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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended
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Sep. 30, 2018
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Basis of Presentation The terms “WMT,” “WNDM,” “we,” “the Company,” and “us” as used in this report refer to Wound Management Technologies, Inc. and its wholly owned subsidiaries. The accompanying unaudited consolidated balance sheet as of September 30, 2018, and unaudited consolidated statements of operations for the nine-months ended September 30, 2018 and 2017, 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, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, 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, 2017, and December 31, 2016, included in the Company’s Annual Report on Form 10-K. The accompanying consolidated balance sheet as of December 31, 2017, has been derived from the audited financial statements filed in our Form 10-K and is included for comparison purposes in the accompanying balance sheet. Certain prior year amounts have been reclassified to conform to current year presentation. Principles of Consolidation The accompanying consolidated financial statements include the accounts of WMT and its wholly-owned subsidiaries: Wound Care Innovations, LLC a Nevada limited liability company (“WCI”); Resorbable Orthopedic Products, LLC, a Texas limited liability company (“Resorbable); and Innovate OR, Inc. “InnovateOR” formerly referred to as BioPharma Management Technologies, Inc., a Texas corporation (“BioPharma”). All intercompany accounts and transactions have been eliminated. Effective August 28, 2018, the Company consummated definitive agreements that continued operations to market the Company’s principal products, CellerateRX® Surgical Activated Collagen® Peptides and CellerateRX® Hydrolyzed Collagen wound fillers (CellerateRX), through a 50% ownership interest in a newly formed limited liability company, Cellerate, LLC. The remaining 50% ownership interest is held by an affiliate of The Catalyst Group (CGI), which recently acquired an exclusive license to distribute CellerateRX products. Cellerate, LLC will conduct operations with an exclusive sublicense from a CGI affiliate to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico. While the Company has significant influence over the operations of Cellerate, LLC, the Company does not have a controlling interest. CGI has the controlling vote in the event of a deadlocked vote by the Board of Managers of Cellerate, LLC. Therefore, the Company’s investment in Cellerate, LLC is reported using the equity method of accounting. Beginning September 1, 2018, the Company’s 50% share of Cellerate, LLC’s net income or loss is presented as a single line item on WMT’s Statement of Operations. Cellerate, LLC’s Statement of Operations are included as an exhibit to the Financial Statements of WMT (see Exhibit 30.6 for Cellerate, LLC’s Statement of Operations for the month ended September 30, 2018). The definitive agreements related to the Cellerate, LLC transaction are summarized below. The full agreements are attached as exhibits to this filing. Contribution Agreement Wound Care Innovations, LLC (“Wound Care”), a wholly owned subsidiary of WNDM, transferred to Cellerate, LLC all of its existing inventories and certain Wound Care trademarks and UPC numbers in exchange for its 50% ownership interest in Cellerate, LLC. The inventories had a net book value of $448,511 at the time of closing. Additionally, as part of the transaction, the Company issued a 30-month convertible promissory note to CGI in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest is payable quarterly, but may be deferred at WNDM’s election to the maturity of the Note. Outstanding principal and interest are convertible at CGI’s option into shares of WNDM common stock at a conversion price of $.09 per share. The Company recorded its initial investment in Cellerate, LLC at cost, which was $1,948,511 as of the closing date. This included the $1,500,000 convertible promissory note to CGI and inventories valued at $448,511 net of obsolescence. The trademarks and UPC numbers contributed to Cellerate, LLC had zero book value. For the period ending September 30, 2018, the Company recognized $10,906 of income from its equity method investment in Cellerate, LLC, resulting in an investment balance of $1,959,417 as of September 30, 2018. CGI transferred to Cellerate, LLC in exchange for its 50% ownership interest an exclusive sublicense to distribute CellerateRX into the wound care and surgical markets in the United States, Canada and Mexico. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by CGI or Wound Care on six-months' notice. The foregoing summary of the Contribution Agreement does not purport to be complete and is qualified in its entirety by reference to the Contribution Agreement. See Exhibit 30.1 for a full copy of the Contribution Agreement. Operating Agreement Cellerate, LLC’s Operating Agreement provides for the business and affairs of Cellerate, LLC to be managed by a Board of Managers consisting of two persons. CGI and Wound Care each has the right to appoint one person to the Board of Managers who serve indefinite terms until their resignation, removal or death. The Board of Managers act by a vote of the Managers, but in the event of a deadlocked vote, the vote of the CGI designated manager will be controlling, except (i) in the case of a transaction with a related party or affiliate (other than Cellerate, LLC) of the CGI designee or (ii) CGI transfers any portion of its ownership interest in Cellerate, LLC to a third party or more that 50% of CGI’s ownership is transferred to a third party. The initial Board of Managers is Mr. Ron Nixon as the CGI designee, and Mr. Michael Carmena as the Wound Care designee. The Board of Managers manages the general operations of Cellerate, LLC, subject however to a vote by members of Cellerate, LLC holding two-thirds of the membership interests in Cellerate, LLC to approve major actions of Cellerate, LLC. When sufficient cash is available, distributions to Cellerate, LLC’s owners will be made at times and in amounts determined by a vote of the Board of Managers. Cellerate, LLC, however, will make distributions on an annual basis sufficient for each owner to pay such owner’s income taxes arising from its ownership interest in Cellerate, LLC. The Operating Agreement contains restrictions on transfer of ownership interests with customary rights of first refusal, co-sale and buy/sell provisions applicable to each owner. The foregoing summary of Cellerate, LLC’s Operating Agreement does not purport to be complete and is qualified in its entirety by reference to the Operating Agreement. See Exhibit 30.2 for a full copy of the Operating Agreement. Sublicense Agreement Cellerate, LLC has an exclusive sublicense to distribute CellerateRX® Activated Collagen® products into the wound care and surgical markets in the United States, Canada and Mexico. The wound care market comprises the care for external wounds, including the treatment of external, tunneled or undermined wounds. This would include pressure ulcers (Stages I-IV), venous stasis ulcers, diabetic ulcers, ulcers resulting from arterial insufficiency, surgical wounds, traumatic wounds, first and second-degree burns, superficial wounds, cuts, scrapes, skin tears, skin flaps and skin grafts. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by either party on six-months' notice. Cellerate, LLC pays specified royalties to CGI based on Cellerate, LLC’s annual net sales of CellerateRX® Activated Collagen® Adjuvant. The foregoing summary of the Sublicense Agreement does not purport to be complete and is qualified in its entirety by reference to the Sublicense Agreement. See Exhibit 30.3 for a full copy of the Sublicense Agreement. Professional Services Agreement WNDM and CGI have agreed to provide Cellerate, LLC with certain professional services needed to conduct the affairs of Cellerate, LLC through December 31, 2018. WNDM and CGI will be reimbursed on a monthly basis by Cellerate, LLC for services performed, consistent with historical costs to provide the services. WNDM will also receive reimbursement for office lease and other overhead costs dedicated to supporting Cellerate, LLC’s activities. These reimbursements from Cellerate, LLC will be recognized by the Company as reductions of lease and overhead costs. The foregoing summary of the Professional Services Agreement does not purport to be complete and is qualified in its entirety by reference to the Professional Services Agreement. See Exhibit 30.4 for a full copy of the Professional Services Agreement. Promissory Note As part of the transaction to form Cellerate, LLC, the Company issued a 30-month convertible promissory note to CGI in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest is payable quarterly, but may be deferred at the Company’s election to the maturity of the Note. Outstanding principal and interest are convertible at CGI’s option into shares of WNDM common stock at a conversion price of $.09 per share. See Exhibit 30.5 for a full copy of the convertible promissory note. Equity Method Investment The Company owns membership interests of 50% in Cellerate, LLC. Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. The Company accounts for its interest in Cellerate, LLC using the equity method. Under the equity method of accounting, the Company records the investment at cost. The Company’s investment in the entity is increased by additional contributions to the entity as well as its proportionate share of earnings in the entity. Conversely, the Company’s investment is decreased by distributions made by the entity and by its proportionate share of losses by the entity. During the period ending September 30, 2018, the Company recognized Income from equity method investment of $10,906. Revenue Recognition On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no impact to the opening balance of accumulated deficit or revenues for the quarter ended September 30, 2018 as a result of applying Topic 606. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer. 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. Royalty revenues include $50,250 in accrued income for each of the three-months ended September 30, 2018 and 2017, and revenues of $150,750 for each of the nine-months ended September 30, 2018 and 2017 from the development and license agreement the Company executed with BioStructures, LLC (BioStructures) in 2011. Royalties of 2.0% are earned on sales of products containing the Company’s patented resorbable bone hemostasis, provided however, the minimum annual royalty due to the Company shall be $201,000 throughout the life of the patent which expires in 2023. These royalties are payable in quarterly installments of $52,250. Revenue streams from royalties and sales of CellerateRX and HemaQuell products for the nine-months ended September 30, 2018 and 2017 are presented below.
|  | Nine-months Ended |
|  | September, 30 |
|  | 2018 |  |  | 2017 |
CellerateRX Powder |  | $ | 5,249,059 |  |  | $ | 4,083,068 |
CellerateRX Gel |  |  | 355,472 |  |  |  | 373,344 |
HemaQuell |  |  | 35,021 |  |  |  | - |
Royalty revenue |  |  | 150,750 |  |  |  | 150,750 |
Total Revenue |  | $ | 5,790,302 |  |  | $ | 4,607,162 |
Beginning September 1, 2018, all CellerateRX and HemaQuell revenues were excluded from the Company’s results and included in Cellerate, LLC’s Statement of Operations. The Company will report its investment in Cellerate, LLC using the equity method of accounting. The Company’s 50% share of Cellerate, LLC’s net income or loss will be presented as a single line item on WMT’s Statement of Operations beginning September 1, 2018. Contract Assets and Liabilities The Company does not have any contract assets or contract liabilities. Inventories As part of the Cellerate, LLC transaction described above, the Company transferred to Cellerate, LLC all of its existing inventories including certain trademarks and UPC numbers. As a result, the Company has no product inventory or allowance for obsolete inventory on its balance sheet as of September 30, 2018. For prior period reporting, inventories were stated at the lower of cost or net realizable value, with cost computed on a first-in, first-out basis. Inventories consist of finished goods and related packaging supplies. The Company recorded no inventory obsolescence expense for the nine-months ended September 30, 2018, compared to $8,347 for the nine-months ended September 30, 2017. The allowance for obsolete and slow-moving inventory had a balance of $0 at September 30, 2018, and $144,996 at December 31, 2017. Fair Value Measurements As defined in Accounting Standards Codification (“ASC”) Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement. The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Our intangible assets have also been valued using the fair value accounting treatment. A description of the methodology used, including the valuation category, is described in the Company’s Annual Report on Form 10-K. Income Per Share The Company computes income per share in accordance with Accounting Standards Codification “ASC” Topic No. 260, “Earnings per Share,” which requires the Company to present basic and dilutive income per share when the effect is dilutive. Basic income per share is computed by dividing income available to common shareholders by the weighted average number of common shares available. Diluted income per share is computed similar to basic income 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. All convertible instruments were excluded as their inclusion would have been anti-dilutive during both the three months and nine months ended September 30, 2018 and 2017. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASC 842 Leases which is to be effective for reporting periods beginning after December 15, 2018. The Company has reviewed the pronouncement and believes it will not have a material impact on the Company’s financial position, operations or cash flows. In March 2016, the FASB issued ASU 2016-07, which eliminates a requirement for the retroactive adjustment on a step by step basis of the investment, results of operations, and retained earnings as if the equity method had been effective during all previous periods that the investment had been held when an investment qualifies for equity method accounting due to an increase in the level of ownership or degree of influence. The cost of acquiring the additional interest in the investee is to be added to the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. The presentation of the Company’s financial statements is consistent with this guidance.

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