |
|
Reported
|
|
|
Restated
|
|
|
|
|
| |
|
September 30,2011
|
|
|
September 30, 2011
|
|
|
Change
|
|
|
Total Assets
|
|
$ |
7,777,050 |
|
|
$ |
7,777,050 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$ |
(2,964,209 |
) |
|
$ |
(8,222,286 |
) |
|
$ |
(5,258,077 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
$ |
(4,812,841 |
) |
|
$ |
(445236 |
) |
|
$ |
5,258,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(7,008,903 |
) |
|
$ |
(7,588,460 |
) |
|
$ |
(579,557 |
) |
|
Income (Loss) available to common stockholders
|
|
$ |
(7,008,903 |
) |
|
$ |
(7,588,460 |
) |
|
$ |
(579,557 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Loss per Share
|
|
$ |
(0.13 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.01 |
) |
NOTE 11 - SUBSEQUENT EVENTS
On October 1, 2012, the Company paid $20,000 principal due on one of the third quarter secured subordinated promissory notes.
On October 1, 2012, the Company executed a promissory note in the amount of 75,000 to an unrelated party. The terms of the debt are as follows: (i) interest accrues at 9% per annum; (ii) The principal of this Note shall be due and payable as follows: (a) $10,000; (b) $15,000 each November 30, 2012, December 31, 2012 and January31, 2013; and (c) $20,000 on February 28, 2013 the maturity date; (iii) the Company will issue to Lender five-year warrant to purchase a total of 225,000 shares of common Stock at a price of $0.15 per share.
On October 8, 2012, the Company paid Tonaquint $5,000 to extend the Forbearance Period to November 15, 2012. Additionally, on October 26, 2012, the Company issued Tonaquint 43,382 pursuant to the terms of the Forbearance Agreement (see Note 3 “Significant Transactions”).
On October 19, 2012, the Company received an additional $25,000 of funding related to the May 30, 2012 convertible note.
In October of 2012, the Company paid a total of $45,000 of principal due on the August 3, 2012 note payable.
The Company has evaluated all subsequent events from the balance sheet date through the date of this filing and with the exception of the items mentioned above there are no events to disclose.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures as of September 30, 2012, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of September 30, 2012, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about June 4, 2012, the United States Securities and Exchange Commission filed a Complaint against the Company and Scott A. Haire, a former officer and director of the Company, in the United States District Court for the Southern District of Florida. The Complaint alleges that from at least July through November 2009, the Company and Haire engaged in a fraudulent scheme and market manipulation involving the Company’s stock. The Complaint alleges that (a) Haire arranged to sell Company restricted stock to an FBI agent posing as the trustee of a pension fund and to pay that person a kickback for engaging in the transaction; and (b) Haire arranged to make payments to a fictitious person, putatively a broker, in exchange for the broker’s trading in company stock timed with Company press releases. The Complaint asserts claims for violations of Section 17(a) (1) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. The Complaint seeks (a) a declaration that the Company and Haire committed those violations; (b) an injunction against the further commission of such violations; (c)disgorgement; (d) civil money penalties; (e) an order barring Haire from participating in any offering of a penny stock; and (f) an order barring Haire from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or that is require to tile reports pursuant to Section 15(d) of the Securities Exchange Act.
The Company, separate from Mr. Haire, is engaged in settlement discussions with the Securities and Exchange Commission concerning a potential settlement of the action against the Company. On September 14, 2012, the Company filed a Consent of Defendant with the SEC and has reached an agreement-in-principal with the staff of the Miami Regional Office of the SEC. To resolve the claims against it, the Company has consented to the entry of a permanent injunction against violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act involving the payment of undisclosed compensation to investment advisors, managers, and trustees or the manipulation of the price or volume of any security. As part of the settlement agreement the Company paid a $20,000 civil money penalty. The proposed settlement is subject to approval by the Commissioners of the SEC and the court in the enforcement action. Proceedings against Wound management in the enforcement action have been stayed to allow time for the approval process to proceed.
On November 14, 2011, Ken Link instituted litigation against the Company and Scott A. Haire in the District Court of Tarrant County Texas, 342nd Judicial District alleging default under the terms of a certain promissory note executed by Wound Management Technologies, Inc. and guaranteed by Scott A. Haire. Ken Link asserts that the unpaid balance of the note, including accrued interest as of December 4, 2011 is the sum of $255,292 plus 200,000 shares of the Company’s common stock. We have disputed the claim and have asserted a counter claim that the transaction described in the Plaintiff’s original petition is usurious in violation of the provisions of the Texas Finance Code. Furthermore, we have filed an action for recovery of damages related to a note previously executed by the Company and Ken Link, which is also usurious under the Texas Finance Code. We further claim that the Plaintiff, who placed $223,500 of orders in 2011, is in breach of a Distribution Agreement with WCI. While we believe the claims made against the Company are without merit, and will vigorously defend against them, 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 results of operations.
On July 13, 2012, Tonaquint, Inc. (“Tonaquint”) filed suit against the Company and certain of its affiliates in connection with a Securities Purchase Agreement by and between Tonaquint and the Company under which Tonaquint purchased a Secured Convertible Promissory Note in the original principal amount of $560,000 (the “Note”). The suit alleges, among other things, a failure of the Company to make certain payments and to honor a conversion notice delivered pursuant to the Note. On August 17, 2012, Tonaquint and the Company entered into a forbearance agreement, pursuant to which Tonaquint agreed:
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(iv)
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To refrain from exercising its rights under the Note through November 15, 2012, which date can, at the Company’s option, be extended an additional 30 days;
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(v)
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To convert $20,000 in principal amount owed under the Note into shares of the Company’s Common Stock, the number of such shares to be determined as set forth in the Forbearance Agreement; and
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(vi)
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To accept as payment in full of the Note (in conjunction with the issuance of the Conversion Shares) a cash payment of $200,000 on or before October 16, 2012 (as such date may be extended at the Company’s option.)
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On August 21, 2012, the Company issued to Tonaquint, pursuant to the forbearance agreement, 166,667 shares of Common Stock in conversion of $20,000 of note principal. An additional 43,382 shares of Common Stock were issued on October 20, 2012, also in relation to the $20,000 conversion. On October 8, 2012, the Company paid Tonaquint $5,000 to extend the Forbearance Period to November 15, 2012.
The Company was delinquent in the payment of 2004-2005 tax liabilities with the Internal Revenue Service (the “IRS”). A tax lien was filed against the Company in December 2009. On January 28, 2012 the Company made payment in the amount of $122,223 to the IRS for the balance due for payroll tax liabilities from 2004-2005. Approximately $116,075 was applied to the outstanding tax liability while the remaining balance was applied to related fees and interest. Additional interest payments in the amount of $8,026 were made in the second quarter. As of the date of this filing the Company is in the process of attempting to settle the remaining obligation of approximately $208,142 related to fees and interest and the final amount due will be subject to negotiations with the IRS.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide this information.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the nine months ended September 30, 2012. The securities bear a restrictive legend and no advertising or public solicitation was involved.
As further described in Part I – Financial Information “Notes to Unaudited Condensed Consolidated Financial
Statements” filed herewith:
On January 25, 2012, 164,286 shares of Common Stock valued at $100,214 which were issued in the first quarter of 2011 for prepaid advertising were cancelled and returned to the Company after the advertising company was unable to complete the contract.
In March of 2012, the Company issued 200,000 shares of Common Stock with a fair market value of $46,000 to an unrelated party as part of the March 27, 2012 debenture issuance.
On April 2, 2012, the Company issued 4 million shares of common stock in conversion of debentures in the amount of $588,000.
On April 27, 2012, the Company issued 137,143 shares of common stock in the conversion of $12,000 on unrelated party debt.
On May 8, 2012, the Company issued 216,460 shares of common stock in the conversion of $18,000 of unrelated party debt and $1,200 of unrelated party interest.
On May 8, 2012, the Company issued 166,113 shares of common stock in the conversion of $15,000 of unrelated party debt.
On August 21, 2012, the Company issued 166,667 shares of common stock in the conversion of $20,000 of unrelated party debt in accordance with the Forbearance Agreement (see Note 3).
On August 23, 2012, the Company issued 300,000 shares of common stock valued at $42,000 for advertising expense.
On September 20, 2012, the Company issued 160,000 shares of common in the exercise of warrants and 222,420 shares of common stock in conversion of $20,000 of unrelated party debt.
On September 24, 2012, the Company issued 500,000 shares of common stock valued at $72,500 as settlement for consulting services.
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(2) of the Securities Act of 1933, as amended (the “Act”). The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions. We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
This item is not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
· The following documents are filed as part of this Report:
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2.1
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Agreement and Plan of Merger, dated as of September 17, 2009, by and among BioPharma Management Technologies, Inc., a Texas corporation, certain shareholders thereof, Wound Management Technologies, Inc., a Texas corporation, and BIO Acquisition, Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 21, 2009)
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3.1
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Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)
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3.2
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Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit A to the Company’s Information Statement filed with the Commission on May 13, 2008)
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3.3
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Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)
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10.1
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Forbearance Agreement dated July 13, 2012 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 19, 2012)
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10.2
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Form of Secured Subordinated Promissory Note (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 19, 2012)
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10.3
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Form of Warrant to Purchase Shares of Common Stock (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed July 19, 2012)
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10.4
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Commitment Letter dated July 10, 2012 (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed July 19, 2012)
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10.5
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Amendment to Forbearance Agreement dated July 25, 2012 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 30, 2012)
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31.1*
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Certification of Principal Executive Officer and Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002*
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32.1*
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Certification of Principal Executive Officer and Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002*
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101
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Interactive Data Files pursuant to Rule 405 of Regulation S-T.
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SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WOUND MANAGEMENT TECHNOLOGIES, INC.
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| Date: November 14, 2012 |
/S/ Robert Lutz, Jr.
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Robert Lutz, Jr.,
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Chairman of the Board, Chief Executive Officer and President
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