The terms “WMT,” “we,”  the “Company,“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, 2010March 31, 2011 and unaudited condensed consolidated statements of operations for the ninethree months ended September 30,March 31, 2011 and 2010 and 2009 have been prepared in accordance with U. S. 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 accrua ls)accruals) considered necessary for a fair presentation have been included.  Operating results for the ninethree month period ended September 30, 2010March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 20102011 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, 20092010 and December 31, 2008,2009, included in the Company’s Annual Report on Form 10-K.  The accompanying condensedaudited consolidated balance sheet as of December 31, 20092010 has been derived from audited financial statements at that date.included for comparison purposes in the accompanying balance sheet.  Certain prior year amounts have been reclassified to conform to current year presentation.

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 (“eHealth”SeHealth”).  eHealth,, a Nevada limited liability company, was purchased on February 1, 2010 (see Note 3 “Asset and Business Acquisitions”).company.  All intercompany accounts and transactions have been eliminated.

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 low estlowest priority to unobservable inputs (level 3 measurement).   This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category ge nerallygenerally 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, 2010March 31, 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 67 “Intangible Assets.”

The Company has current liabilities in excess of current assets.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 for, 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.

On February 1, 2010, the Company entered into a purchase agreement with VHGI Holdings, Inc., formerly VirtualHealth Technologies, 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:

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

Scott A. Haire, the Company's Chief Executive Officer (“CEO”) and Chairman, also serves as Chairman and the CEO, Chief Financial Officer (“CFO”), and a director of VHGI.  Based on shares outstanding as of the Annual Report on Form 10-K filed by VHGI for the year ended December 31, 2009,2010, Mr. Haire beneficially owns, individually and through H.E.B., LLC, a Nevada limited liability company (“HEB”) of which Mr. Haire is the managing member, 42%28% of the outstanding common stock of VHGI.

Funds are advanced to HEB based on the termsThe following is a summary of an unsecured line of credit for $800,000 dated December 28, 2007 at 10% per annum with no maturity date.  At September 30, 2010, the amount advanced to HEB is $506,947 and theamounts due from related parties, including accrued interest separately recorded, as of this date is $38,439.  See Note 5 “Notes Payable – Related Parties” for information of funds advanced from this same related party.March 31, 2011:

The Private Access Note, in the amount of $1,500,000, is with an unrelated company and the loan of $1,500,000 accruesbears interest at 9% per annum from the day of purchase to the maturity date of July 31, 2013, with $90,750$159,000 of interest accrued as of September 30, 2010.March 31, 2011.  According to the terms of the Assignment and Assumption Agreement between VHGI (“Assignor”), Private Access, Inc. (“Private Access”) and the Company VHGI(“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 Company.Assignee.  Under the terms of the Security Agreement dated August 3, 2009, which was assigned to the Company by VHGI,Assignor, the Company, along with other investors, holds pro rata security interests in all property of Private Access including its intellectual prop erty.property.

Funds are advanced to the Company from various related parties including from affiliates of Scott A. Haire, the Company’s CEO.Company's CEO, and entities controlled by him.  Other stockholdersshareholders 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 accruedterms of the debt, and the interest separately recorded,accrued as of September 30, 2010:March 31, 2011:

In July 2009,As mentioned in Note 4 – “Asset Dispositions,” the Company executed a discounted noteprincipal balance of $400,000 WMT Note due to an unrelated party with a face amountVHGI for the purchase of $615,000 and a funded amountassets in February 2010 has been paid in full as of $550,000.March 31, 2011.  The discount of $65,000 was expensed over the term of the loan and deferred loan costs of $79,766 were amortized over the term of the loan. The note accruesaccrued interest at 18% per annum and was due in January 2010, but was subsequently extended to August 31, 2010.  In August 2010, 250,000 shares of the Company’s stock were issuedrelated to the lender to extend theWMT Note had a remaining balance of $31,036 due dateas of the loan to DecemberMarch 31, 2010.  The fair value of these shares on the date of issuance was $175,0002011 and this amount has been recorded aswas paid in April 2011.  In addition, there is remaining accrued interest expenseof $35 due to a related party as of that date.  AsMarch 31, 2011 for debt paid prior to the end of September 30, 2010, the note balance is $186,698 and the amount of accrued interest is $8,194.quarter.

Related toDuring the above mentioned note executed in July 2009, a shareholderfirst quarter of the Company contributed 50,000 shares of Company stock owned or controlled by the shareholder, to a lender to facilitate obtaining a loan for the Company.  In addition, another shareholder contributed 1,000,000 shares of the stock of an unrelated company to the same lender to facilitate obtaining the loan. The $220,000 total value of the stock has been recorded as a capital contribution and was amortized as interest expense over the term of the loan.

On AugustDecember 28, 2010, a convertible promissory note was executed in the amount of $50,000 to an unrelated party.  Interest accrues on the note at 8% per annum and the maturity date of the note is September 30, 2011.  The total discount amount related to the note is $3,000, which is being amortized over the nine-month term of the loan, and the unamortized discount balance at March 31, 2011 is $1,982.  The total owed to this lender, net of discount, as of March 31, 2011 is $48,018.  The accrued interest balance as of this same date is $1,044.

On October 28, 2010, the Company executed twofour 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 $75,000 each to two different unrelated parties$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 has been 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 at a market value of $836,000, resulting in a loss on settlement of $561,000.   The remaining balance owed on the notes was paid in cash and the notesbalance owed is zero as of March 31, 2011.

As consideration for making the above mentioned loans, a combined total of 800,000 warrants were structuredissued 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 with the same identicalfollowing factors:  (i) market price per share of the Company’s common stock on issuance date was $.38 (ii) volatility of 296% was calculated using the Company’s closing stock prices since October 2008 (iii) risk free rate of 2.15% based on the 1-year treasury rate. The $304,000 value of the warrants was recorded as a capital contribution and loan origination expense at the date of issuance.

On December 28, 2010, a promissory note in the amount of $50,000 was executed with an unrelated party. The terms which areof the note were as follows for each note:follows:  (i) interest rate of 12% (ii) maturity date of October 12, 2010 (iii) discount amountFebruary 28, 2011(iii) issuance costs of $1,262.50$3,100 (iv) origination fee of 156,250 restricted160,000 shares of common stock (v) collateral of 200,000 free trading shares of the Company’s common stock to be held in escrow.  The total discount amountissuance costs of $2,525 on both notes$3,100 and the market value of the stock issued$56,000, for the shares issued as an origination fee, for both notes ($206,250) have beenwere expensed in the current period based onat inception due to the short term nature of the notes.note.  The 400,000200,000 total shares to be held in escrow for collateral have beenwere provided by a sharehold ershareholder on behalf of the Company.  The due date forAs of March 31, 2011, the two promissory notestotal amount owed to this lender has been extended to November 30, 2010paid in full, including accrued interest, and the balance owed is zero.

In the first quarter of 2011, the Company issued convertible 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 (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 (iv) conversion feature at execution of the debt instrument based on these two notesconversion rate of $0.40 per share, subject to adjustment.  The portion of the debt converted at execution was $47,000, with the issuance of 4,300,000 shares of the Company’s common stock.  As mentioned above, in accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present 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 $715,000 was calculated as the total value of the beneficial conversion feature, which is being amortized over the six-month term of the debt.  The amount amortized during the three month period ended March 31, 2011was $141,171 and the unamortized balance at March 31, 2011 is $573,829.  The total owed as of September 30, 2010March 31, 2011, net of discount and common stock issued at execution of the debt instrument, is $150,000 total.  Accrued$1,044,671. The accrued interest on the two notesbalance as of September 30, 2010this same date is $1,600 total.$23,232.

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 com moncommon stock.   This ownership restriction may be waived, however, by a holder upon sixty-one (61) days prior written notice.

The Debentures may be redeemed by the Company at any time or from time to time at a price equal to (x) one hundred twenty percent (120%) of the principal amount of the Debenture if the Debenture is called for redemption prior to the expiration of six months from the issuance date, or one hundred thirty one percent (131%) if called for redemption thereafter, plus (y) interest accrued through the day immediately preceding the date of redemption.

In the second quarter ofDuring 2010, the Company issued Debentures in the aggregate principal amount of $495,000 and additional issuances were made in the third quarter for $75,000.$695,000.  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 $244,286$297,857 was calculated as the total value of the beneficial conversion feature, which  is being amortized over the term of the debt, and the unamortized balance at September 30, 2010March 31, 2011 is $226,607.$235,085.  The total amount of debentures issued as of September 30, 2010 is $570,000 and the debt balance net of the discount is $343,393.$459,915.  In addition, debt issuance costs of $86,600$102,850 have been deferred and are being amortized over the term of the debt.  The unamortized balance of deferred loan costs at September 30, 2010March 31, 2011 is $80,196.$80,684.  The debentures have a three (3) year life from the date of issuance.  Interest expense on the debentures has been accrued at 6% per annum and the accrued interest recorded for the nine months ending September 30, 2010as of March 31, 2011 is $14,448.$34,259.

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 restricted 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 heldprivately-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.TheEast. The operations of Pharma Tech to date have been minimal.minimal; however, a sales order for Lebanon was received in April 2011 with others to follow in the second quarter.

Pharma Tech entered into a Distribution Agreement (the “Distribution Agreement”) to market, distribute and sell the WCI wound care products in the Middle East through existing A&Z distribution channels. The initial focus will be on CellerateRX® and the agreement requires Pharma Tech to sell a minimum of $500,000 of the product each year of the five year agreement to maintain the exclusive right to sell the product. The agreement covers 20 countries throughout the Middle East and Northern Africa.  Pharma Tech placed orders with WCI during 2010 for sales of the CellerateRX product in Lebanon; however, the minimum sales amount was not obtained.  Our recent experience with international markets indicates that the sales process is much lengthier than anticipated and 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 in year one is expected to produce the minimum sales amount in 2011.  Orders were placed by Pharma Tech during the first quarter of 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 busines sbusiness 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 (10) years based on the automatic renewable five (5) year term of the  Distribution Agreement.  Nine months of amortization of the asset has been recorded for the period ended September 30, 2010 which is $314,085.  The amount amortized for the yearthree months ended DecemberMarch 31, 20092011 was $104,695 resulting in a balance of  $628,171 in accumulated amortization as of $418,780 and $104,695 at September 30, 2010 and DecemberMarch 31, 2009, respectively.2011.  The balance of the intangible asset, net of accumulated amortization, is $3,559,644 as of March 31, 2011.

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 restricted 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 (10) year useful life. Amortization of the asset recorded was $38,274The amount amortized for the ninethree months ended September 30, 2010  an dMarch 31, 2011 was $12,758, for the year ended December 31, 2009, resulting in a balance of  $76,548 in accumulated amortization as of $51,032 and $12,758 at September 30, 2010 and DecemberMarch 31, 2009, respectively.2011.  The balance of the intangible asset, net of accumulated amortization, is $433,762 as of March 31, 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.

As of May 2008, all shares of Series A preferred stockPreferred Stock of the Company were converted into common stock. There are currently 5,000,000 shares of Preferred Stock authorized, with no shares of preferred stockSeries A Preferred Stock currently issued or outstanding.

The Company is authorized to issue 100,000,000 shares of common shares at astock, par value of $0.001 per share.  These shares have full voting rights.  At September 30, 2010As of March 31, 2011, there are 37,661,255were 55,456,772 shares of common stock issued and 37,657,16655,452,683 shares outstanding.   At December 31, 2009,2010, there were 32,937,31041,316,930 shares of common stock issued and 32,933,22141,312,841 shares outstanding.  Of these shares, 4,089 shares are held by the Company as treasury stock as of September 30, 2010 and December 31, 2009.

During the three month period ending June 30, 2010, a portion of the convertible debt ($7,500) owed to an unrelated party was settled with the issuance of 26,023 shares of unrestricted common stock of the Company, as mentioned in Note 5 “Notes Payable,” resulting in a loss on settlement of $12,017.

On March 12, 2010,9, 2011, the Company adopted, subject to shareholder approval, the 20102011 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.  The Plan will be administered by the Compensation Committee, which shall be composed of two outside directors appointed by the Board of Directors.