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EX-31.1 - WOUND MANAGEMENT TECHNOLOGIES, INC.wmti10qex311093011.htm
EX-32.1 - WOUND MANAGEMENT TECHNOLOGIES, INC.wmti10ex321q093011.htm
 


 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


FORM 10-Q


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

For the quarterly period ended: September 30, 2011

[   ]          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
 
Commission File No.    0-11808

WOUND MANAGEMENT TECHNOLOGIES, INC.
 
 
Texas
59-2219994
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)

777 Main Street
Suite 3100
Fort Worth, Texas 76102
(Address of principal executive offices)
(817) 820-7080
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
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). Yesx   No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “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 the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of September 30, 2011, 58,031,375 shares of the Issuer's $.001 par value common stock were issued and 58,027,286 shares were outstanding.
 
 
 

 


WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

Form 10-Q

Quarter Ended September 30, 2011

PART I – FINANCIAL INFORMATION
 
   
ITEM 1.     Financial Statements
 
   
Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and
 
December 31, 2010 (Audited)
2
   
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended
 
September 30, 2011 and 2010
3
   
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
 
September 30, 2011 and 2010
4
   
Notes to Unaudited Condensed Consolidated Financial Statements
  5
   
ITEM 2.    Management’s Discussion and Analysis of Financial Condition
 
and Results of Operations
17
   
ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk
20
   
ITEM 4.    Controls and Procedures
21
   
PART II. OTHER INFORMATION
 
   
ITEM 1.    Legal Proceedings
21
   
ITEM 1A  Risk Factors
21
   
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds
21
   
ITEM 3.    Defaults upon Senior Securities
22
   
ITEM 4.    Removed and reserved
 
   
ITEM 5.    Other Information
22
   
ITEM 6.    Exhibits
22
   
Signatures
23
 
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30, 2011 (UNAUDITED) and DECEMBER 31, 2010 (AUDITED)
 
             
ASSETS
 
September 30, 2011
   
December 31, 2010
 
             
CURRENT ASSETS:
           
   Cash
  $ 105,821     $ 50,835  
   Accounts Receivable, net
    74,547       450,142  
   Inventory, net
    412,608       290,034  
   Notes Receivable - Related Parties
    1,104,008       13,782  
   Accrued Interest  - Related Parties
    101,366       45,299  
Total Current Assets
    1,798,350       850,092  
                 
LONG-TERM ASSETS:
               
   Property and Equipment, net
    -       806  
   Intangible Assets, net
    3,758,500       4,110,859  
   Deferred Loan Costs
    81,943       89,170  
   Prepaid and Other Assets
    156,869       107,150  
   Note Receivable
    1,750,000       1,500,000  
   Accrued Interest
    231,388       125,250  
Total Long-Term Assets
    5,978,700       5,933,235  
                 
TOTAL ASSETS
  $ 7,777,050     $ 6,783,327  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
   Accounts Payable
  $ 226,341     $ 321,352  
   Accrued Royalties
    334,488       428,238  
   Accrued Liabilities
    547,155       458,218  
   Accrued Interest - Related Parties
    92,837       101,815  
   Accrued Interest
    108,155       23,945  
   Notes Payable - Related Parties
    419,577       1,818,561  
   Notes Payable, net of discount
    721,007       327,060  
   Stock Subscription Payable
    5,000       -  
Total Current Liabilities
    2,454,560       3,479,189  
                 
LONG-TERM LIABILITIES
               
   Debentures, net of discount
    509,649       435,346  
TOTAL LIABILITIES
    2,964,209       3,914,535  
                 
STOCKHOLDERS' EQUITY
               
Series A Preferred Stock, $10 par value, 5,000,000
shares authorized; 0  issued and outstanding
    -       -  
                 
Series B Preferred Stock, $10 par value, 75,000
shares authorized; 0  issued and outstanding
    -       -  
                 
Common Stock: $.001 par value; 100,000,000
shares authorized; 58,031,375 issued and
58,027,286 outstanding as of September 30, 2011
and 41,316,930 issued and 41,312,841 outstanding
 as of December 31, 2010
    58,031       41,317  
   Additional Paid-in Capital
    34,752,970       26,056,408  
   Stock Subscription Receivable
    (52,398 )     (292,074 )
   Treasury Stock
    (12,039 )     (12,039 )
   Accumulated Deficit
    (29,933,723 )     (22,924,820 )
Total Stockholders' Equity
    4,812,841       2,868,792  
TOTAL LIABILITIES AND STOCKHOLDERS'
               
EQUITY
  $ 7,777,050     $ 6,783,327  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
3

 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
                         
   
THREE MONTHS
   
THREE MONTHS
   
NINE MONTHS
   
NINE MONTHS
 
   
ENDED
   
ENDED
   
ENDED
   
ENDED
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
                         
                         
REVENUES
  $ 133,841     $ 111,652     $ 1,296,951     $ 292,609  
                                 
COST OF GOODS SOLD
    373,505       296,641       552,658       345,455  
                                 
GROSS PROFIT
    (239,664 )     (184,989 )     744,293       (52,846 )
                                 
GENERAL AND ADMINISTRATIVE EXPENSES:
                               
                                 
General and Administrative Expenses
    394,727       424,791       2,202,913       1,400,171  
Depreciation / Amortization
    117,453       135,618       353,165       371,496  
INCOME (LOSS) FROM CONTINUING OPERATIONS:
    (751,844 )     (745,398 )     (1,811,785 )     (1,824,513 )
                                 
OTHER INCOME (EXPENSES):
                               
Gain (Loss) on Debt Settlement
    252,969       (462,545 )     (1,128,914 )     (1,195,219 )
Gain (Loss) from Joint Venture
    11,655       -       11,655       -  
Interest Income
    77,179       47,610       212,879       116,364  
Interest Expense
    (69,282 )     (318,696 )     (206,104 )     (484,757 )
Debt related Expense
    (586,693 )     (206,250 )     (4,086,634 )     (206,250 )
                                 
LOSS BEFORE INCOME TAXES
    (1,066,016 )     (1,685,279 )     (7,008,903 )     (3,594,375 )
   Current tax expense
    -       -       -       -  
   Deferred tax expense
    -       -       -       -  
NET LOSS
  $ (1,066,016 )   $ (1,685,279 )   $ (7,008,903 )   $ (3,594,375 )
                                 
Basic and diluted loss per share of common stock
  $ (0.02 )   $ (0.05 )   $ (0.13 )   $ (0.10 )
                                 
Weighted average number of common shares outstanding
    57,505,852       35,677,399       53,447,612       34,893,037  
                                 
                                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
4

 
 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010
 
             
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss from continuing operations
  $ (7,008,903 )   $ (3,594,375 )
Adjustments to reconcile net loss to net cash provided (used) in
               
operating activites:
               
     Depreciation and amortization
    353,165       353,818  
 Amortization of discounts and deferred costs
    498,436       (51,587 )
 Stock issued as payment for services
    161,600       218,282  
 Non-cash debt related costs
    250,000       455,306  
 Stock Issued as payment of expenses
    388,080       -  
 Stock issued for debt related costs
    3,338,200       -  
 Gain on Joint Venture
    (11,655 )     -  
 Loss on debt settlement
    1,128,914       1,195,219  
     Non-cash expenses
    201,387       22,019  
Changes in assets and liabilities:
               
    (Increase) decrease in accounts receivable
    375,595       (50,893 )
    (Increase) decrease in inventory
    (15,424 )     43,218  
(Increase) decrease in accrued interest receivable - related parties
    (106,741 )     (25,614 )
(Increase) decrease in accrued interest receivable
    (106,138 )     (90,750 )
(Increase) decrease in prepaids and other assets
    (45,000 )     (172,587 )
    Increase (decrease) in accrued royalties
    (93,750 )     280,559  
    Increase (decrease) in accounts payable
    (95,011 )     23,956  
Increase (decrease) in accrued liabilities
    88,937       (20,430 )
Increase (decrease) in accrued interest payable - related parties
    28,793       149,311  
Increase (decrease) in accrued interest payable
    86,210       18,290  
Net cash flows provided (used) in operating activities
    (583,305 )     (1,246,258 )
                 
Cash flows from investing activities:
               
Cash paid in acquisitions
    -       (100,000 )
Purchase of notes receivable - related parties
    (5,284,666 )     (1,280,037 )
Proceeds from notes receivable - related parties
    4,330,244       756,375  
Net cash flows used in investing activities
    (954,422 )     (623,662 )
                 
Cash flows from financing activities:
               
Net change in overdraft
    -       (4,363 )
Proceeds from notes payable - related parties
    831,363       1,355,046  
Payments on notes payable - related parties
    (1,617,852 )     (137,181 )
Proceeds from notes payable
    3,213,000       457,475  
Payments on notes payable
    (1,960,498 )     (483,302 )
Proceeds from debentures
    -       570,000  
Proceeds from sale of stock
    954,699       149,998  
Proceeds from stock subscriptions receivable
    167,001       -  
Proceeds from stock subscriptions payable
    5,000       -  
Net cash flows provided by financing activities
    1,592,713       1,907,673  
                 
Increase in cash
    54,986       37,753  
                 
Cash and cash equivalents, beginning of period
    50,835       -  
Cash and cash equivalents, end of period
  $ 105,821     $ 37,753  
                 
                 
Cash paid during the period for:
               
Interest
  $ 91,101     $ 22,473  
Income Taxes
    -       -  
                 
Supplemental Non-cash investing and financing activities:
               
Common stock issued for debt conversion
  $ 1,282,664     $ 2,498,401  
Financing acquisition of note receivable and related debt
  $       $ 400,000  
Deferred financing costs
  $ 34,227     $ 294,000  
Subscriptions receivable offset with note payable
  $ 72,675     $ -  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
         
 
 
 
5

 

 
WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011



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, 2011 and unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 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, 2010 and December 31, 2009, included in the Company’s Annual Report on Form 10-K.  The accompanying audited consolidated balance sheet as of December 31, 2010 has been 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 (“WCI”), a Nevada limited liability company; BioPharma Management Technologies, Inc. (“BioPharma”), a Texas corporation; Resorbable Orthopedic Products, LLC (“Resorbable”), a Texas limited liability company; and Secure eHealth, LLC (“SeHealth”), a Nevada limited liability 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.
 
 
 
6

 

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.

There are no financial instruments existing at September 30, 2011 that are subject to fair value measurement.  Our intangible assets have been valued using this 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. 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 using the effective interest method.


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.  Amounts recorded by the Company as a result of this transaction were the following:

a)  
A long term asset has been recorded for the $1,500,000 Senior Secured Convertible Promissory Note Receivable issued by Private Access, Inc. (the “Private Access Note”).
 
 
 
7

 
 
b)  
A liability was incurred for the note payable obligation of $1,000,000, which included accrued interest incurred by VHGI in conjunction with the Private Access Note transaction. Subsequent to the purchase date, the Company negotiated payment of this debt with stock.

No value was assigned to the other assets included in the transaction, which were fully amortized intangibles, because no value was identified for these assets when determining the purchase price paid.  These intangibles include intellectual property related to the prescription drug monitoring “Veriscrip” technology and the System Tray Notifier license owned by SeHealth.  The purchased assets also included VHGI’s 100% membership interest in SeHealth.

Scott A. Haire, the Company's Chief Executive Officer (“CEO”) and Chairman, also serves as Chairman and the Chief Financial Officer (“CFO”) of VHGI.  Based on shares outstanding as of the Annual Report on Form 10-K filed by VHGI for the year ended December 31, 2010, Mr. Haire beneficially owns, individually and through H.E.B., LLC, a Nevada limited liability company of which Mr. Haire is the managing member, 28% 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.  Juventas is an affiliate of Biomet Texas, Ltd., the largest Biomet distributor. This multi-year agreement has 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.

NOTE 4 - NOTES RECEIVABLE

Notes ReceivableRelated Parties

The following is a summary of amounts due from related parties, including accrued interest separately recorded, as of September 30, 2011:

Related party
Nature of relationship
Terms of the agreement
Principal amount
Accrued Interest
         
H.E.B., LLC, a Nevada
limited liability company
 
Scott Haire is the managing
member of HEB.
Unsecured $800,000 line of credit due on demand
with interest rate of 10% per annum.   Available
line as of September 30, 2011 is $760,867.
$     39,133
$1,171
         
VHGI Holdings, Inc.
 
Scott Haire is a director and officer
of WMT and VHGI.
Unsecured note with interest accrued at rate of
10% per annum and is due on demand.
     45,664
 
 
4,418
         
MAH Holding, LLC
 
MAH Holding, LLC has provided
previous lines of credit to affiliates
 of WMT.
Unsecured note with interest accrued at 10%
per annum and is due on demand.
  1,019,211
95,777
 
TOTAL
   
$1,104,008
$101,366
 
Notes Receivable

The Private Access Note, in the amount of $1,500,000, is with an unrelated company and the loan bears interest at 9% per annum from the day of purchase to the maturity date of July 31, 2013, with $227,152 of interest accrued as of September 30, 2011.  According to the terms of the Assignment and Assumption Agreement between VHGI (“Assignor”), Private Access, Inc. (“Private Access”) and the Company (“Assignee”), Assignor 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 Assignee.  Under the terms of the Security Agreement dated August 3, 2009, which was assigned to the Company by Assignor, the Company, along with other investors, holds pro rata security interests in all property of Private Access including its intellectual property.
 
 
 
8

 

The Company has five $50,000 5% secured notes, with the same unrelated party for a total balance of $250,000.  The notes were received as part of the June 21, 2011 note payable and warrant purchase agreement (see note 5).  Each $50,000 5% secured note receivable has a maturity date 49 months from the initial funding.  As of September 30, 2011, the principal balance receivable on these notes is $250,000.   As of this same date, $4,236 of interest receivable has been accrued.


NOTE 5 – NOTES PAYABLE

Notes Payable – Related Parties

Funds are advanced to the Company from various related parties including Scott A. Haire, the Company's CEO, and entities controlled by him.  Other shareholders may fund the Company as necessary to meet working capital requirements and expenses.  The following is a summary of amounts due to related parties, including terms of the debt, and the interest accrued as of September 30, 2011:


Related party
Nature of relationship
Terms of the agreement
Principal amount
Accrued Interest
         
H.E.B., LLC, a Nevada
limited liability company
Scott Haire is the managing
member of H.E.B., LLC.
Series of funds advanced under three separate,
unsecured lines of credit totaling $1.3 million at
10% per annum; no maturity date; unused lines
available at September 30, 2011 total $1,147,988.
$   152,012
$42,236
         
Commercial  Holding
AG, LLC
Commercial Holding AG, LLC
has provided previous lines of
credit to affiliates of WMT.
Unsecured notes with interest accrued at rates of
8% and 10% per annum until paid in full with no
maturity date.
     199,145
49,247
         
MAH Holding, LLC
 
MAH Holding, LLC has
provided previous lines of
credit to affiliates of WMT.
Unsecured notes with interest accrued at 10% per
annum until paid in full with no maturity date.
68,420
1,354
TOTAL
   
$   419,577
$92,837

As mentioned in Note 3 – “Significant Transactions,” the principal balance of the $400,000 WMT Note due to VHGI for the purchase of assets in February 2010 was paid in full as of March 31, 2011. The remaining $31,036 of accrued interest payable related to the WMT note due as of March 31, 2011 was paid in April of 2011.

Notes Payable
On December 28, 2010, the company issued a note in the amount of $50,000 to an unrelated party. The note and interest, accrued at 12%, had a maturity date of February 28, 2011.  In consideration of the note, the Company issued 160,000 shares of common stock valued at $56,000.  The Company recorded the value of the common stock and $3,100 of issuance costs as a loan origination fee in the fourth quarter of 2010. The entire balance due on this note, including accrued interest, was paid in full in February of 2011.

In the first quarter of 2011, the Company issued debt in the amount of $1,660,000 to various unrelated parties.  The terms of the debt are as follows:  (i) interest accrues at 10% per annum; (ii) maturity date is six months from the date of issuance; and (iii) debt is secured by a first priority interest in the inventory of the Company and is senior to all other obligations of the Company.   Additionally, the Company agreed to issue a total of 4,150,000 shares of common stock to the lenders at a price of $0.01 per share, the value of which reduced the balance of the notes payable. The Company issued 3,900,000 of the shares in the first quarter of 2011 and recorded the difference between the fair market value of the stock and the $39,000 reduction in notes payable as a loan origination fee in the amount of $2,276,250.  The remaining 250,000 shares were issued in the second quarter of 2011 and a loan origination fee in the amount of $153,750 was recorded in addition to a $2,500 reduction to the notes payable.  The total owed to these lenders as of September 30, 2011 is $295,002.  The accrued interest balance as of this same date is $9,928.
 
 
 
9

 

On January 11, 2011 the Company executed a promissory note in the amount of $200,000 to an unrelated party.  In consideration for the note, the Company issued 200,000 shares of common stock valued at $112,000 as a loan origination fee.  The note payable and interest, accrued at 10%, was paid in full in February 2011.

On January 10, 2011, the Company executed two promissory notes to two unrelated parties in the amount of $50,000 each.  The notes and interest, accrued at 24% per annum, are due two months from the issuance date. An additional note payable in the amount of $100,000 with the same terms was issued to a third party on January 14, 2011.  The Company issued a total of 400,000 shares of common stock in the first quarter for a total reduction to the notes payable in the amount of $8,000.  The remaining note balances including $8,000 of accrued interest were paid in full as of March 31, 2011.

On May 27, 2011, the Company executed a senior promissory note in the amount of $125,000 with an unrelated party.  In consideration for the note, the Company agreed to issue 370,000 shares of common stock valued at $234,950 as a loan origination fee.  The shares of stock were issued in the third quarter and as of September 30, 2011 the note balance is paid in full.

On June 3, 2011, the Company executed a short-term promissory note in the amount of $75,000 to an unrelated party. The note was repaid in full as of June 30, 2011.

On June 17, 2011, the Company executed three senior promissory notes to unrelated parties in the total amount of $250,000. The terms of the debt are as follows: (i) interest accrues at 12% per annum; (ii) maturity date is three months from the date of issuance; (iii) the Company will issue 475,000 shares of common stock; and (iv) the Company will issue to the Lenders five-year warrants to purchase a total of 475,000 shares of common stock at a price of $0.60 per share.  The 475,000 Common Shares were issued in the third quarter of 2011 and the fair market value of the stock has been recorded as a loan origination fee in the amount of $332,750.  The Company measured the fair value of the warrants and recorded a 100% discount against the principal of the notes. The discount is being accreted to interest expense over the term of the notes using the effective interest method.   In September of 2011, the Company executed an agreement extending the due date of one of the notes in the amount of $62,500 to October 31, 2011.  The Company also executed two additional agreements extending the due dates of the remaining notes to November 31, 2011.  As of September 30, 2011, $245,000 of principal and $8,430 of accrued interest remains due.  The discount has been fully amortized as of this same date.  As of the date of this filing, $61,250 of principal related to these notes is past due.

On September 2, 2011, the Company executed two short-term promissory notes with two unrelated parties for a total of $55,000.   Both notes were paid in full as of September 30, 2011.

Convertible Notes Payable

OCTOBER 28, 2010 CONVERTIBLE NOTES

On October 28, 2010, the Company executed four convertible promissory notes to unrelated parties with a combined total face amount of $390,000 and a funded amount of $250,000.  The maturity date for each of the notes was February 28, 2011 and there was no stated interest rate.   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.  A discount in the amount of $202,800 was calculated as the total value of the beneficial conversion feature, which is being amortized over the term of the note.  The remaining unamortized balance as of December 31, 2010 was $65,333 and this amount has been amortized and recorded as interest expense in the first quarter of 2011.  In addition, the discount amount of $140,000 has also been amortized over the term of the loan.    The unamortized balance as of December 31, 2010 was $94,640 and this amount was fully amortized and recorded as interest expense in the first quarter 2011.  Upon the February 28, 2011 maturity date, $275,000 of the balance owed was converted into 1,100,000 shares of common stock.   An additional $20,000 of the balance owed was arranged to be converted into 80,000 shares of common stock which were issued in the second quarter of 2011. The remaining balance owed on the notes was paid in cash in March of 2011 and the balance owed as of September 30, 2011 is zero.
 
 
 
10

 

As consideration for making the above mentioned loans, a combined total of 800,000 warrants were issued to the lenders to purchase shares of the Company’s common stock.  The warrants have an exercise price of $.25, $.50, $.75 and $1.00 in increments of 200,000, respectively.  All the warrants expire 5 years from the date of issuance. The fair value of the warrants on the date of issuance was calculated using the Black-Scholes option pricing model at each of the above mentioned exercise prices.  The $304,000 value of the warrants was recorded as a capital contribution and loan origination expense at the date of issuance.

DECEMBER 28, 2010 CONVERTIBLE NOTE

On December 28, 2010, a convertible promissory note was executed in the amount of $50,000 to an unrelated party.  The note, which accrues interest at 8% per annum, has a maturity date of September 30, 2011.  The note agreement included a $3,000 discount which is being amortized over the nine-month term of the loan.  The note is convertible into shares of the Company’s common stock at a 45% discount.  In July of 2011, the Company issued 235,603 shares of common stock in payment of the principal balance and all accrued interest.  The Company also amortized the remaining discount of $985 and recorded a loss on the conversion in the amount of $52,066.

APRIL 4 & MAY 20, 2011 CONVERTIBLE NOTES

On April 4, 2011 and May 20, 2011, the Company executed convertible promissory notes with the same terms to the same unrelated party in the amounts of $50,000 and $30,000, respectively.  The notes mature nine months from the date of issuance and accrue interest at 8% per annum.  In the event of default the interest rate will increase to 22%. The Note holder has the right to convert any outstanding principal and accrued interest payable, at a conversion price per share equal to 55% of the average of the three lowest closing prices of the Company’s common stock for the 10 day trading period ending on the latest complete trading day before the conversion date.

In accordance with ASC Topic No. 470-20-25-4, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $77,418 as additional paid-in capital and an equivalent discount that reduced the carrying value of the convertible notes. The discount is being accreted to interest expense over the term of the notes.  The remaining unamortized balance as of September 30, 2011 is $32,201.  The accrued interest payable on the notes as of the same date is $2,691.

JUNE 9, 2011 CONVERTIBLE NOTES

On June 9, 2011, the Company executed three convertible promissory notes to unrelated parties in the total amount of $300,000.  The notes accrue interest at 10% and mature six months from the issue date.  The notes are convertible into shares of the Company’s common stock at the lesser of $0.40 per share or 50% of the lowest bid price in the five days preceding the conversion date. In addition, the Company issued to such investors a total of 999,999 three-year detachable warrants to purchase shares of common stock at an exercise price of $0.40 per share.

In accordance with ASC 470-20, the proceeds of $300,000 were allocated based on the relative fair values of the convertible notes and the detachable warrants at the time of issuance. The Company allocated $198,876 of the proceeds to the detachable warrants and recorded an equivalent discount.  The Company then recognized the intrinsic value of the embedded beneficial conversion feature of $101,124 as additional-paid-in capital and an equivalent discount for a total discount of $300,000. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The unamortized discount balance as of September 30, 2011 is $178,535. The accrued interest payable balance as of the same date is $9,370.
 
 
 
11

 


JUNE 21, 2011 CONVERTIBLE NOTE

On June 21, 2011, the Company entered into a note and warrant purchase agreement whereby the Company issued and sold, and an unrelated party purchased: (i) a convertible promissory note of the Company in the principal amount of $560,000 bearing a 12% interest rate (ii) and two warrants, each giving the holders the right to purchase 250,000 shares of common stock. Additionally upon closing, the Company issued to the lender 100,000 shares of common stock of the Company valued at $60,000 as a loan origination fee. The maturity date of the note is June 21, 2015.  In consideration for the issuance and sale of the note and warrants, the lender paid cash in the amount of $250,000 and issued five $50,000 5% secured notes, each with a maturity date 49 months from the initial funding date.  The $60,000 variance between the face value of the note and the funds received represents a 9.1% original issue discount of $50,000 and a $10,000 payment obligation with respect to certain fees and expenses.

The note is convertible into shares of the Company’s common stock, at the option of the lender, at a price per share equal to (a) the principal and interest to be converted divided by (b) 70% of the lowest trade price for the thirty (30) trading days immediately preceding conversion. The principal and interest subject to conversion under the note shall be eligible for conversion in tranches, as follows: (1) an initial tranche in an amount equal to $310,000 and any interest or fees accrued thereon, and (5) five additional subsequent tranches each in an amount equal to $50,000 and any interest or fees accrued thereon.  The first tranche of $310,000, representing the amounts paid by the investor upon the closing of the transaction, may be converted at the lender’s option at any time.  The lender’s right to convert any of the subsequent tranches is conditioned upon the lender’s payment of the corresponding 5% secured note receivable (see note 4).  Accordingly, principal and interest under the note may only be converted by the lender in proportion to the amounts paid under each of the 5% secured notes.

Both warrants are exercisable for a period of five years from the initial funding date, and entitle the investor to purchase 250,000 shares of common stock.  The first warrant is exercisable at $0.50 per share and the second at $1.00 per share.

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. The discount is being accreted to interest expense over the term of the notes using the effective interest method. The unamortized discount balance as of September 30, 2011 is $567,830.  The principal balance and accrued interest payable balance due on the note as of the same date is $560,000 and $20,804 respectively.

JULY 13 & AUGUST 18, 2011 CONVERTIBLE NOTES

On July 13, 2011 and August 18, 2011, the Company executed convertible promissory notes with the same terms to the same unrelated party in the amounts of $40,000 and $50,000, respectively.  The notes mature nine months from the date of issuance and accrue interest at 8% per annum.  In the event of default the interest rate will increase to 22%. The Note holder has the right to convert any outstanding principal and accrued interest payable, into shares of the Company’s common stock at a conversion price per share equal to 50% of the average of the three lowest closing prices of the Company’s common stock for the 10-day trading period ending on the latest complete trading day before the conversion date.

In accordance with ASC Topic No. 470-20-25-4, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $88,542 as additional paid-in capital and an equivalent discount that reduced the carrying value of the convertible notes. The discount is being accreted to interest expense over the term of the notes.  The remaining unamortized balance as of September 30, 2011 is $70,429.  The accrued interest payable on the notes as of the same date is $1,475.

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 the Company’s 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 the Company’s common stock.   This ownership restriction may be waived, however, by a holder upon sixty-one (61) days prior written notice.
 
 
 
12

 
 
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, the intrinsic value of the embedded beneficial conversion feature was calculated and a a discount in the amount of $297,857 was recorded as the total value of the beneficial conversion feature. The discount is being amortized over the three year term of the Debentures. The unamortized discount balance at September 30, 2011 is $185,351 and the debt balance, net of the discount, is $509,649.  In addition, debt issuance costs of $102,850 have been deferred and are being amortized over the term of the debt.  As of September 30, 2011 the unamortized balance of deferred loan costs is $63,511. The Company accrues interest expense on the debentures at 6% per annum, and as of September 30, 2011 the balance of accrued interest related to the Debentures is $55,457.
 

NOTE 6 – INTANGIBLE ASSETS

Marketing Contacts

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.
 
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 agreement, which covers 20 countries throughout the Middle East and Northern Africa, requires Pharma Tech to sell a minimum of $500,000 of the products each year of the five year agreement to maintain the exclusive right to sell the products.  The operations of Pharma Tech to date have been minimal, and although Pharma Tech placed orders with WCI during 2010 for sales of the CellerateRX product in Lebanon, the minimum sales amount was not obtained.  Our recent experience with international markets indicates that the sales process is much lengthier than first anticipated.  As a result, the impact on sales figures from the contacts in the Middle East can’t be accurately evaluated until the sales team has had 24 months to work through the government regulations regarding the sale of medical products.   Although other distributors are now able to sell the product in the region, the sales pipeline already developed by Pharma Tech in year one has resulted in additional sales in 2011.
 
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 a discounted 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 is ten years based on the automatic renewable five year term of the  Distribution Agreement.  The amount amortized for the nine months ended September 30, 2011 was $314,087 resulting in a balance of  $837,563 in accumulated amortization as of  September 30, 2011.  The balance of the intangible asset, net of accumulated amortization, is $3,350,252 as of September 30, 2011.
 
 
 
13

 
 
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 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 amount amortized for the nine months ended September 30, 2011 was $38,272, resulting in a balance of  $102,062 in accumulated amortization as of September 30, 2011.   The balance of the intangible asset, net of accumulated amortization, is $408,248 as of September 30, 2011.
 
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, 2011
   
December 31, 2010
 
Patent
  $ 510,310     $ 510,310  
Accumulated amortization
    (102,062 )     (63,790 )
 
Patent, net of accumulated amortization
  $ 408,248     $ 446,520  
                 
Marketing contacts
  $ 4,187,815     $ 4,187,815  
Accumulated amortization
    (837,563 )     (523,476 )
 
Marketing contacts,  net of accumulated amortization
  $ 3,350,252     $ 3,664,339  
Total intangibles, net of accumulated amortization
  $ 3,758,500     $ 4,110,859  

NOTE 7 - STOCKHOLDERS’ EQUITY

Preferred Stock

As of May 2008, all shares of Series A Preferred Stock of the Company were converted into 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.
 
 
 
14

 

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, 2011, there were 58,031,375 shares of common stock issued and 58,027,286 shares outstanding.   At December 31, 2010, there were 41,316,930 shares of common stock issued and 41,312,841 shares outstanding.  The Company holds 4,089 shares as treasury stock.

During the three months ended March 31, 2011, the Company entered into various Subscription Agreements with unrelated parties (the “Investors”) to purchase 3,473,300 Units at a purchase price of $.25 per Unit (“Units”), with each Unit consisting of:   (i) one share of the Company’s common stock and (ii) a warrant to purchase one share of the Company’s common stock (the “Warrants”).   One-half of the Warrants have an exercise price of $1.00 per share of common stock and one-half of the Warrants have an exercise price of $.50 per share of common stock.  The Warrants may be exercised at any time over a three-year period.  The total amount paid for the Units was $868,700, of which $434,350 was recorded for the sale of stock and $434,350 was recorded for the sale of warrants.

In addition, during the three months ended March 31, 2011, the Company issued 4,169,213 shares of common stock in payment of related party debt in the amount of $778,108 and 5,400,000 shares of common stock in payment of unrelated party debt in the amount of $322,000.  The Company also issued 164,286 shares of common stock as payment for cable television spots and 200,000 shares in payment of consulting and services.    Debt related costs in the amount of $405,580 were paid with the issuance of 733,043 shares of common stock.

During the three months ending June 30, 2011, the Company entered into various Subscription Agreements to various unrelated parties and issued 244,000 shares of common stock and 260,000 warrants, half with an exercise price of $1.00 and half with an exercise price of $0.50 in consideration for payments of $76,000 in the aggregate. The Company also issued 80,000 shares for consulting services with a value of $49,600 and 400,000 shares of stock in payment of placement fees with a value of $268,000. The Company issued an additional 300,000 shares in payment of related party debt and 80,000 shares in payment of unrelated party debt.  The Company also issued 350,000 shares for loan origination fees.

During the three months ended September 30, 2011, the Company converted $52,000 of debt and accrued interest into 235,603 shares of common stock. The Company also issued 845,000 shares of common stock for loan origination fees valued at $567,700.  Additionally, the Company entered into various Subscription agreements with unrelated parties and issued 40,000 shares of common stock in consideration for payments of $10,000.


2011 Omnibus Long-Term Incentive Plan

On March 9, 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 are 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 must be obtained on or before March 8, 2012.
 
 
 
15

 


Warrants

A summary of the status of the warrants granted for the nine month period ended September 30, 2011 and for the year ended December 31, 2010 and changes during the periods then ended is presented below:


For the Year Ended December 31, 2010
 
For the Nine Months Ended September 30, 2011
 
   
Shares
   
Weighted Average Exercise Price
     
Shares
   
Weighted Average Exercise Price
 
Outstanding at beginning of period
    1,299,769     $ 1.54  
Outstanding at beginning of period
    3,230,369     $ 1.07  
Granted
    1,930,600       0.75  
Granted
    5,708,299       0.68  
Exercised
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Forfeited
    -       -  
Expired
    -       -  
Expired
    -       -  
Outstanding at end of period
    3,230,369     $ 1.07  
Outstanding at end of period
    8,938,668     $ 0.82  


As of September 30, 2011
   
As of September 30, 2011
 
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       1.3     $ 0.001       299,769     $ 0.001  
  0.25       200,000       4.1       0.25       200,000       0.25  
  0.40       999,999       2.8       0.40       999,999       0.40  
  0.50       2,694,450       2.7       0.50       2,694,450       0.50  
  0.60       475,000       4.8       0.60       475,000       0.60  
  0.75       200,000       4.1       0.75       200,000       0.75  
  1.00       3,069,450       2.6       1.00       3,069,450       1.00  
  2.00       1,000,000       1.3       2.00       1,000,000       2.00  
$ 0.001- 2.00       8,938,668       2.7     $ 0.82       8,938,668     $ 0.82  

 
NOTE 8 - RELATED PARTY TRANSACTIONS

The Company’s corporate office is located in Fort Worth, Texas, in a space leased by HEB, LLC.  The Company shares the space with the VHGI corporate office and other HEB affiliated companies.  The Fort Lauderdale office occupied by WCI is also leased by HEB and shared with a subsidiary of VHGI.  The Company reimburses HEB for the cost of both office spaces.
 
 
 
16

 

The Company also reimburses HEB for the cost of accounting and administrative services provided to the Company by employees of HEB. Additionally, the Company pays HEB for the actual costs of health benefits provided to Company employees through HEB.

NOTE 9 - SUBSEQUENT EVENTS

In October of 2011, $22,000 of the principal balance due on the April 4, 2011 8% convertible promissory note was converted into 180,311 shares of common stock.  The Company also paid the balance of $295,002 and all accrued interest related to the notes payable from the first quarter of 2011.

On October 7, the Company executed a convertible promissory note with an unrelated party in the amount of $30,000.  The note matures nine months from the date of issuance and accrues interest at 8% per annum.  The Note holder has the right to convert any outstanding principal and accrued interest payable into shares of the Company’s common stock at a 50% discount on the market value.
 
On November 8, 2011 the Company executed a development and license agreement with BioStructures, LLC.  The agreement licensed certain rights to BioStructures, LLC to develop products in the field of bone remodeling, based on Resorbable’s patent number 7,074,425 (see Note 6 “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 as well as a 3% royalty on product sales over the life of the patent, which expires in 2013.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
 
Forward-Looking Statements

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such a statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

The following discussion and analysis of our financial condition is as of September 30, 2011.  Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2010.
 

Business Overview
 
Unless otherwise indicated, we use “WMT,” “the Company,” “we,” “our” and “us” in this report to refer to the businesses of Wound Management Technologies, Inc.

The Company markets and sells the patented CellerateRX® product in the expanding advanced wound care market; 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.
 
 
 
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CellerateRX’s activated collagen (approximately 1/100th the size of native collagen) delivers the essential benefits of collagen to a wound immediately, where other forms of native, intact collagen in commercially available products require time for the body to prepare the collagen for use in the wound healing process. We believe CellerateRX is an ideal product to help the diabetic community with their wound issues and our goal in 2010 was to develop a commercialization strategy for our existing line of wound care products in order to accelerate our sales and revenues for 2011 and thereafter, recognizing that most corporate level sales can take 12 months or more to finalize.  Here is a brief recap of some key accomplishments over the past year:

Ø  
We created a channel map and identified major areas of new opportunities from health system to consumer sales, since our products do not require a prescription.  We have gained customers in all of these areas, which include:
 
·  
hospitals
·  
health systems
·  
pharmacies
·  
podiatrists
·  
surgeons
·  
home health care
·  
wound care centers
·  
consumers via third party distributors

Ø  
In April 2010, we hired a Sr. VP of Sales & Marketing for Wound Care Innovations, LLC and hired a small direct sales team to grow customer awareness and sales.

Ø  
As disclosed in our Form 8-K filing on April 14, 2011, we announced a strategic channel partner, Juventas, LLC (“Juventas”), who purchased the exclusive right to sell the CellerateRX powder products in North America.  Juventas is an affiliate of Biomet Texas, Ltd. and is the largest Biomet distributor. This multi-year agreement has escalating target sales, with 2012’s minimum sales of CellerateRX® powder set at $9 million, in order 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.

Ø  
By December 2010, we had ten VHA hospitals using CellerateRX and in December 2010 we engaged Government Marketing and Procurement to assist us with procuring more VA hospitals and getting on their  (SDVOSB) Service Disabled Veteran Owned Small Business) GSA schedule.

Ø  
In 2010, we signed a distribution agreement with MED3TV to market CellerateRX 28g gel via TV spots.  In March 2011, the TV spot campaigns began to air and our sales have increased.  In addition to sales, these programs are increasing the awareness of the unique capabilities of CellerateRX among patients and providers. In August 2011 Marketing Media Enterprises became a CellerateRX distributor and has launched TV spot campaigns on The Military Shopping Channel and a Spanish Network.

Ø  
 After two plus years of work, in 2010, CellerateRX received government approvals and reimbursement codes for sales in South Africa and sales are steadily building.  Other distribution began in The Bahamas and Central America. The CE mark for European distribution is closer to completion and our Italian distribution partner is poised to begin marketing.  Contract negotiations are underway in many other countries as well.

Ø  
In June 2011, WellDyneRX, a national pharmacy benefits manager added CellerateRX to their health and wellness programs.  We expect sales to ramp from this new source.

Ø  
PharmaTech International, our joint venture for sales in the Middle East, has been working diligently in the region to gain necessary government and health system approvals.   In April 2011, we announced a new order for Lebanon, followed by a new order for Saudi Arabia in May 2011. We are expecting more to follow both in Lebanon and throughout the region.

 
 
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While we have been commercializing the CellerateRX business, we have also been strategically planning the market launch of a resorbable bone wax and delivery system for orthopedic bone void fillers through our Resorbable subsidiary.  We Plan on filing 510(k)s for these new product in the 4th quarter of 2011. In addition, the secure healthcare communication products to be offered by eHealth were featured in the Interoperability Showcase at the Health Information Systems Society meeting in February 2011 in Orlando, Florida.

One of our challenges in 2010 was to secure adequate financing for inventory to meet anticipated product order growth, and we were successful in accomplishing that goal in 2011.

Results of Operations

Three and nine months ended September 30, 2011 compared with the three and nine months ended September 30, 2010:

Revenues.  The Company generated revenues for the three months ended September 30, 2011 of $133,841, as compared to revenues of $111,652 for the three months ended September 30, 2010, or a 20% increase in revenues.  The Company generated revenues of $1,296,951 and $292,609 for the nine months ended September 30, 2011 and 2010, respectively, or an increase of 343%.  The increase in revenues is due to the increase in sales and to the receipt of $500,000 from Juventas for the exclusive right to distribute CellerateRX powder (see note 3 “Significant Transactions”).
 
Cost of goods sold. Cost of goods sold for the three months ended September 30, 2011 were $373,505, as compared to costs of goods sold of $296,641 for the three months ended September 30, 2010, or a 26% increase. The cost of goods sold for the nine months ended September 30, 2011 and 2010, respectively, were $552,658 and $345,455, or an increase of 60%. The increase is the result of the Company’s increased cost of product.
 
General and administrative expenses (“G&A"). G&A expenses for the three months ended September 30, 2011 were $394,727, as compared to G&A expenses of $424,791 for the three months ended September 30, 2010, or a 7% decrease in G&A expenses.  G&A expenses for the nine months ended September 30, 2011 were $2,202,913, as compared to G&A expenses of $1,400,171 for the nine months ended September 30 2010, or a 57% increase.  The increase is due to additional marketing and consulting expenses in 2011.
 
Interest Income.   Interest income was $77,179 for the three months ended September 30, 2011, as compared to $47,610 for the three months ended September 30, 2010, or a 62% increase. Interest income for the nine months ended September 30, 2011 and 2010, respectively, was $212,880 and $116,364 or an increase of 83%. The increase is due primarily to the increase in interest bearing loans made to related parties.
 
Interest expense.  Interest expense was $69,282 for the three months ended September 30, 2011, as compared to $318,696 for the three months ended September 30, 2010, or a decrease of 78%.   Interest expense was $206,104 for the nine months ended September 30, 2011, as compared to $484,757 for the nine months ended September 30 2010, or a decrease of 57%. Interest expense has decreased in 2011 as the Company uses equity compensation to secure financing and reduce interest costs.
 
Debt related expense.  Debt related expense was $586,693 for the three months ended September 30, 2011, as compared to $206,250 for the three months ended September 30, 2010, or a 184% increase.  Debt related expense was $4,086,636 for the nine months ended September 30, 2011 as compared to $206,250 for the nine months ended September 30, 2010 or an 1881% increase. The increase is due to additional equity compensation given to lenders to secure financing.
 
Gain/Loss on debt settlement.   The gain on settlement was $252,969 for the three months ended September 30, 2011, as compared to a loss of $462,545 for the three months ended September 30, 2010.    The loss on settlement was $1,128,914 for the nine months ended September 30, 2011 as compared to $1,195,219 for the nine months ended September 30, 2010, or a decrease of 6%. The gain on settlement for the three months ended September 30, 2011 is primarily the result of the increase of the fair market value of the Company’s stock between the date of the conversion agreements and the date of stock issuance.
 
 
 
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Net loss. We had a net loss for the three months ended September 30, 2011 of $1,066,016, as compared to a net loss of $1,685,279 for the three months ended September 30, 2010, or a decrease in loss of 37%. The net loss for the nine months ended September 30, 2011 was $7,008,904 as compared to $3,594,375 for the nine months ended September 30, 2010, or an increase in loss of 95%.  Although we experienced higher gross profit in 2011, the expense associated with obtaining the debt to finance our growth has exceeded the profit generated by the increased sales.
 
Liquidity and Capital Resources
 
Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities generated $1,592,713 for the nine months ended September 30, 2011, and $1,907,673 for the nine months ended September 30, 2010.  We may need to raise additional capital to bring additional products to market in the future.
 
Off-Balance Sheet Arrangements
 
None.

Recent Accounting Pronouncements
 
For the period ended September 30, 2011, there were no other changes to our critical accounting policies as  identified in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Contractual Commitments

Federal Payroll Taxes.  The Company is delinquent in the payment of 2004-2005 tax liabilities with the Internal Revenue Service (the “IRS”).  As of September 30, 2011, unpaid payroll taxes total approximately $116,642 and related penalties and interest approximated $219,406 computed through September 30, 2011. These liabilities have been recorded as accrued liabilities and general and administrative expenses at September 30, 2011.  A tax lien was filed against the Company in December 2009. The Company is in the process of settling this obligation with the IRS and the final amount due will be subject to negotiations with the IRS.

Inventory Contract. In September of 2010 the Company placed an inventory order for CellerateRX.  At December 31, 2010, the Company had an asset of $107,150 recorded for the inventory that had been ordered, but not yet received. The inventory was received and paid for in the first quarter of 2011.

Royalty Agreement.  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 in the aggregate, (b) an aggregate royalty of fifteen percent (15%) of gross sales occurring during the first year of the license; (c) an additional upfront royalty of $400,000, in the aggregate, which was paid October, 2009; plus (d) an aggregate 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, 2010 was $428,238 and, on March 14, 2011, the Company paid $375,000 to Applied.  As of September 30, 2011, the balance due to Applied is $334,488.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide this information.
 
 
 
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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, 2011, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of September 30, 2011, 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 PROCEEEDINGS

None.

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 three months ended September 30, 2011 not previously disclosed.  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:

In July 2011, the Company issued 235,603 shares of common stock to an unrelated party in conversion of debt and accrued interest payable in the amount of $52,000.

In July 2011, the Company issued 370,000 shares of common stock for loan origination costs related to the May 27 note payable to an unrelated party.  Loan origination costs in the amount of $234,950 were recorded based on the fair market value of the stock on May 27, 2011.

In September 2011, the Company issued 40,000 shares of common stock for subscription agreements purchased in the amount of $10,000.

In September 2011, the Company issued 475,000 shares of common stock in payment of loan origination fees of $332,750 that were recorded in the second quarter of 2011, related to the June 17 senior promissory notes payable to unrelated parties.
 
 
 
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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.  REMOVED AND RESERVED

ITEM 5.  OTHER INFORMATION

None.
 
ITEM 6.  EXHIBITS

The following documents are filed as part of this Report:
 
Exhibit No.

 
2.1
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)

 
3.1
Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)

 
3.2
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)

 
3.3
Bylaws  (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 11, 2008)

 
31.1*
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*

 
32.1*
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*

 
101
Interactive Data Files pursuant to Rule 405 of Regulation S-T.

 
*  Filed herewith



 
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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.
 
   
WOUND MANAGEMENT TECHNOLOGIES, INC.
       
Date: November 14, 2011 
 
   /s/ Scott A. Haire  
    Scott A.  Haire, Chairman of the Board,  
    Chief Executive Officer and Principal Financial Officer  
       

 
 
 
 
 
 
 
 
 
 
 
 
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