SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
--------------- ------------------
Commission file number 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
CORNICHE GROUP INCORPORATED
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
23,051,460 SHARES, $.001 PAR VALUE, AS OF JULY 25, 2003
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
I N D E X
Page No.
Part I - Financial Information:
Item 1. Financial Statements (Unaudited):
Balance Sheets
At June 30, 2003 and December 31, 2002 3
Statements of Operations
For the three and six months
ended June 30, 2003 and 2002 4
Statement of Stockholders' Deficit
For the six months ended June 30, 2003 5
Statements of Cash Flows
for the six months ended June 30, 2003 and 2002 6
Notes to Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-13
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
Item 4. Controls and Procedures 14
Part II - Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K. 15
Signatures 15
2
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2003 2002
---------------------------------
Current assets:
Cash and equivalents $27,452 $19,255
Notes receivable, net of allowance of $250,000 1,000,000 1,000,000
Prepaid expenses and other current assets, net
of allowance of $8,103 56,258 40,094
---------------------------------
Total current assets 1,083,710 1,059,349
Property and equipment, net 2,365 -
Deferred Acquisition Costs 98,735 123,835
Other assets 3,000 -
---------------------------------
$1,187,810 $1,183,184
=================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Dividends payable - preferred stock $409,354 $385,512
Accounts payable 516,213 344,279
Accrued liabilities 180,310 157,806
Stockholder advances 106,000 106,000
Notes payable 320,000 125,000
Current portion of long-term debt 21,056 22,595
---------------------------------
Total current liabilities 1,552,933 1,141,192
Unearned revenues 140,191 175,200
Long-term debt - 9,513
Series A Convertible Preferred Stock:
$0.07 cumulative convertible preferred stock;
liquidation value - $1.00 per share;
authorized, 1,000,000 shares; outstanding,
681,174 shares 681,174 681,174
Stockholders' Deficit:
Preferred stock; authorized, 5,000,000 shares
Series B convertible redeemable preferred stock,
liquidation value, 10 shares of common stock per
share; $0.01 par value; authorized, 825,000 shares;
issued and outstanding, 10,000 shares 100 100
Common stock, $.001 par value; authorized,
75,000,000 shares; issued and outstanding,
23,051,460 shares at June 30, 2003 and
22,398,710 shares at December 31, 2002 23,052 22,399
Additional paid-in capital 8,898,735 8,847,573
Accumulated deficit (10,108,375) (9,693,967)
---------------------------------
Total stockholders' deficit (1,186,488) (823,895)
---------------------------------
$1,187,810 $1,183,184
=================================
See accompany notes to financial statements
3
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------
Earned revenues $17,005 $18,287 $35,009 $42,839
Direct costs (12,177) (13,694) (25,100) (33,064)
------------------------------------------------------------------------
Gross profit 4,828 4,593 9,909 9,775
Selling, general and administrative
expenses (209,490) (205,526) (338,068) (576,961)
------------------------------------------------------------------------
Operating loss (204,662) (200,933) (328,159) (567,186)
Other income (expense):
Realized loss on
marketable securities - - - (3,490)
Interest income 3 22,118 7 63,138
Interest expense (42,927) (1,009) (62,414) (2,128)
Property and equipment impairment charge - (54,732) - (54,732)
------------------------------------------------------------------------
(42,924) (33,623) (62,407) 2,788
------------------------------------------------------------------------
Net loss (247,586) (234,556) (390,566) (564,398)
Preferred dividend (11,921) (11,921) (23,842) (23,842)
------------------------------------------------------------------------
Net loss attributable to common stockholders $(259,507) $(246,477) $(414,408) $(588,240)
========================================================================
Net loss per common share $(0.01) $(0.01) $(0.02) $(0.03)
========================================================================
Weighted average
common shares outstanding 22,597,777 22,293,335 22,584,172 22,292,015
========================================================================
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Series B
Convertible
Preferred Stock Common Stock
--------------- ------------ Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------------------------------------------------------------ --------------
Balance - January 1, 2003 10,000 $100 22,398,710 $22,399 $8,847,573 $(9,693,967) $(823,895)
Issuance of common stock
upon exercise of options -- -- 550,000 550 2,200 -- 2,750
Issuance of common stock
for services -- -- 100,000 100 2,900 -- 3,000
Issuance of common stock
to directors -- -- 2,750 3 300 -- 303
Stock options granted
with debt -- -- -- -- 45,762 -- 45,762
Series A Convertible
stock dividends -- -- -- -- -- (23,842) (23,842)
Net loss -- -- -- -- -- (390,566) (390,566)
------------------------------------------------------------------------ --------------
Balance - June 30, 2003 10,000 $100 23,051,460 $23,052 $8,898,735 $(10,108,375) $(1,186,488)
======================================================================== ==============
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months Ended
June 30,
------------------------------
2003 2002
------------------------------
Cash flows from operating activities:
Net loss $(390,566) $(564,398)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common shares issued and stock
options granted for services rendered and
interest expense 49,065 999
Depreciation and amortization 216 16,766
Property and equipment impairment charge - 54,732
Unearned revenues (35,009) (46,070)
Deferred acquisition costs 25,100 32,508
Changes in operating asset and
liability account balances:
Prepaid expenses and other current assets (19,164) (25,802)
Accounts payable 171,934 211,794
Accrued liabilities 22,504 (45,893)
------------------------------
Net cash used in operating activities (175,920) (365,364)
Cash flows from investing activities:
(Increase) decrease in marketable securities - 1,503,374
Notes receivable - (1,250,000)
Acquisition of property and equipment (2,581) (1,134)
------------------------------
Net cash provided by (used in) investing activities (2,581) 252,240
Cash flows from financing activities:
Issuance of common stock 2,750 -
Advances on notes payable 195,000 -
Stockholder advances - 81,000
Payment of capital lease obligations (1,539) (343)
Repayment of long-term debt (9,513) (10,129)
------------------------------
Net cash provided by financing activities 186,698 70,528
------------------------------
Net increase (decrease) in cash and cash equivalents 8,197 (42,596)
Cash and cash equivalents at beginning of period 19,255 51,268
------------------------------
Cash and cash equivalents at end of period $27,452 $8,672
==============================
Supplemental Disclosure of Cash Flow Information:
Interest paid $2,712 $1,009
==============================
Supplemental Schedule of Non-cash Financing Activities:
Series A Preferred Stock dividends $23,842 $23,842
==============================
Issuance of common stock for services rendered $3,303 $999
==============================
Stock options issued with debt $45,762 $-
==============================
See accompanying notes to financial statements.
6
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY.
On July 24, 2003, Corniche Group Incorporated changed its name to Phase
III Medical, Inc. (the "Company"). The Company was a provider of extended
warranties and service contracts via the Internet at warrantysuperstore.com
through June 30, 2002. In June 2002, management determined, in light of
continuing operating losses, to discontinue its warranty and service
contract business and to seek new business opportunities for the Company. On
February 6, 2003, the Company appointed Mark Weinreb as a member of the
Board of Directors and as its President and Chief Executive Officer. The
Company and Mr. Weinreb have been exploring business plans for the Company
that may involve, under the name "Phase III Medical, Inc.", entering the
medical sector by acquiring or participating in one or more biotech and/or
medical companies or technologies, owning one or more drugs or medical
devices that may or may not yet be available to the public, or acquiring
rights to one or more of such drugs or medical devices or the royalty
streams therefrom. Mr. Weinreb was appointed to finalize and execute the
Company's new business plan. The Company will need to recruit management,
business development and technical personnel, and develop its business
model. Accordingly, it will be necessary for the Company to raise new
capital. There can be no assurance that any such business plan developed by
the Company will be successful, that the Company will be able to acquire
such new business or rights or raise new capital, or that the terms of any
transaction will be favorable to the Company.
The business of the Company today comprises the "run off" of its sale of
extended warranties and service contracts via the Internet and the new
business opportunity it is pursuing in the medical/bio-tech sector.
The Company's financial statements have been prepared assuming the
Company will continue as a going concern. The Company discontinued sales of
its extended warranty service contracts through its web site in June 2002.
Accordingly, the Company has no operations nor available means to finance
its current expenses and with which to pay its current liabilities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 2 - BASIS OF PRESENTATION.
The accompanying unaudited 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 for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, the statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position as of June 30, 2003, the
results of operations for the three and six months ended June 30, 2003 and
2002 and the cash flows for the six months ended June 30, 2003 and 2002. The
results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the results to be expected for the full year.
The December 31, 2002 balance sheet has been derived from the audited
financial statements at that date included in the Company's Annual Report on
Form 10-K. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K.
NOTE 3 - ACCOUNTING POLICIES.
There were no changes in the Company's accounting policies during the six
months ended June 30, 2003.
NOTE 4 - NOTES RECEIVABLE.
As previously reported, on January 7, 2002, the Company entered into a
Stock Contribution Exchange Agreement (the "Agreement") with StrandTek
International, Inc., a Delaware corporation ("StrandTek"), certain of
StrandTek's principal shareholders and certain non-shareholder loan holders
of StrandTek (the "StrandTek Transaction"). Consummation of the StrandTek
Transaction was conditioned upon a number of closing conditions which
ultimately could not be met. As a result, the Agreements were formally
terminated by the Company and StrandTek in June 2002.
7
NOTE 4 - NOTES RECEIVABLE (continued)
In January 2002, the Company advanced to StrandTek a loan of $1 million
on an unsecured basis, which is personally guaranteed by certain of the
principal shareholders of StrandTek and a further loan of $250,000 on
February 19, 2002 on an unsecured basis. Such loans bore interest at 7% per
annum and were due on July 31, 2002 following termination of the Agreements
in June 2002.
StrandTek defaulted on the payment of $1,250,000 plus accrued interest
due to the Company on July 31, 2002. As a result, on August 6, 2002, the
Company filed a complaint in the Superior Court of New Jersey entitled
Corniche Group Incorporated v StrandTek International, Inc., a Delaware
corporation, StrandTek International, Inc., a Florida corporation, David M.
Veltman, William G. Buckles Jr., Jerome Bauman and Jan Arnett. The complaint
sought recovery of the $1,250,000 loans, plus interest, costs and fees, and
sought recovery against the individual defendants pursuant to their partial
guarantees. On May 9, 2003, the Company was granted a final judgment in the
amount of $1,415,622.02 from each corporate defendant, in the amount of
$291,405.50 against each individual defendant and dismissing defendants'
counterclaims.
Since the February 2002 loan of $250,000 was unsecured and not
guaranteed, the Company established an allowance of $250,000 at December 31,
2002. No assurances can be given that the Company will be able to collect
fully on the balance of the loans, even after the reserve. The Company was
informed that on April 16, 2003, StrandTek made an assignment for the
benefit of its creditors, so that any collection on its judgment other than
on the personal guarantees is highly unlikely.
On July 24, 2003 the Company entered into a Forbearance Agreement with
personal guarantors Veltman and Buckles pursuant to which they made an on
account payment of $50,000 each with a further on account payment of $75,000
each due on or before August 20, 2003 and additional payments of $50,000
each due by the 20th of each subsequent month with the final balance due
being paid in December 2003. Additionally, each of Veltman and Buckles are
to provide collateral to secure payment of their respective judgments. A
similar forbearance agreement was reached with guarantor Arnett as of July
28, 2003, also against an on account payment of $50,000. The Company has
agreed to forbear from taking further steps to exercise on the judgments
entered against each of them in May 2003, subject to their adhering to the
terms of the Forbearance Agreements.
NOTE 5 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
June 31, December 31,
2003 2002
--------------------------
Computer equipment $2,581 $-
Computer software 602,014 602,014
--------------------------
604,595 602,014
Less: Accumulated depreciation (602,230) (602,014)
--------------------------
$2,365 $-
==========================
Depreciation and amortization charged to operations was $216 and $7,830
for the three months ended June 30, 2003 and 2002, respectively and $216 and
$16,766 for the six months ended June 30, 2003 and 2002, respectively. An
impairment charge of $54,732 was recorded in June 2002 to record property
and equipment at its net realizable value.
NOTE 6 - NOTES PAYABLE.
In September 2002, the Company sold to accredited investors five 60-day
promissory notes in the principal sum of $25,000 each, resulting in net
proceeds to the Company of $117,500, net of offering costs. The notes bear
interest at 15% per annum payable at maturity. The notes include a default
penalty pursuant to which if the notes are not paid on the due date the
holder shall have the option to purchase twenty five thousand shares of the
Company's common stock for an aggregate purchase price of $125. If the non
payment continues for 30 days, then on the 30th day, and at the end of each
successive 30-day period until the note is paid in full, the holder shall
have the option to purchase an additional twenty five thousand shares of the
Company's common stock for an aggregate purchase price of $125. During the
six months ended June 30, 2003, options for 550,000 shares were exercised by
the note holders. At June 30, 2003, the Company had reserved 450,000 shares
of the Company's common stock for issuance against exercise of the options
granted pursuant to the default penalty.
8
NOTE 6 - NOTES PAYABLE (continued)
On February 11, 2003, the Company commenced a private placement offering
to raise up to $100,000 in 30-day promissory notes in increments of $5,000
bearing interest at 20% per annum. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, were eligible to purchase these promissory notes. The
Company raised $50,000 through the sale of such promissory notes, resulting
in net proceeds to the Company of $45,000, net of offering costs. The
Company has since repaid $5,000 of such promissory notes and the balance of
$45,000 remains outstanding and past due together with accrued interest.
On March 17, 2003, the Company commenced a private placement offering to
raise up to $250,000 in 6-month promissory notes in increments of $5,000
bearing interest at 15% per annum. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, are eligible to purchase these promissory notes. As of
June 30, 2003 and July 25, 2003 the Company had raised $150,000 and
$190,000, respectively, through the sale of such promissory notes, resulting
in net proceeds to the Company of $135,000, and $171,000 net of offering
costs.
NOTE 7 - LONG-TERM DEBT.
Long-term debt consists of the following:
June 30, December 31,
2003 2002
----------------- ----------------
Bank note payable in equal monthly installments of
$2,043 including interest at 8.75% $ 21,056 $ 32,108
Less: current maturities 21,056 22,595
----------------- ----------------
$ - $ 9,513
================= ================
NOTE 8 - SERIES "A" CONVERTIBLE REDEEMABLE PREFERRED STOCK.
The Certificate of Designation for the Company's Series A Preferred Stock
provides that at any time after December 1, 1999 any holder of Series A
Preferred Stock may require the Company to redeem his shares of Series A
Preferred Stock (if there are funds with which the Company may legally do
so) at a price of $1.00 per share. Notwithstanding the foregoing redemption
provisions, if any dividends on the Series A Preferred Stock are past due,
no shares of Series A Preferred Stock may be redeemed by the Company unless
all outstanding shares of Series A Preferred Stock are simultaneously
redeemed. The holders of Series A Preferred Stock may convert their Series A
Preferred Stock into shares of Common Stock of the Company at a price of
$5.20 per share. At June 30, 2003 and December 31, 2002, 681,174 shares of
Series A Preferred Stock were outstanding.
NOTE 9 - STOCKHOLDERS' EQUITY.
(a) Common Stock:
During the six months ended June 30, 2003, the Company issued 2,750
shares of its common stock whose fair value was $303 to its board
members for director's fees.
On February 6, 2003, the Company entered into a deferment agreement with
three major creditors pursuant to which liabilities of approximately
$523,887 in aggregate, were deferred, subject to the success of the
Company's debt and equity financing efforts, until January 15, 2005,
against a pledge of the StrandTek note receivable (see Note 4). In
consideration for the deferral, the Company agreed to issue 100,000
restricted shares of the Company's common stock whose fair value was
$3,000. Amounts received from the StrandTek guarantors will be used to
repay these liabilities.
9
NOTE 9 - STOCKHOLDERS' EQUITY. (Continued)
(b) Warrants:
The Company has issued common stock purchase warrants from time to time
to investors in private placements, certain vendors, underwriters, and
directors and officers of the Company. A total of 44,000 shares of
common stock are reserved for issuance upon exercise of outstanding
warrants as of June 30, 2003 at prices ranging from $3.20 to $8.10 and
expiring through October 2004.
(c) Stock Option Plans:
The Company has two stock option plans, the 1998 Employee Incentive Stock
Option Plan and the 2003 Equity Participation Plan. The 1998 Employee
Incentive Stock Option Plan provided for the grant of options to purchase
shares of the Company's common stock to employees. The 1998 Employee
Incentive Stock Option Plan has been superceded by the 2003 Equity
Participation Plan.
Information with respect to options under the 1998 Stock Option Plan is
summarized as follows:
For the Six Months Ended
June 30, 2002
-----------------------------
Shares Prices
-------------- --------------
Outstanding at beginning of period 301,500 $0.41 to $1.94
Granted -
Expired (1,500) $0.41
Cancelled -
--------------
Outstanding at end of period 300,000 $0.69 to $1.94
==============
All outstanding options under the 1998 Employee Incentive Stock Option
Plan were either cancelled or expired during 2002.
In February 2003, the Company adopted the 2003 Equity Participation Plan,
which was approved by stockholders at the Company's Annual Meeting on
July 24, 2003. Under this plan, the Company has reserved 15,000,000
shares of common stock for the grant of incentive stock options and
non-statutory stock options to employees and non-employee directors,
consultants and advisors.
Information with respect to options under the 2003 Equity Participation
Plan is summarized as follows:
For the Six Months Ended
June 30, 2003
-----------------------------
Shares Prices
-------------- --------------
Outstanding at beginning of period - -
Granted 3,200,000 $0.03 to $0.05
Expired - -
Cancelled - -
--------------
Outstanding at end of period 3,200,000 $0.03 to $0.05
==============
All options were granted at an exercise price equal to the fair value of
the common stock at the grant date. Therefore, in accordance with the
provisions of APB Opinion No. 25 related to fixed stock options, no
compensation expense is recognized with respect to options granted or
exercised. Under the alternative fair-value based method defined in SFAS
No. 123, the fair value of all fixed stock options on the grant date
would be recognized as expense over the vesting period. Assuming the fair
value of the stock at the date of grant to be $.3125 per share in May
1996, $.40625 per share in May 1997, $.6875 in January 1999, $1.00 per
share in September 1999, $1.94 in June 2000, $1.097 in September 2000,
$.03 in February 2003 and $.05 in June 2003, the life of the options to
be from three to ten years, the expected volatility at 200%, expected
dividends are none, and the risk-free interest rate of 10%, 3.97% and
2.4%, the Company would have recorded compensation expense of $1,088 and
$14,531 for the three months ended June 30, 2003 and 2002, respectively,
and $3,708 and $29,062 for the six months ended June 30, 2003 and 2002,
respectively, as calculated by the Black-Scholes option pricing model.
10
NOTE 9 - STOCKHOLDERS' EQUITY. (Continued)
(c) Stock Option Plans (continued):
As such, pro-forma net loss and loss per share would be as follows:
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-------------- -------------- -------------- --------------
Net loss as reported $ (247,586) $ (234,556) $ (390,566) $ (564,398)
Additional compensation (1,088) (14,531) (3,708) (29,062)
----------- ----------- ----------- -----------
Adjusted net loss $ (248,674) $ (249,087) $ (394,284) $ (593,460)
=========== ========== ========== ==========
Loss per share as reported $ (0.01) $ (0.02) $ (0.02) $ (0.03)
=========== ========== =========== ===========
Adjusted loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.03)
=========== ========== =========== ===========
NOTE 10 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION.
The Company's operations are currently in one segment, namely the "run
off" of its sale of extended warranties and service contracts via the
Internet. Additionally, the Company is currently endeavoring to establish
new business operations in the medical/bio-tech sector. The Company's
operations are conducted entirely in the United States.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Quarterly Report, statements that are not statements of current or historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "plan", "intend" "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
In June 2002, in light of on-going operating losses, management determined that
it was in the best interest of the Company to discontinue the Company's sale of
extended warranties and service contracts business and to seek new business
opportunities for the Company. On February 6, 2003, the Company appointed Mark
Weinreb as a member of the Board of Directors and as its President and Chief
Executive Officer. The Company and Mr. Weinreb have been exploring business
plans for the Company that involve focusing on entering the medical sector by
acquiring or participating in one or more biotech and/or medical companies or
technologies, owning one or more drugs or medical devices that may or may not
yet be available to the public, or acquiring rights to one or more of such drugs
or medical devices or the royalty streams therefrom. Mr. Weinreb was appointed
to finalize and execute the Company's new business plan. The Company will need
to recruit management, business development and technical personnel, and develop
its business model. Accordingly, it will be necessary for the Company to raise
new capital. There can be no assurance that any such business plan developed by
the Company will be successful, that the Company will be able to acquire such
new business or rights or raise new capital, or that the terms of any
transaction will be favorable to the Company.
RESULTS OF OPERATIONS
The Company recognizes revenue from its warranty service contracts business over
the life of contracts executed. Additionally, the Company purchased insurance to
fully cover any losses under the service contracts from a domestic carrier. The
insurance premium expense and other costs related to the sale are amortized
ratably over the life of the contracts.
Three Months Ended June 30, 2003 Compared To Three Months Ended June 30, 2002.
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $17,000 for the three months ended
June 30, 2003 (three months ended June 30, 2002: $18,000). The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. Similarly, direct costs incurred in the
period relate to costs previously deferred over the life of such contracts
($12,000 and $14,000 for the three months ended June 30, 2003 and 2002,
respectively).
General and administration expenses increased 1.9% to $209,000 for the three
months ended June 30, 2003 as compared to $205,000 for the three months ended
June 30, 2002. The three months ended June 30, 2003 is not strictly comparable
to the same period in the prior year because in the corresponding period in
fiscal 2002 the Company was operating its warranty service contracts business
from its office in Texas whereas in fiscal 2003 it has been endeavoring to
establish new business operations in the medical sector as described above.
Notwithstanding the foregoing, the increase in general and administrative
expenses of $4,000 is primarily due to an increase in payroll costs $21,000,
legal and professional fees $22,000, D&O insurance $20,000, commissions on loan
note financing $14,000 and annual stockholder meeting costs $13,000 not being
fully off-set by lower travel and subsistence costs $15,000, property costs
$11,000, directors' fees $9,000, and information technology expenses $9,000
incurred in connection with the Company's extended warranties and service
contracts business and other expense decreases totaling $42,000, including
employee termination costs of $25,000.
Interest income decreased by $22,000 in the three months ended June 30, 2003 as
compared to the corresponding period in 2002 when interest income was generated
from the StrandTek loans and from investment in marketable securities. Interest
expense increased by $42,000 for the three months ended June 30, 2003 compared
to 2002 primarily as a result of short-term loans secured in September 2002 and
in the six months ended June 30, 2003.
The Company also recorded a property and equipment impairment charge of $55,000
for the three months ended June 30, 2002.
12
For the reasons cited above, net loss for the three months ended June 30, 2003
increased by 5.6% to $248,000 from the comparable loss of $235,000 for the three
months ended June 2002.
Six Months Ended June 30, 2003 Compared To Six Months Ended June 30, 2002.
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $35,000 for the six months ended June
30, 2003 (six months ended June 30, 2002: $43,000). The revenues generated in
the quarter were derived entirely from revenues deferred over the life of
contracts sold in prior periods. Similarly, direct costs incurred in the period
relate to costs previously deferred over the life of such contracts ($25,000 and
$33,000 for the six months ended June 30, 2003 and 2002, respectively).
General and administration expenses decreased 41.4% to $338,000 for the six
months ended June 30, 2003 as compared to $577,000 for the six months ended June
30, 2002. The six months ended June 30, 2003 is not strictly comparable to the
same period in the prior year because in the corresponding period in fiscal 2002
the Company was operating its warranty service contracts business from its
office in Texas whereas in fiscal 2003 it has been endeavoring to establish new
business operations in the medical sector as described above. Notwithstanding
the foregoing, the decrease in general and administrative expenses of $239,000
is primarily due to decreases in legal and professional fees $86,000, payroll
$14,000, travel and subsistence $41,000, property costs $29,000, directors fees
$15,000, employee termination costs $25,000, depreciation charges $17,000 and
information technology expenses $40,000 incurred in connection with the
Company's extended warranties and service contracts business, net of commissions
on loan note financing $15,000 and annual stockholder meeting costs $13,000.
Interest income decreased by $63,000 in the six months ended June 30, 2003 as
compared to the corresponding period in 2002 when interest income was generated
from the StrandTek loans and from investment in marketable securities. Interest
expense increased by $60,000 for the six months ended June 30, 2003 compared to
2002 primarily as a result of short-term loans secured in September 2002 and in
the six months ended June 30, 2003.
For the reasons cited above, net loss for the six months ended June 30, 2003
decreased by 30.8% to $391,000 from the comparable loss of $564,000 for the six
months ended June 2002.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
Six Months Ended
------------------------------
June 30, 2003 June 30, 2002
Cash used in
Operating Activities $(175,920) $(365,364)
Cash (used in) provided by
Investing Activities (2,581) 252,240
Cash provided by
Financing Activities 186,698 70,528
The Company incurred a net loss of $390,566 for the six months ended June 30,
2003. Such losses adjusted for non-cash items such as deferred revenues (net of
deferred acquisition costs) ($9,909) and other non cash credits totaling $49,281
resulted in cash used in operations totaling $175,920 for the six months ended
June 30, 2003, net of working capital movements of $175,274.
To meet its cash requirement during the six months ended June 30, 2003, the
Company relied on the proceeds (net of issuance costs) of sale of Promissory
Notes, $195,000. The Company's liquidity position continues to be hurt by
StrandTek's failure to repay loans advanced to them in the first quarter of
fiscal 2002.
The Company has no contracted capital expenditure commitments in place. As of
June 30, 2003, the Company had cash balances totaling $27,452. The Company will
rely on its cash reserves and short-term loans to meet its cash needs pending an
equity private placement to fund its new business operations until they become
cash generative. Additionally, on February 6, 2003, the Company entered into a
deferment agreement with three major creditors pursuant to which liabilities of
approximately $524,000 in aggregate, were deferred, subject to the success of
the Company's debt and equity financing efforts or its collection efforts
against StrandTek, until January 15, 2005, against a pledge of the loans
advanced to StrandTek in the first quarter of fiscal 2002 in the sum of
$1,250,000 plus accrued interest. While the Company was recently awarded summary
judgment on its claims against StrandTek and has entered into a Forbearance
Agreement with three of the four personal guarantors pursuant to which it
received $150,000 in July 2003, there can be no assurance that the Company will
be able to collect fully on the judgments obtained. See Note 4 to the Unaudited
Financial Statements.
13
In March 2003, the Company commenced a private placement to "accredited
investors" to sell up to $250,000 in promissory notes (the "Notes") in $5,000
increments or multiples thereof, each bearing interest at 15% per annum and each
due 6 months from the date issued (the "Maturity Date"). Principal will be
payable at the Maturity Date and interest will be payable monthly in arrears. As
of the date hereof, the Company had raised $171,000, net of placement
commissions through this private placement. In the event that the Notes are not
paid at the Maturity Date, the interest rate will increase to a default rate of
20% per annum. The Company will pay its placement agent an amount equal to 10%
of the proceeds of the offering as commissions for the placement agent's
services, in addition to reimbursement of the placement agent's expenses and
indemnification against customary liabilities. The offering is a best efforts
offering with no required minimum amount to be raised. If the full $250,000 is
not raised, the Company's startup activities will be constrained. There can be
no assurance that the offering will be successful.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company discontinued sales of its extended
warranty service contracts through its web site in June 2002. Accordingly, the
Company has no operations nor available means to finance its current expenses
and with which to pay its current liabilities. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the three and six months ended June 30, 2003, a situation which
is expected to continue for the foreseeable future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the Company's
most recently completed fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) covered by this report, the
Company carried out an evaluation, with the participation of the
Company's management, including the Company's Chief Executive Officer,
of the effectiveness of the Company's disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon
that evaluation, the Company's Chief Executive Officer concluded that
the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act
is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There have been
no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter to which this
report relates that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
14
PHASE III MEDICAL, INC. (formerly known as Corniche Group Incorporated)
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Corniche v. Strandtek
On May 9, 2003, the Court granted the Company's motion for final summary
judgment against all parties on all claims, and dismissed the defendants'
counterclaims against the Company as a matter of law.
As a result of this ruling, final judgment was entered against the two corporate
defendants, Strandtek (Delaware) and Strandtek (Florida), for $1,415,622.02,
plus post-judgment interest at 5% and an award of attorneys' fees and collection
costs.
Also, final judgment was subsequently entered against each of the four
guarantors (David Veltman, William Buckles, Jerome Baumann and Jan Arnett) for
$291,405.50 ($250,000 plus 25% of the accrued unpaid interest of $165,622.02)
together with post-judgment interest at 5%. The guarantors are not liable for
any portion of the attorneys' fees and collection costs.
After the Court's decision, the Company was informed that the corporate
defendants had made an assignment to the benefit of creditors on April 16, 2003,
and that its senior secured lender is undersecured. Accordingly, it is highly
unlikely that the Company will recover on the judgment other than against the
personal guarantors.
On July 24, 2003 the Company entered into a Forbearance Agreement with personal
guarantors Veltman and Buckles pursuant to which they made an on account payment
of $50,000 each with a further on account payment of $75,000 each due on or
before August 20, 2003 and additional payments of $50,000 each due by the 20th
of each subsequent month with the final balance due being paid in December 2003.
Additionally, each of Veltman and Buckles are to provide collateral to secure
payment of their respective judgments. A similar forbearance agreement was
reached with guarantor Arnett as of July 28, 2003 against an account payment of
$50,000. The Company has agreed to forbear from taking further steps to exercise
on the judgments entered against each of them in May 2003, subject to their
adhering to the terms of the Forbearance Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the Company's stockholders at
its 2003 Annual Meeting held on July 24, 2003 and the votes cast were as set
forth:
(i) The election of Mark Weinreb and Wayne A. Marasco to serve as directors of
the Company until the next meeting of stockholders. The votes cast were as
follows:
For Against Authority
Withheld
Mark Weinreb 19,343,084 0 1,499
Wayne A. Marasco 19,343,202 0 1,381
(ii) A change of the Company's name to "Phase III Medical, Inc." The votes cast
were as follows:
For Against Abstain Broker Non-voting
19,332,645 11,840 98 -
15
(iii) An increase in the number of shares of the Company's authorized Common
Stock from 75,000,000 to 250,000,000 shares. The votes cast were as
follows:
For Against Abstain Broker Non-voting
19,277,341 67,029 213 -
(iv) The Company's 2003 Equity Participation Plan and the options granted
thereunder to the Company's president, Mark Weinreb, and director Marasco.
The votes cast were as follows:
For Against Abstain Broker Non-voting
9,123,570 161,371 10,194 10,049,448
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K dated June 3, 2003 reporting the appointment Wayne A. Marasco
as a member of the Board of Directors of the Company.
Form 8-K dated July 24, 2003 reporting the change of the Company's name
to Phase III Medical, Inc.
Form 8-K dated July 29, 2003 reporting the change of the Company's
common stock ticker symbol to PHSM and Series A preferred stock symbol
to PHSMP.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE III MEDICAL, INC. (formerly known as CORNICHE GROUP
INCORPORATED (Registrant)
By: /s/ Mark Weinreb
---------------------
Mark Weinreb, President and Chief Executive Officer
Date: August 13, 2003
17
EXHIBIT 99.1
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Phase III Medical, Inc.
(formerly Corniche Group Incorporated);
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this Quarterly Report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
/s/ Mark Weinreb
- -----------------------
Name: Mark Weinreb
Title: Chief Executive Officer of Phase III Medical, Inc.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Phase III Medical, Inc. (the
"Company") on Form 10-Q for the six months ended June 30, 2003 filed with the
Securities and Exchange Commission (the "Report"), I, Mark Weinreb, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition of the Company as of the
dates presented and the result of operations of the Company for the
periods presented.
Dated: August 13, 2003
/s/ Mark Weinreb
-----------------------
Mark Weinreb
Chief Executive Officer
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a
separate disclosure document.