Sanara MedTech Inc. - Quarter Report: 2009 September (Form 10-Q)

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, 2009

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                    
Commission File No. 0-11808

WOUND MANAGEMENT TECHNOLOGIES, INC.

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). Yes o No o

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)

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 November 20, 2009, 32,937,310 shares of the Issuer's $.001 par value common stock were issued and 32,933,221 shares were outstanding.

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARY
 
Form 10-Q
 
Quarter Ended September 30, 2009

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF

SEPTEMBER 30, 2009

AND AUDITED FOR THE YEAR ENDED DECEMBER 31, 2008

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.   

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(continued)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.   

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. They do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates. The results of operations for the period ended September 30, 2009 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2009. These financial statements should be read in conjunction with the Management's Discussion and Analysis and with the Company's financial statements and accompanying notes thereto as of and for the year ended December 31, 2008, filed with the Company's Annual Report on Form 10-K.

NOTE 2- GOING CONCERN

The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The Company has continuously incurred losses from operations and has a significant accumulated deficit. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. These conditions raise substantial doubt about its ability to continue as a going concern.

It is the Company's belief that it will continue to incur losses for at least the next twelve months, and as a result will require additional funds from debt or equity investments to meet such needs. To meet these objectives, management's plans are to (i) raise capital by obtaining financing from debt financing and/or equity financing through private placement efforts, (ii) issue common stock for services rendered in lieu of cash payments and (iii) obtain loans from shareholders as necessary. Without realization of additional capital or significant revenues from operations, it would be unlikely for the Company to continue as a going concern. The Company anticipates that its shareholders will contribute sufficient funds to satisfy the cash needs of the Company for the next twelve months. However, there can be no assurances to that effect, as the Company has minimal revenues and the Company's need for capital may change dramatically if it is successful in expanding its current business or acquiring a new business. If the Company cannot obtain needed funds, it may be forced to curtail or cease its activities.

Management believes that actions presently taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. The Company's future ability to achieve these objectives cannot be determined at this time. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

WOUND MANAGEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2009
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – RELATED PARTY NOTE PAYABLE

Funds are advanced from various related parties including the Company’s President and CEO/CFO. Other shareholders fund the Company as necessary to meet working capital requirements and expenses. The advances outstanding are made pursuant to a note agreement that bears interest at 10% per annum payable quarterly with no maturity date. Accrued interest due to related parties on the note as of September 30, 2009 was approximately $27,406. The following is a summary of amounts due to related parties as of September 30, 2009:

NOTE 4 – CURRENT NOTES PAYABLE

In July 2009, the Company executed a discounted note to an unrelated party with a face amount of $615,000 and a funded amount of $550,000. The note including interest at 18% per annum is due in January 2010. Deferred loan costs amounted to $79,766 and are being amortized over the term of the loan with an unamortized balance of $50,728 at September 30, 2009. Prepaid interest amounted to $7,540 at September 30, 2009.

In February the Company issued a discounted note to an unrelated party with a face amount of $215,000 and a funded amount of $200,000. The principal and accrued interest, at 18% per annum, was due on May 22, 2009. Deferred loan costs amounted to $35,600 and were amortized over the term of the loan. The amortized discount of  $415,000 was expensed over the term of the loan. The interest expense amounted to $9,000 at June 30, 2009. The principal amount of the note was paid in full at June 30, 2009.

On February 24, 2009 a shareholder of the company contributed 20,000 shares of Company stock owned or controlled by the shareholder, to a lender to facilitate obtaining a loan for the Company. The $68,000 value of the stock has been recorded as a capital contribution and was amortized as interest expense over the term of the loan.

On September 17, 2009 BioPharma entered into a $100,000 Promissory Note to an unrelated party, Commercial Holding AG, LLC. The Promissory Note is unsecured and accrues interest at a rate of 8% per annum until paid in full. The Promissory Note remained unfunded until October 2009 when $100,000 of the proceeds was received. The balance at September 30, 2009 was $-0-.

NOTE 5- INVESTMENT ACQUISITIONS

On September 17, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), whereby BioPharma Management Technologies, Inc. (“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 restricted common stock were issued in exchange for all the oustanding common stock of BioPharma. The acquisition has been recorded at a value of $4,187,515 or approximately $.93 per common share issued. BioPharma had total assets of less than $1,000 but held a 50% interest in a marketing joint venture. The financial statements of BioPharma have been consolidated with the Company since the date of acquisition resulting in an intangible asset of $4,187,515 representing the marketing rights and contacts of the joint venture.
Prior to the Merger Agreement, BioPharma entered into a joint venture agreement with A&Z Pharmaceutical, LLC to form Pharma Technology International, LLC (“Pharma Tech”) and BioPharma owns 50% of Pharma Tech, which has had no operations to date.

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 (“Resorbable”) 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. The patent was recorded at $462,715, or approximately $.93 per share plus $47,595 for the assumed liability.

NOTE 6- COMMITMENTS AND CONTINGENCIES

Lawsuit – The Company has been named as a defendant in a lawsuit. The Company and its attorneys have reviewed the matter and believe the lawsuit is baseless and would have little or no impact on the Company. The Company intends to vigorously defend itself in this matter.

NOTE 7- STOCKHOLDERS EQUITY
 
On March 24, 2009, outstanding warrants to purchase shares of our common stock at an exercise price of $.001 per share were exercised, through a cashless exercise in the warrant, resulting in the issuance of 700,000 shares of common stock. The price of our common stock on March 24, 2009, which was used to calculate the number of warrants exercised was $3.00.

NOTE 8- SUBSEQUENT EVENTS

On November 2, 2009 the Company entered into a Letter of Intent to purchase all health care related assets (MOS, Secure eHealth and Veriscrip) from VirtualHealth Technologies, Inc. in exchange for $1,000,000 in cash and debt, 4,000,000 shares of stock and a royalty agreement for continued revenues to the Company. Final consummation of the acquisition is not guaranteed and is subject to the completion of a definitive acquisition agreement.

The Company has evaluated subsequent events from the Balance Sheet date through November 20, 2009.

ITEM 1A: RISK FACTORS 

As a smaller reporting company, we are not required to provide this information.

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

Introduction
 

Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations.

Caution Concerning Forward-Looking Statements/Risk Factors

The following discussion should be read in conjunction with the financial statements and the notes thereto and the other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words “believes,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. You are also urged to carefully review and consider our discussions regarding the various factors that affect our business, included in this section and elsewhere in this report.

Factors That Could Affect Future Results

We face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. Such claims may include, among others, that our products contain contaminants or include inadequate instructions as to use or inadequate warnings concerning side effects and interactions with other substances. We do not anticipate obtaining contractual indemnification from parties supplying raw materials or marketing our products. In any event, any such indemnification if obtained would be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial condition.

Because of our dependence upon consumer perceptions, adverse publicity associated with illness or other adverse effects resulting from the use of our products or any similar products distributed by other companies could have a material adverse effect on our operations. Such adverse publicity could arise even if the adverse effects associated with such products resulted from consumers' failure to consume such products as directed. In addition, we may not be able to counter the effects of negative publicity concerning the efficacy of our products. Any such occurrence could have a negative effect on our operations.

Other key factors that affect our operating results are as follows:

Overview and plan of operation

Wound Management Technologies, Inc. distributes collagen-based wound care products that are FDA cleared as medical devices and used in the management of acute and chronic wounds. Our products are distributed to healthcare providers such as wound care centers, long-term care facilities, home health agencies, DME providers, and physicians in the medical domestic and international markets, as well as government and first-aid wound care markets. The Company holds certain exclusive world-wide distribution rights to a patented collagen-based wound care product formula and processes for a molecular form of collagen that is used in our primary products, CellerateRx® powder and gel. Until now, most collagen has been presented to the body in an intact, native form which requires time for the body to break down. CellerateRx’s patented

collagen fragments are a fraction of the size of the native collagen molecules and particles found in other products, delivering the benefits of collagen to the body immediately and thereby helping to “jump start” collagen’s role in wound bed processes. We believe that CellerateRx provides for unprecedented performance, range of use, cost savings, and patient friendliness. CellerateRx is indicated for acute and chronic wounds which include but are not limited to pressure ulcers (stages I-IV), traumatic wounds, diabetic ulcers, surgical wounds, venous stasis ulcers, ulcers due to arterial insufficiency, superficial wounds, and 1^st and 2^nd degree burns. Its ease of application can increase patient compliance and provide minimal lifestyle interruption.

Our CellerateRx products are currently marketed to and being used by wound care providers of all types. These products are also approved for reimbursement under Medicare Part B. The professional medical market and certain international markets will be the primary focus of our marketing and sales efforts for the immediate future. We believe that these products are unique in composition, applicability, clinical performance, and demonstrate the ability to reduce costs associated with standard wound management.

The Company is established to market, develop, manufacture, and distribute medical devices, prescription, and over-the-counter (OTC) products. Focused on the rapid successful expansion and increased profitability of the current product lines, as well as the development and acquisition of additional products, the Company is currently positioned to immediately impact the greater than $2.5 billion domestic US wound care market.

The Company is headquartered in Fort Worth, TX and is managed by the founding partners and veteran healthcare executives with over 50 years combined experience working as an executive team within the healthcare industry. The Company, a specialty medical device company, represents the realization of the founders to more effectively impact the healthcare market with niche products positioned in health plans, wholesalers, distributors, and retail markets that benefit patients across the U.S. and around the world.

Manufacturing of our products is conducted by Applied Nutritionals. CellerateRx is a trademark of Applied Nutritionals, LLC. Warehousing, shipping, and physical inventory management is outsourced to Pac-Source, LLC Manufacturing of Rochester, NY.

Our sales and marketing activities to date have been limited and have resulted in a nominal revenue stream. We have been focused on obtaining additional evidence based data that is necessary in today’s health care market and have had data published in peer reviewed journals and abstracts at several of the major wound care conferences. Celleraterx has been included in presentations at several key would care conferences in 2009, and through these activities, we have secured product evaluations with a number of key accounts. These accounts are regional and national healthcare provider organizations that represent strong recurring revenue opportunities for the Company. We are currently in negotiations with several key sales individuals to market CellerateRX and believe that this will significantly increase sales opportunities. In addition we have finalized an agreement to distribute CellerateRX in the Middle East and are in discussions with other international parties as well.

We currently intend to secure capital resources for expansion of staff, inventories, marketing efforts, and research and development; however we may be unsuccessful in our efforts to secure such capital. If we are successful in raising capital, we anticipate hiring a number of management, marketing, and clinical staffs to secure additional accounts, market to the broader US wound care market, support customers in specific geographies, broaden our clinical/educational programs, and evaluate retail and international market opportunities.

Results of Operations

Three and nine months ended September 30, 2009 and 2008

Revenues. The Company generated revenues of $102,926 and $77,084, for the three months ended September 30, 2009 and 2008, respectively, or an increase of approximately 34% from the same period in 2008. The Company generated revenues of $229,644 and $215,484 for the nine months ended September 30, 2009 and 2008, respectively, or an increase of approximately 6% from the same period in 2008.

Cost of revenues and gross margin. Costs of revenues for the three months ended September 30, 2009 were $98,123 and were $48,831 for the three months ended September 30, 2008. Costs of revenues for the nine months ended September 30, 2009 were $511,875 and for the nine months ended September 30, 2008, cost of revenues were $268,357. Our gross loss for September 30, 2009 was $282,231 and was $52,873 for the nine months ended September 30, 2008.

Selling, general and administrative expenses ("SGA") were $239,680 and $386,888 for the three months ended September 30, 2009 and 2008, respectively. SGA were $648,310 and $876,179 for the nine months ended September 30, 2009 and 2008, respectively. SGA consists primarily of wages, enhanced product promotions, facility-related expenses, and outside professional services such as legal and professional fees incurred in connection with our SEC reporting requirements. We expect selling, general and administrative expenses to increase as we continue to expand our marketing efforts and the number of products we offer.

LIQUIDITY AND CAPITAL RESOURCES

The Company currently has limited resources to maintain its current operations, secure more inventories, and meet its contractual obligations. Additional capital must be raised through equity or debt offerings. If we are unable to obtain additional capital, we will be unable to operate our business.

Without realization of additional capital or significant revenues from operations, it would be unlikely for the Company to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The Company has continuously incurred losses from operations and has a significant accumulated deficit. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. These conditions raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty and should not be regarded as typical for normal operating periods.

It is the Company's belief that it will continue to incur nominal losses for at least the next twelve months, and as a result will require additional funds from debt or equity investments to meet such needs. The Company anticipates that its officers and shareholders will contribute sufficient funds to satisfy the cash needs of the Company for the next twelve months. However, there can be no assurances to that effect, as the Company has insignificant revenues and the Company's need for capital may change dramatically if it is successful in acquiring a new business. If the Company cannot obtain needed funds, it may be forced to curtail or cease its activities. Our future funding requirements will depend on numerous factors, some of which are beyond the Company's control. These factors include our ability to operate profitably, recruit and train management and personnel, and to compete with other, better-capitalized and more established competitors. To meet these objectives, management's plans are to (i) raise capital by obtaining financing through private placement efforts; (ii) issue common stock for services rendered in lieu of cash payments and (iii) obtain loans from officers and shareholders as necessary.

The Company does not anticipate incurring significant research and development costs, the purchase of any major equipment, or any significant changes in the number of its employees over the next twelve months.

Federal Payroll Taxes

The Company is delinquent in the payment of its payroll tax liabilities with the Internal Revenue Service. As of September 30, 2009, unpaid payroll taxes total approximately $203,000. The Company has estimated the related penalties and interest at approximately $179,000 computed through September 30, 2009, which are included in current liabilities at September 30, 2009. The Company expects to pay these delinquent payroll tax liabilities as soon as possible. The final amount due will be subject to the statutes of limitations related to such liabilities and to negotiations with the Internal Revenue Service.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide this information.

ITEM 4T. CONTROLS AND PROCEDURES

Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer, who is also the principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer/principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

During the third quarter of 2009, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 17, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), whereby BioPharma Management Technologies, Inc. (“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 BioPharma, the value of which was determined to be $4,187,515.

On September 29, 2009, the Company entered into an Asset Purchase Agreement (the “Agreement”), whereby the Company acquired the assets and liabilities of Resorbable Orthopedic Products, LLC (“Resorbable”) in exchange for 500,000 shares of the Company’s common stock, the net value of which was determined to be $462,715.

ITEM 3. Defaults Upon Senior Securities

None
 

ITEM 4. Submission of Matters to a Vote of Security Holders

None
 

ITEM 5. Other Information

None

ITEM 6. Exhibits

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.