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REVOLUTIONS MEDICAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This quarterly report on Form 10-Q and other reports filed by Revolutions Medical Corporation ("we," "us," "our," or the "Company") from time to time with the U.S. Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates Plan of Operation The Company completed receipt of its first order of approximately 2.6 million 3ml RevVac™ safety syringes in August 2012 in three forty foot containers. The RevVac™ safety syringes passed all customs and inspections with the FDA and were placed in the Ladson, SC warehouse. The Company has inventory of the 3ml RevVac™ safety syringes in 21, 23 and 25 gauge needle sizes. The Company continues its product sales through introduction to distributors, advertisements through its online sales programs, attendance at numerous industry trade shows and a direct marketing campaign. The Company expects to be in full-scale production by the second quarter of 2013 for its 1ml, 5 ml and 10ml RevVac™ safety syringe. This RevVac™ safety syringe uses vacuum technology to retract the needle into the plunger after use. The syringe cannot be reused once the vacuum is activated. Revolutions Medical believes its safety syringe has many advantages over its competition including price, ease of use and safety. It should virtually eliminate accidental needle stick injuries and also aid in reducing the spread of contagious diseases. The Company also believes that with the help of government regulatory initiatives and individual state law reforms that the safety syringe market will grow in the foreseeable future. During 2010, Revolutions Medical entered into two university clinical studies utilizing its proprietary MRI software tools. These first two clinical studies are for cases involving head trauma and brain masses. These results are expected to clinically validate the use of its MRI software tools as an additional application to enhance the diagnostic confidence of physicians. In preparation for the expected commercial launch of the MRI software suite of products, the Company hired Strata Corporation ("Strata") in March 2012. Strata is an expert in computer software and programming and the Company believes that by the second quarter of 2013, the first application of RevColor™, RevDisplay™ and Rev3D™ will be commercially available. The launch of this product will be a "software as a service" (SaaS) business model, where customers will log on to our secure website and send current black and white images to the Company via high speed internet (teleradiology), and the images will be sent back to the customer in color and three dimensional with auto segmentation. Preliminarily, the Company will charge a per-use fee, but may expand depending upon volume into monthly service agreements. Potential customers could include MRI centers, doctors, hospitals and even patients. 17 The Company is currently working on developing, enhancing and securing it proprietary MRI software tools for commercial launch. The Company believes that once clinical application validations using its MRI software suite of products including RevColor™, RevDisplay™ and Rev3D™ directed at concussions, stroke, Alzheimer's and breast disease are achieved, it will eventually aid in the enhanced diagnosis, detection, and monitoring of such diseases and afflictions. Results of Operations For the three months ended September 30, 2012 compared to the three months ended September 30, 2011 Revenues During the three months ended September 30, 2012, the Company had $349 in sales revenue, compared to $0 for the same period in 2011. General and Administrative Expenses During the three months ended September 30, 2012, the Company incurred $826,489 in general and administrative expenses, compared to $564,910 for the same period in 2011. Employee salaries were $207,036 for the three months ended September 30, 2012, an increase of $27,524, compared to $179,512 for the same period in 2012. This increase in salary expense is due primarily to additional salary paid in the third quarter of 2012 to the Company's additional sales staff. In addition to this, compensation costs related to the issuance of options to officers and directors during the three months ended September 30, 2012, totaled $20,979, compared to $0 for the same period in 2011. Further, consulting agreement fees and legal fees were $171,383 and $120,731, respectively, for the three months ended September 30, 2012, an increase in consulting fees of $33,649 and an increase in legal fees of $29,971, respectively, compared to $137,734 and $90,760 for the same period in 2011. The increase in consulting fees was partly due to the increased fees associated with additional product testing and compliance for the RevVac™ syringe. The increase in legal fees was due primarily to increased expenses related to the arbitration case the Company is involved in with MIG, its former contract manufacturer. A total of $60,302 in prepaid consulting agreements was expensed in the quarter ended September 30, 2012, compared to $91,284 for the same period in 2011. Interest and derivative adjustment expenses increased to $438,681 during the three months ended September 30, 2012, compared to $160,950 for the same period in 2011. This increase is due primarily to the new convertible debt agreements entered into with individual investors during the three months ended September 30, 2012. These agreements allow for an immediate conversion into shares of common stock and require the debt discount recorded at the time of the agreement to be fully amortized immediately. The total amount amortized to interest expense for these individual convertible debt agreements during the three months ended September 30, 2012, was $277,460. This is in contrast to the agreements entered into with Asher Enterprises, JMJ Financial, Inc. ("JMJ") and TCA Global Credit Master Fund, LP ("TCA") that amortize the debt discount over a period of time. We also incurred capital expenditures in the amount of $7,594 and $0 during the three months ended September 30, 2012 and 2011, respectively, for additional inventory of the 3 ml RevVac™ safety syringe. Net Loss Net loss for the three months ended September 30, 2012, was $(1,311,664) compared to $(695,391) for the same period in 2011, as the Company increased expenses primarily related to product liability insurance, investment banking fees, convertible debt interest, legal fees and consulting fees. The Company incurred a net operating loss of $(864,600) during the three months ended September 30, 2012, compared to a net operating loss of $(566,535) for the same period in 2011. 18 For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 Revenues During the nine months ended September 30, 2012 and 2011, respectively, the Company had $1,189 in sales revenue, compared to $0 for the same period in 2011. General and Administrative Expenses During the nine months ended September 30, 2012, the Company incurred $3,017,340 in general and administrative expenses, compared to $2,260,713 for the same period in 2011. Employee salaries were $429,452 for the nine months ended September 30, 2012, a decrease of $36,348, compared to $465,800 for the same period in 2011. In addition to this, compensation costs related to the issuance of options to officers and directors during the nine months ended September 30, 2012, totaled $445,438, compared to $0 for the same period in 2011. This increase is due primarily to options being issued to officers and directors in the first quarter of 2012. Further, consulting agreement fees and legal fees were $690,284 and $489,810, respectively, for the nine months ended September 30, 2012, a decrease in consulting fees of $264,262 and an increase in legal fees of $212,109, respectively, compared to $954,546 and $277,701, respectively, for the same period in 2011. The decrease in consulting fees was partly due to the Company's decision in 2011 to terminate the consulting agreement with Strategic Product Development ("SPD"). The increase in legal fees was due primarily to increased expenses related to securities issuance and SEC compliance along with legal expenses related to arbitration litigation and the protection of the Company's intellectual property. A total of $284,925 in prepaid consulting agreements was expensed in the nine months ended September 30, 2012, compared to $529,346 for the same period in 2011. Interest and derivative adjustments increased to $1,198,603 during the nine months ended September 30, 2012, compared to $321,123 for the same period in 2011. This increase is due primarily to the new convertible debt agreements entered into with individual investors during the first quarter. These agreements allow for an immediate conversion into shares of common stock and require the debt discount recorded at the time of the agreement to be fully amortized immediately. The total amount amortized to interest expense during the first nine months of 2012 for these agreements was $632,706. This is in contrast to the agreements entered into with Asher, JMJ and TCA that amortize the debt discount over a period of time. We also incurred capital expenditures in the amount of $0 and $362,000 during the nine months ended September 30, 2012 and 2011, respectively, for payments to complete the final design of our production molds related to the 3 ml RevVac™ safety syringe. We also incurred capital expenditures in the amount of $320,837 and $0 during the six months ended September 30, 2012 and 2011, respectively, for inventory of the 3 ml RevVac™ safety syringe. Net Loss Net loss for the nine months ended September 30, 2012, was $(4,204,031) compared to $(2,777,528) for the same period in 2011, as the Company incurred greater expenses primarily related to an increase in salaries, additional compensation expenses, legal fees and expenses associated with the convertible debt agreements. The Company incurred a net operating loss of $(3,192,075) during the nine months ended September 30, 2012, compared to a net operating loss of $(2,377,323) for the same period in 2011. Liquidity and Capital Resources As of September 30, 2012, the Company did not have and currently does not have sufficient cash on hand to pay present obligations as they become due. In addition, due to current economic conditions and the Company's related risks and uncertainties, there is no assurance that we will be able to raise additional capital on acceptable terms, if at all, to meet our current obligation over the next 12 months. Because of the foregoing, the Company's auditors have expressed substantial doubt about our ability to continue as a going concern. 19 Status of Purchase Orders The Company accepted a purchase order on March 14, 2012, from OX Technologies, Inc. ("OXT") for 480,000 units of the RevVac™ safety syringe. The purchase order was contingent on the issuance of a Permit for Importation to OXT from the Mexican government. The Company has worked diligently with OXT to file the appropriate paperwork and respond to requests for further information from the Mexican authorities. The Company and OXT expect the Permit for Importation to be issued in the fourth quarter of 2012, at which time the order can be fulfilled. The Company also accepted a purchase order on March 15, 2012, from DS WorldMed, its distributor in the Middle East and South America. The purchase order was contingent on the issuance of an import permit in Iraq. DS WorldMed's customer in Iraq has subsequently lost its right to distribute product in the country. As a result, DS WorldMed informed the Company in late-September that it would be cancelling its purchase order. The Company has subsequently notified DS WorldMed of its intention to revoke the exclusive distribution rights in all distribution territories as a result of DS WorldMed's failure to perform in accordance with the distribution agreement between the Company and DS WorldMed dated December 31, 2011. Net cash used for operating activities for the nine months ended September 30, 2012 and September 30, 2011, was $(3,248,040) and $(2,426,002), respectively. The net loss for the nine months ended September 30, 2012 and 2011, was $(4,204,031) and $(2,777,528), respectively. This increase is primarily attributable to the increased expense related to legal expenses, salaries and other compensation expenses, and the interest and derivative expenses related to the convertible debt agreements. Net cash used for investing activities for the nine months ended September 30, 2012 and September 30, 2011, was $(15,392) and $(176,621), respectively. This cash used for investing activities in the first nine months of 2012 is a result of legal expenses related to patent development for the RevVac™ safety syringe. Net cash obtained through all financing activities for the nine months ended September 30, 2012, was $3,259,661, as compared to $2,535,910 for the same period in 2011. The increase in cash obtained through financing activities is primarily a result of cash received from convertible debt agreements. Cash adjustments through the payment of debt totaled $357,002 during the nine months ended September 30, 2012. Common stock in the amount of $1,271,700 was issued in the first nine months of 2012 to satisfy convertible debt agreements. An increase due to the convertible debt's beneficial conversion feature as of September 30, 2012, is $436,184. Convertible debentures issued for cash totaled $357,002 for the first nine months of 2012, and a decrease from the balance of the derivative liability as of September 30, 2012, totaled $127,383. For the nine months ended September 30, 2012, the Company received $291,915 from the exercise of options and warrants. The Company received $635,707 and $394,136 for the issuance of unexercised options and warrants, respectively, in the first nine months of 2012. In order to fund the completion of the RevVac™ safety syringe production molds, we issued stock options and/or common stock when it is acceptable to third parties for services rendered in assisting us in the product distribution and marketing process. Compensation costs related to the issuance common stock to outside parties for services rendered during the nine months ended September 30, 2012 and 2011, were $410,675 and $355,850, respectively. Additionally, we received payments for exercised options and warrants during the nine months ended September 30, 2012, totaling $291,915, compared to $1,465,820 for the same period in 2011. As of September 30, 2012, the Company did not have and currently does not have sufficient cash to pay present obligations as they become due. We are searching for additional financing to generate the liquidity necessary to continue our operations. Due to current economic conditions and the Company's risks and uncertainties, there is no assurance that we will be able to raise any additional capital on acceptable terms, if at all. Because of these uncertainties, the auditors have expressed substantial doubt about our ability to continue as a going concern. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy. Because we do not currently generate any cash from operations and have no credit facilities available, our only means of funding is through the sale of our common stock. We presently have 250,000,000 shares of common stock authorized, of which 65,628,176 shares were issued and outstanding as of September 30, 2012. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy. 20 Our estimated working capital requirement for the next 12 months is $3,100,000 with an estimated burn rate of $230,000 per month. The Company entered into one securities purchase agreement in the third quarter of 2012 with Asher Enterprises, pursuant to which the Company issued a convertible promissory note to Asher Enterprises for an original principal amount of $42,500 on August 15, 2012, in return for aggregate gross cash proceeds of $42,500. The note bears interest at a rate of 8% per annum and provides for the payment of all principal and interest nine months from the date of the notes' respective issuance. The principal amount owed to Asher Enterprises at September 30, 2012, is $138,000. This includes the note issued for $42,500 in the third quarter of 2012 and the notes from May 15, 2012, for $53,000 and from June 21, 2012, for $42,500. The notes are convertible at the election of Asher Enterprises into that number of shares of the Company's common stock determined by multiplying 55% by the average of the lowest three closing bid prices of the Company's common stock on the OTC Markets OTCQB during the ten business days immediately preceding the date of conversion, subject to adjustment. The notes issued by Asher Enterprises in 2012, contain a beneficial conversion feature due to an amendment featuring a fixed conversion price of $0.00009 and no adjustment due to dilutive issuance. As a result, these notes were not bifurcated and valued with an embedded call option. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. Additionally, the notes issued through the private placement to individual investors all contain a beneficial conversion feature due to an amendment featuring a fixed conversion price of $0.00009 and no adjustment due to dilutive issuance. The total paid in capital for this beneficial conversion feature for these agreements as of September 30, 2012, is $530,807. Of this, $289,377 is due to the agreements with Asher Enterprises and $241,430 is due to the agreements with private investors. On February 22, 2011, the Company issued a $1,050,000 Convertible Promissory Note to JMJ, a private investor. The note bears interest in the form of a onetime interest charge of 8%, payable with the note's principle amount on the maturity date, February 22, 2014. All or a portion of this note's principle and interest is convertible at the option of JMJ from time to time, into shares of the Company's common stock, originally fixed at a per share conversion price equal to 70% of the average of the three lowest closing prices for the Company's common stock in the 20 trading days previous to the effective date of each such conversion. During the course of 2011, the Company borrowed $450,000 against this note. Over the course of the loan, JMJ elected to convert a total of $258,337 in principal from this note. The principal amount owed to JMJ at September 30, 2012, is $191,663. On February 28, 2011, the Company issued a $500,000 Convertible Promissory Note to JMJ. The note bears interest in the form of a onetime interest charge of 8%, payable with the note's principle amount on the maturity date, February 28, 2014. All or a portion of this note's principle and interest is convertible at the option of JMJ from time to time, into shares of the Company's common stock, originally fixed at a per share conversion price equal to 70% of the average of the three lowest closing prices for the Company's common stock in the 20 trading days previous to the effective date of each such conversion. The Company entered into a securities purchase agreement in the first quarter of 2012 with TCA Global Credit Master Fund, LP ("TCA"), pursuant to which the Company issued a convertible promissory note to TCA for an original principal amount of $225,000 on January 3, 2012. The note bears interest at a rate of 12% per annum and provides for the payment of all principal and interest 12 months from the date of the note's respective issuance. TCA elected to convert $50,000 of the convertible debt agreement into common stock on August 15, 2012. The conversion price was determined by multiplying 95% by the average of the two lowest daily volume weighted average prices of the Company's common stock on the OTC Markets OTCQB during the five business days immediately preceding the date of conversion. This resulted in the conversion of 294,118 shares of common stock to satisfy this debt. The principal amount owed to TCA at September 30, 2012, is $175,000. The note is convertible at the election of TCA into that number of shares of the Company's common stock determined by multiplying 95% by the average of the two lowest daily volume weighted average prices of the Company's common stock on the OTC Markets OTCQB during the five business days immediately preceding the date of conversion, subject to adjustment. 21 The Company entered into nine securities purchase agreements in the third quarter of 2012, with individual investors, pursuant to which the Company issued nine convertible promissory notes for an original principal amount of $25,000 on July 12, 2012, for $100,000 on July 13, 2012, for $50,000 on July 13, 2012, for $75,000 on July 26, 2012, for $25,000 on August 2, 2012, for $25,000 on August 30, 2012, for $25,000 on September 4, 2012 and for $15,000 on September 20, 2012, respectively, in return for aggregate gross cash proceeds of $390,000. The notes bear interest at a rate of 8% per annum and provide for the payment of all principal and interest 12 months from the date of the notes' respective issuance. The notes also feature detachable warrants exercisable within one year of the agreement. All warrants issued along with the convertible debt agreements are outstanding, with a total of 3,666,005 warrants issued at $0.25 and 1,833,002 warrants issued at $0.50. In determining the cost associated with the issuance of this debt and the appropriate fair value for the warrants, the Company uses the Black-Scholes option pricing formula. The principal amount owed according to these notes as of September 30, 2012, is $240,000. The notes are convertible at the election of the individual into that number of shares of the Company's common stock determined by multiplying 75% by the average of the daily volume weighted average prices of the Company's common stock on the OTC Markets OTCQB during the five business days immediately preceding the date of conversion, subject to adjustment. The following table summarizes total current assets, liabilities and working capital at September 30, 2012, compared to September 30, 2011. September 30, September 30, 2012 2011 Increase/ (unaudited) (unaudited) (Decrease) Current Assets $ 740,373 $ 222,165 $ 518,208 Current Liabilities $ 3,119,598 $ 1,894,713 $ 1,224,885 Working Capital Deficit $ (2,379,225 ) $ (1,672,548 ) $ 706,677 As of September 30, 2012, we had a working capital deficit of $2,379,225, as compared to a working capital deficit of $1,672,548 as of September 30, 2011, an increase of $706,677. Current assets increased primarily due to the litigation receivable of $311,000 from the judgment against Globe Med Tech and inventory of $320,837. Factors contributing to the increase in current liabilities include an increase in accounts payable due to purchase of the new production molds according to the terms of the manufacturing agreement signed with Yeso-med in December 2011. Additional factors increasing the current liabilities include an increase in accounts payable due to product purchases of $206,227, an increase in trades payable of 308,413 primarily due to increased legal and consulting fees and an increase in payroll tax liabilities of $249,321. The issuance of the convertible notes and the embedded derivatives associated with these notes increased current liabilities to $859,313 as of September 30, 2012, as compared to a balance of $621,762 as of September 30, 2011. Other current assets include the amount related to pre-paid consulting expenses incurred through the issuance and exercise of stock options. The balance of prepaid consulting fees as of September 30, 2012, was $35,601, compared to $191,861 as of September 30, 2011. The remaining balance includes $71,300 for a short-term note receivable. September 30, September 30, 2012 2011 Building $ - $ - Production machinery and equipment 1,109,199 894,000 Furniture and fixtures 49,147 39,846 Office equipment 4,036 4,036 Leasehold improvements 33,000 41,800 Less: accumulated depreciation and amortization (57,109 ) (14,360 ) Property, plant and equipment, net $ 1,138,273 $ 965,322 22 Production machinery and equipment as of September 30, 2012, consisted primarily of amounts incurred in connection with the pilot molds and final molds related to the lines for the RevVac™ syringe. The Company continues to treat the amounts paid to MIG under the terminated agreement as production equipment until the outcome of the breach of contract arbitration is finalized. September 30, September 30, 2012 2011 Goodwill $ 23,276 $ 23,276 Licensing agreement 15,000 15,000 Patent development 123,418 29,000 Total other assets $ 161,694 $ 67,276 The Company capitalizes patent development costs in the amount of $41,737 during the first nine months of 2012. During the same time period, the Company had amortization expenses of $19,745 from these patents. The Company does not currently generate any cash from operations and does not have access to traditional credit facilities; however, the Company does expect an increase in product sales in the fourth quarter of 2012. Over the next 12 months, in order to implement our business plan and meet our liquidity needs going forward, the Company may sell shares of its common stock, issue additional convertible debt notes or permit warrant exercises. If we implement any of the foregoing financing alternatives to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy. Current Liabilities consists of the following: September 30, September 30, 2012 2011 Accounts payable and credit cards $ 875,326 $ 149,773 Accrued salaries and payroll liabilities 468,569 190,108 Convertible debentures and accrued interest (net) 603,182 111,985 Note payable and accrued interest 768,226 830,176 Derivative liabilities 314,928 527,538 Other current liabilities 89,367 85,133 Total current liabilities $ 3,119,598 $ 1,894,713 The primary change in the balance to Accounts payable is a result of the purchase agreement for the 1ml and 3ml RevVac™ safety syringe molds as well as increase in accounts payable from the initial orders of the 3ml RevVac™ safety syringe. Accrued salaries increased by $278,461 due to an increase in payroll tax liabilities of $249,321 and an increase in accrued salary of $29,140. Notes payable and accrued interest are a result of the settlement and determination of a liability with Gifford Mabie and the SEC. The issuance of the convertible debt agreements resulted in an increase in convertible debentures principal balance due. The conversion of outstanding convertible debt agreements resulted in a decrease in derivative liabilities. Other current liabilities include an amount due to a former employee of the Company. Expected Purchase or Sale of Plant and Significant Equipment The Company expects to purchase and begin making payments for the production of the 1ml, 5ml and 10ml RevVac™ safety syringe molds in the fourth quarter of 2012. Expected Significant Changes in the Number of Employees The Company began leasing additional space in the same building as of July 1, 2011, and expects to hire between 3 to 7 office personnel to assist with operations as sales continue with the 3ml RevVac™ safety syringe. 23 Off-Balance Sheet Arrangements As of September 30, 2012, the Company had no off-balance sheet arrangements. |