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 SEPTEMBER 30, 2004
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
(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 of 1934).
Yes No X
--- ---
40,476,873 SHARES, $.001 PAR VALUE, AS OF OCTOBER 31, 2004
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
1
Page No.
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Part I - Financial Information:
Item 1. Financial Statements (Unaudited):
Balance Sheets
At September 30, 2004 and December 31, 2003 3
Statements of Operations
For the three and nine months
ended September 30, 2004 and 2003 4
Statements of Cash Flows
for the nine months ended
September 30, 2004 and 2003 5
Notes to Unaudited Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information:
Item 1. Legal Proceedings 16
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures 17
2
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2004 2003
----------------------------
Current assets:
Cash and equivalents $461,436 $210,947
Prepaid expenses and other current
assets - 18,024
----------------------------
Total current assets 461,436 228,971
Property and equipment, net 3,936 1,935
Deferred acquisition costs 51,674 77,782
Other assets 3,000 3,000
----------------------------
$520,046 $311,688
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable -
preferred stock $468,959 $433,196
Accounts payable 227,396 87,896
Accrued liabilities 81,709 92,115
Notes payable 575,000 400,000
Convertible debentures, related
party - net of debt discount
of $14,706 85,294 -
Current portion of long-term debt - 9,513
----------------------------
Total current liabilities 1,438,358 1,022,720
Unearned revenues 73,185 110,568
Series A mandatorily redeemable
convertible preferred stock 681,174 681,174
----------------------------
Total Liabilities 2,192,717 1,814,462
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,
250,000,000 shares; issued and
outstanding, 39,364,373 shares
at September 30, 2004 and
26,326,460 shares at December
31, 2003 39,365 26,327
Additional paid-in capital 10,498,699 9,232,753
Accumulated deficit (12,210,835) (10,761,954)
----------------------------
Total stockholders' deficit (1,672,671) (1,502,774)
----------------------------
$520,046 $311,688
============================
See accompanying notes to financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------
Earned revenues $2,968 $15,294 $37,383 $50,303
Direct costs (1,964) (10,826) (26,108) (35,926)
----------------------------------------------------
Gross profit 1,004 4,468 11,275 14,377
Selling, general and
administrative (184,342) (201,253) (508,953) (539,321)
Purchase of medical royalty
stream (234,060) - (714,060) -
----------------------------------------------------
Operating loss (417,398) (196,785) (1,211,738) (524,944)
Other income (expense):
Interest income - 51,116 159 51,123
Interest expense (71,176) (58,293) (201,539) (120,707)
Interest expense - Series A
mandatorily redeemable
convertible preferred
stock (11,921) - (35,763) -
----------------------------------------------------
Net loss (500,495) (203,962) (1,448,881) (594,528)
Preferred dividend - (11,921) - (35,763)
----------------------------------------------------
Net loss attributable to
common stockholders $(500,495) $(215,883) $(1,448,881) $(630,291)
====================================================
Net loss per common share $(.01) $(.01) $(.05) $(.03)
====================================================
Weighted average
common shares outstanding 33,464,208 23,190,047 29,885,230 22,890,937
====================================================
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
2004 2003
-------------------------
Cash flows from operating activities:
Net loss $(1,448,881) $(594,528)
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 152,337 91,446
Depreciation 1,933 431
Deferred acquisition costs 26,108 35,926
Amortization of debt discount 2,941
Changes in operating assets and liabilities
Prepaid expenses and other current assets 18,024 20,470
Unearned revenues (37,383) (50,303)
Accounts payable, accrued expenses and other
current liabilities 164,857 (364,796)
-------------------------
Net cash used in operating activities (1,120,064) (861,354)
-------------------------
Cash flows from investing activities:
Notes receivable collections - 675,000
Acquisition of property and equipment (3,934) (2,581)
-------------------------
Net cash (used in) provided by investing
activities (3,934) 672,419
-------------------------
Cash flows from financing activities:
Net Proceeds from issuance of common stock 1,109,000 5,000
Proceeds from advances on notes payable 410,000 295,000
Proceeds from convertible debenture, related
party 100,000 -
Repayments of notes payable (235,000) -
Stockholder repayments - (81,000)
Repayment of long-term debt (9,513) (16,760)
-------------------------
Net cash provided by financing activities 1,374,487 202,240
-------------------------
Net increase in cash and cash equivalents 250,489 13,305
Cash and cash equivalents at beginning of
period 210,947 19,255
-------------------------
Cash and cash equivalents at end of period $461,436 $32,560
=========================
2004 2003
------------------------
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for:
Interest $61,825 $9,949
========================
Supplemental Schedule of Non-cash
Financing Activities:
Net accrual of dividends on
Series A Preferred Stock $- $35,763
========================
Issuance of common stock for
services rendered $6,000 $3,303
========================
Compensatory element of stock options $127,137 $88,143
========================
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Phase III Medical, Inc. ("Phase III" or the "Company") (formerly known as
Corniche Group Incorporated) provides capital and guidance to companies,
within the medical sector, in exchange for revenues, royalties and other
contractual rights known as "royalty interests", that entitle it to receive
a portion of revenue from the sale of pharmaceuticals, medical devices and
biotechnology products. The Company charges payments for the purchase of
future potential royalty interests to expense as paid and will record
revenues when royalty payments are received. As of September 30, 2004, the
Company has not received any such royalty payments. Previously, the Company
was a provider of extended warranties and service contracts via the Internet
at warrantysuperstore.com through June 30, 2002. 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.
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 September 30, 2004
and December 31, 2003, the results of operations for the three and nine
months ended September 30, 2004 and 2003 and the cash flows for the nine
months ended September 30, 2004 and 2003. The results of operations for the
three and nine months ended September 30, 2004 are not necessarily
indicative of the results to be expected for the full year.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. Accordingly, the Company currently has no
operations and limited financial resources to pay its current expenses and
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.
The December 31, 2003 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 -STOCK OPTIONS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure - an amendment of
FASB Statement No. 123 ("SFAS 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and does
not permit the use of the original SFAS No. 123 prospective method of
transition in fiscal years beginning after December 15, 2003. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results, regardless of whether, when,
or how an entity adopts preferable fair value based method of accounting.
SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular
format and by requiring disclosure in the "Summary of Significant Accounting
Policies" or its equivalent and improves the timeliness of those disclosures
by requiring their inclusion in financial reports for interim periods. The
Company has adopted the disclosure requirements of SFAS No. 148. The Company
will continue to account for stock-based employee compensation under APB
Opinion No. 25 and its related interpretations.
6
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for all periods:
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
----------- -------------- ------------- --------------
Net loss as reported $ (500,495) $ (203,962) $ (1,448,881) $ (594,528)
Additional compensation (7,488) (4,638) (165,273) (9,094)
----------- -------------- ------------- --------------
Adjusted net loss $ (507,983) $ (208,600) $ (1,614,154) $ (603,622)
=========== ============== ============= ==============
Net loss per share as reported $ (.01) $ (.01) $ (.05) $ (.03)
=========== ============== ============= ==============
Adjusted net loss per share $ (.02) $ (.01) $ (.05) $ (.03)
=========== ============== ============= ==============
NOTE 4 - 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
nine months ended September, 2004, options for 800,000 shares of common
stock were exercised by the note holders. At September 30, 2004, the Company
had reserved 1,075,000 shares of the Company's common stock for issuance
against exercise of the options granted pursuant to the default penalty. At
September 30, 2004, $100,000 of these notes was unpaid along with $38,106 of
accrued interest.
On March 17, 2003, the Company commenced a private placement offering which
raised $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
September 30, 2004, $225,000 remains outstanding and all notes are in
default. All interest payments on these notes have been made.
On August 26, 2003, the Company borrowed $25,000 from a then consultant to
the Company. The loan bears interest at 8% and as of September 30, 2004,
$26,956, including accrued interest of $1,956, remains unpaid.
In February 2004, the Company commenced a sale of 30 day 20% notes in the
amount of $125,000 to three accredited investors to fund current operations.
It was anticipated that these notes will be repaid from the proceeds of the
January 2004 amended equity private placement. Two of these notes have a
default provision that if they are not paid within 30 days, there is an
additional interest payment of $250 per $25,000 for each 30 day period or
part thereof. As of September 30, 2004, $95,000 of these notes remains
unpaid. All interest payments have been paid timely. In May 2004, the
Company sold an additional 30 day 20% note in the amount of $40,000 to an
accredited investor to fund current operations. This note plus interest has
been repaid. In July 2004, the Company sold a five month 20% note in the
amount of $25,000 and two six month 20% notes totaling $80,000 to three
accredited investors to fund current operations. These notes remain unpaid
as of September 30, 2004. All interest payments have been paid timely. In
August 2004, the Company sold additional 30 day 20% notes in the amount of
$55,000 to two accredited investors to fund current operations. As of
September 30, 2004, $25,000 of these notes remains unpaid. All interest
payments have been paid timely.
7
In August 2004, the Company sold a six month 20% convertible note in the
amount of $100,000 to its Chief Operating Officer ("COO"). Upon maturity,
the Company and the COO have agreed to convert the principal amount of the
new note into shares of the Company's common stock at 85% of the average
price as quoted on the NASD Over-the-Counter Bulletin Board for the five
days prior to the maturity date of the note. Approximately $18,000 of the
total debt was attributed to the intrinsic value of the beneficial
conversion feature. This amount was recorded as an equity component. The
remaining balance of approximately $82,000 was recorded as debt. For the
nine months ended September 30, 2004 the amortization of debt discount
approximated $3,000. All interest is paid monthly in arrears. As of
September 30, 2004 this note remains unpaid. All interest payments have been
paid timely.
A summary of the above descriptions is as follows:
December 31, 2003 Proceeds Repayments September 30, 2004
---------------------------------------------------------------
September 2002 Notes $125,000 $ - $(25,000) $100,000
March 2003 Notes 250,000 (25,000) 225,000
Consultant Note 25,000 25,000
February - August 2004 Notes 410,000 (185,000) 225,000
Related Party Note - 100,000 - 100,000
---------------------------------------------------------------
Total $400,000 $480,000 $(235,000) $675,000
===============================================================
NOTE 5 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE 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 September 30, 2004 and December 31, 2003, 681,174 shares
of Series A Preferred Stock were outstanding.
NOTE 6 - STOCKHOLDERS' EQUITY
(a) Common Stock:
During the nine months ended September 30, 2004, the Company issued
30,000 shares of its common stock whose fair value was $4,200 to two
note holders as additional interest.
The Company amended its equity private placement to raise up to $4
million through the sale of up to 40 million shares of Common Stock in
increments of $5,000 or 50,000 shares. 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
shares. The initial placement closed on December 31, 2003. During the
nine months ended September 30, 2004, the Company sold 12,132,913 common
shares resulting in net proceeds to the Company of $1,105,000. Such
shares have not been registered under the Securities Act and may not be
offered or sold in the United States absent registration or an
applicable exemption of registration requirements.
As described in Note 4, the Company granted purchasers of the Company's
September 2002 60-day promissory notes, options to purchase shares of
common stock if the Company defaulted on the payment of principal or
interest on such promissory notes. For each 30 day period, the purchaser
is granted the option to purchase 25,000 shares of common stock for an
aggregate price of $125 on the 30th day. During the nine months ended
September 30, 2004, holders of such promissory notes exercised their
options and purchased 800,000 shares of common stock resulting in net
proceeds to the Company of $4,000.
(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 351,500 shares of
common stock are reserved for issuance upon exercise of outstanding
warrants as of September 30, 2004 at prices ranging from $0.05 to $8.10
and expiring through December 2008. In connection with the September
2003 equity private placement, the Company issued a 5 year warrant to
purchase 282,500 shares of its Common Stock at an exercise price of
$0.12 per share to its retained placement agent, Robert M. Cohen &
Company. The warrant contains piggyback registration rights. On August
20, 2004 and September 20, 2004, the Company issued 3 year warrants to
purchase a total of 50,000 shares of its Common Stock at $.05 per share,
25,000 on each date, to Consulting For Strategic Growth, Ltd., the
Company's public relations firm.
8
(c) Stock Option Plans:
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 Nine Months Ended
September 30, 2004
-------------- --------------
Shares Prices
-------------- --------------
Outstanding at beginning of period 3,700,000 $0.03 to $0.18
Granted 2,735,000 $0.10 to $0.15
Expired - -
Cancelled - -
-------------- --------------
Outstanding at end of period 6,435,000 $0.03 to $0.18
============== ==============
Options are granted at an exercise price equal to the fair value of the
common stock at the grant date. However, included above are 300,000
options to purchase the Company's common stock at $ .10 per share
granted at an exercise price of $.10 when the fair value on that date
was $.15. Therefore the Company recorded an expense of $15,000
associated with that transaction. During the nine months ended September
30, 2004, options to purchase 1,000,000 shares of the Company's common
stock were granted to five members of the Company's Board of Advisors
pursuant to their agreements. Each advisor was issued options to
purchase 200,000 shares of the Company's common stock at a range of
exercise prices of $.11 to $.15 per share. The remaining options granted
were for services to consultants and directors of the Company.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On April 22, 2004, the Company entered into an agreement with an advisor
in connection with its amended private placement to provide assistance
in finding qualified investors. The agreement calls for the payment of
10% of the funds raised by the Company as a direct result of
introductions made by the advisor. In addition, the Company is obligated
to pay a 2% non-accountable expense allowance on all funds received that
are subject to the 10% payment. As of September 30, 2004, the Company
paid a total of $21,000 under this agreement.
On March 20, 2004, the Company entered into a consulting agreement which
will provide the Company with advice as to business development
possibilities for the services and technology of NeoStem Inc. (See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS). The agreement provides for the issuance of options to
purchase 300,000 shares of the Company's common stock at an exercise
price of $.10 per share. This option is immediately vested and expires
ten years from the date of issue. The agreement also provides for the
payment of $2,500 per month for each month after the Company has
received capital contributions of $1,000,000 from the date of the
agreement. If certain performance levels are met, the Company is
obligated to issue an additional option to purchase 500,000 shares of
the Company's common stock for an exercise price of $.10 per share.
On December 12, 2003, the Company signed a royalty agreement with
Parallel Solutions, Inc. "(PSI") to develop a new bioshielding platform
technology for the delivery of therapeutic proteins and small molecule
drugs in order to extend circulating half-life to improve
bioavailability and dosing regimen, while maintaining or improving
pharmacologic activity. The agreement provides for PSI to pay the
Company a percentage of the revenue received from the sale of certain
specified products or licensing activity. The Company is providing
capital and guidance to PSI to conduct a proof of concept study to
improve an existing therapeutic protein with the goal of validating the
bioshielding technology for further development and licensing the
technology. During the nine months ended September 30, 2004, the Company
paid $640,000 as specified in the agreement which brought the total paid
since the inception of the agreement to $720,000. The agreement also
calls for the Company to pay on behalf of PSI $280,000 of certain
expenses relating to testing of the bioshielding concept. During the
nine months ended September 30, 2004, the Company paid $74,060 of such
expenses.
9
NOTE 8 - RELATED PARTIES
On September 13, 2004, ("Commencement Date") the Company entered into a
letter agreement (the "Letter Agreement") with Mr. Robert Aholt Jr.
pursuant to which the Company appointed Mr. Aholt as its Chief Operating
Officer. Subject to the terms and conditions of the Letter Agreement,
the term of Mr. Aholt's employment in such capacity will be for a period
of three (3) years from the Commencement Date (the "Term").
In consideration for Mr. Aholt's services under the Letter Agreement,
Mr. Aholt will be entitled to receive a monthly salary of $4,000 during
the first year of the Term, $5,000 during the second year of the Term,
and $6,000 during the third year of the Term. In further consideration
for Mr. Aholt's services under the Letter Agreement, on January 1, 2005
and on the first day of each calendar quarter thereafter during the
Term, Mr. Aholt will be entitled to receive shares of Common Stock with
a "Dollar Value" of $26,750, $27,625 and $28,888, respectively, during
the first, second and third years of the Term. The per share price (the
"Price") of each share granted to determine the Dollar Value will be the
average closing price of one share of Common Stock on the Bulletin Board
(or other similar exchange or association on which the Common Stock is
then listed or quoted) for the five (5) consecutive trading days
immediately preceding the date of grant of such shares; provided,
however, that if the Common Stock is not then listed or quoted on an
exchange or association, the Price will be the fair market value of one
share of Common Stock as of the date of grant as determined in good
faith by the Board of Directors of the Company. The number of shares of
Common Stock for each quarterly grant will be equal to the quotient of
the Dollar Value divided by the Price. The shares granted will be
subject to a one year lockup as of the date of each grant.
In the event Mr. Aholt's employment is terminated prior to the end of
the Term for any reason, earned but unpaid cash compensation and
unreimbursed expenses due as of the date of such termination will be
payable in full. In addition, in the event Mr. Aholt's employment is
terminated prior to the end of the Term for any reason other than by the
Company with cause, Mr. Aholt or his executor of his last will or the
duly authorized administrator of his estate, as applicable, will be
entitled (i) to receive severance payments equal to one year's salary,
paid at the same level and timing of salary as Mr. Aholt is then
receiving and (ii) to receive, during the one (1) year period following
the date of such termination, the stock grants that Mr. Aholt would have
been entitled to receive had his employment not been terminated prior to
the end of the Term; provided, however, that in the event such
termination is by the Company without cause or is upon Mr. Aholt's
resignation for good reason, such severance payment and grant shall be
subject to Mr. Aholt's execution and delivery to the Company of a
release of all claims against the Company.
On August 12, 2004 ("Commencement Date") the Company and Dr. Wayne A.
Marasco, a Company Director, entered into a Letter Agreement appointing
Dr. Marasco as the Company's Senior Scientific Advisor. Dr. Marasco will
be responsible for assisting the Company in reviewing and evaluating
business, scientific and medical opportunities, and for other
discussions and meetings that may arise during the normal course of the
Company conducting business. For his services, during a three year
period ("Term"), Dr. Marasco shall be entitled to annual cash
compensation with increases each year of the Term and an additional cash
compensation based on a percentage of collected revenues derived from
the Company's royalty or revenue sharing agreements. Although the annual
cash compensation and additional cash compensation stated above shall
begin to accrue as of the Commencement Date, Dr. Marasco will not be
entitled to receive any such amounts until the Company raises $1,500,000
in additional equity financing after the Commencement Date. In addition,
Dr. Marasco was granted an option, fully vested, to purchase 675,000
shares of the Company's common stock at an exercise price of $.10 cents
per share. The shares will be subject to a one year lockup as of the
date of grant. The exercise period will be ten years, and the grant will
otherwise be in accordance with the Company's 2003 Equity Participation
Plan and Non-Qualified Stock Option Grant Agreement. Although this
agreement has been agreed to in principle, as of November 12, 2004, this
agreement has not been executed.
NOTE 9 - 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 did not realize any revenue from its purchase of the royalty
interest. The Company's operations are conducted entirely in the United
States.
10
NOTE 10 - SUBSEQUENT EVENTS
On October 20, 2004, the Company issued a 3 year warrant to purchase an
additional 25,000 shares at $.05 per share of its Common Stock to
Consulting For Strategic Growth, Ltd., the Company's public relations
firm. In addition, 37,500 unregistered shares of the Company's common
stock were issued pursuant to their agreement with the Company.
As described in Note 4, holders of promissory notes in default exercised
options to purchase 1,075,000 shares of common stock since September 30,
2004, with net proceeds to the Company of $5,375. Subsequent to
September 30, 2004, $50,000 was repaid with accrued interest and $50,000
was transferred to a previous consultant who holds a note in the amount
of $25,000 as described in Note 4. The two notes were combined into a
new note in the amount of $75,000 which bears interest at 8%, payable at
maturity and matures in June 2005. Accrued interest of $5,244 due on the
two combined notes has been paid and the remaining interest due in the
amount of $10,044 has been included in a deferred payment arrangement
commencing January 1, 2005 which also includes the payment of unpaid
amounts for services. The deferred payment arrangement does not accrue
interest.
As described in Note 4, $225,000 of notes in default were outstanding at
September 30, 2004. Subsequent to September 30, 2004, the Company repaid
$55,000 of these notes. In addition, the remaining $170,000 of these
notes have had their maturity extended to April 1, 2005, however, annual
interest will continue to be paid at 20%.
As described in Note 4, $70,000 of promissory notes sold in February
2004, were repaid subsequent to September 30, 2004. The remaining note
in the amount of $25,000 has been extended to April 2005 and has had the
annual interest rate reduced to 8%.
A summary of the debt repayments subsequent to September 30, 2004 is as
follows:
September 30, 2004 Transfer Repayments October 31, 2004
-------------------------------------------------------------
September 2002 Notes $100,000 $(50,000) $(50,000) $-
March 2003 Notes 225,000 (55,000) 170,000
Consultant Note 25,000 50,000 75,000
February - August 2004 Notes 225,000 (70,000) 155,000
Related Party Note 100,000 - - 100,000
-------------------------------------------------------------
Total $675,000 $ 0 $(175,000) $500,000
=============================================================
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
The Company provides capital and guidance to companies within the medical
sector, in exchange for revenues, royalties and other contractual rights known
as "royalty interests" that entitle it to receive a portion of revenue from the
sale of pharmaceuticals, medical devices and biotechnology products. On December
12, 2003, the Company signed a royalty agreement with Parallel Solutions, Inc.
"(PSI") to develop a new bioshielding platform technology for the delivery of
therapeutic proteins and small molecule drugs in order to extend circulating
half-life to improve bioavailability and dosing regimen, while maintaining or
improving pharmacologic activity. The agreement provides for PSI to pay the
Company a percentage of the revenue received from the sale of certain specified
products or licensing activity. The Company is providing capital and guidance to
PSI to conduct a proof of concept study to improve an existing therapeutic
protein with the goal of validating the bioshielding technology for further
development and licensing the technology. During the nine months ended September
30, 2004, the Company paid $640,000 as specified in the agreement which brought
the total paid since the inception of the agreement to $720,000. The agreement
also calls for the Company to pay on behalf of PSI $280,000 of certain expenses
relating to testing of the bioshielding concept. During the nine months ended
September 30, 2004, the Company paid $74,060 of such expenses.
On January 19, 2004, the Company entered into a letter of intent with NeoStem,
Inc., a California company, whose primary business is to establish an autologous
adult stem cell bank. If a definitive agreement is reached, Phase III would
provide funding and guidance in connection with the adult stem cell banking
enterprise in exchange for a share of the revenues derived from such enterprise.
This letter of intent has expired, however, the Company and NeoStem continue to
discuss and work towards a definitive agreement. As of September 30, 2004, no
payments have been made to NeoStem. No assurances can be given that a definitive
revenue sharing agreement will be finalized, that the Company will raise the
capital needed to fund its obligations to NeoStem, that NeoStem's collection,
processing and storage technology will be successfully implemented, that NeoStem
will be able to commercialize its adult stem cell banking enterprise, or that
there will be market acceptance of any such enterprise sufficient to generate
any material revenues for NeoStem or any material royalty revenues for the
Company, or that any stem cell therapeutic strategies will be successfully
developed or commercialized.
On March 31, 2004, the Company signed a Joint Venture Agreement with NeoStem to
introduce NeoStem to potential clients for its services and/or technology. In
exchange for such introductions, Phase III will receive 10% of any revenues or
fees and 2% of any research grants received from or as a result of the
introduced client. As of September 30, 2004, no payments have been received
under this agreement.
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 September 30, 2004 Compared To Three Months Ended September
30, 2003.
12
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $2,968 for the three months ended September 30,
2004 as compared to $15,294 for the three months ended September 30, 2003. 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 were $1,964 and $10,826 for the three months ended September 30, 2004
and 2003, respectively. In addition, the Company paid $234,060 towards the
purchase of royalty interests as per its agreement with PSI. Due to the
uncertainty of the future revenues, the amounts paid have been charged to
current operations.
General and administration expenses decreased approximately $17,000 to $184,342
for the three months ended September 30, 2004 as compared to $201,253 for the
three months ended September 30, 2003. The decrease in general and
administrative expenses is primarily due to reductions in professional fees of
$59,000, investment banking expenses of $10,000 offset by increases in salaries
of $24,000, D&O insurance of $16,000 and investor relations of $12,000.
Interest expense increased by approximately $13,000 for the three months ended
September 30, 2004 from the three months ended September 30, 2003 primarily as a
result of short-term loans obtained in the last nine months of fiscal year ended
December 31, 2003 and the nine months ended September 30, 2004.
For the reasons cited above, primarily the payment towards royalty interests,
the net loss for the three months ended September 30, 2004 increased to $500,495
from $203,962 for the three months ended September 30, 2003.
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September
30, 2003.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $37,383 for the nine months ended September 30,
2004 as compared to $50,303 for the nine months ended September 30, 2003. The
revenues generated in the nine months were derived entirely from revenues
deferred over the life of contracts sold in prior periods. Similarly, direct
costs incurred were $26,108 and $35,926 for the nine months ended September 30,
2004 and 2003, respectively. In addition, the Company paid $714,060 towards the
purchase of royalty interests as per its agreement with PSI. Due to the
uncertainty of the future revenues, the amounts paid have been charged to
current operations.
General and administration expenses decreased approximately $30,000 to $508,953
for the nine months ended September 30, 2004 as compared to $539,321 for the
nine months ended September 30, 2003. The decrease in general and administrative
expenses is primarily due to reductions in professional fees of $133,000, travel
and entertainment of $18,000, directors fees of $13,000, investment banking fees
of $10,000 and other general expenses of $8,000 offset by increases in salaries
of $74,000, D&O insurance of $53,000, office rent of $13,000 and investor
relations of $12,000.
Interest expense increased by approximately $81,000 for the nine months ended
September 30, 2004 from the nine months ended September 30, 2003 primarily as a
result of short-term loans obtained in the last nine months of fiscal year ended
December 31, 2003 and the nine months ended September 30, 2004.
For the reasons cited above, primarily the payments towards royalty interests,
the net loss for the nine months ended September 30, 2004 increased to
$1,448,881 from $594,528 for the nine months ended September 30, 2003.
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:
Nine Months Ended
---------------------------------------
September 30, 2004 September 30, 2003
Cash used in
Operating Activities $(1,120,064) $(861,354)
Cash (used) provided by
Investing Activities $(3,934) $672,419
Cash provided by
Financing Activities $1,374,487 $202,240
The Company incurred a net loss of $1,448,881 for the nine months ended
September 30, 2004. Such loss adjusted for non-cash items such as deferred
revenues (net of deferred acquisition costs) ($11,275) and other non cash
credits totaling $183,319 resulted in cash used in operations totaling
$1,120,064 for the nine months ended September 30, 2004, including working
capital movements of $145,498.
To meet its cash requirement for the nine months ended September 30, 2004, the
Company relied on:
(i) the net proceeds from the issuance of Promissory Notes in the amount of
$275,000; and
(ii) the proceeds from the sale of the Company's common stock in the amount of
$1,109,000
(iii) proceeds from the settlement of the Strandtek litigation
13
The Company has a contractual commitment to pay PSI up to an additional $206,000
through the end of its agreement. As of September 30, 2004, the Company had cash
balances totaling approximately $461,000. The Company will rely on its current
cash and proceeds from the sale of promissory notes and common stock to fund its
new business operations until they become cash generative. The Company amended
its equity private placement to raise up to $4 million through the sale of up to
40 million shares of Common Stock in increments of $5,000 or 50,000 shares. 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 shares. The initial placement closed on December 31, 2003. As of September
30, 2004, the Company has sold 12,132,913 common shares resulting in net
proceeds to the Company of $1,109,000. Such shares have not been registered
under the Securities Act and may not be offered or sold in the United States
absent registration or an applicable exemption of registration requirements.
Additionally, the Company issued $325,000 of 20% promissory notes with maturity
dates from 30 days to six months from the date of issue to fund the PSI payments
and current operating expenses. The Company repaid $100,000 of these notes as of
September 30, 2004 and $70,000 subsequent to September 30, 2004. In addition,
the Company sold a six month 20% note in the amount of $100,000 to its Chief
Operating Officer ("COO"). Upon maturity, the Company and the COO have agreed to
convert the principal amount of the note into shares of the Company's common
stock at 85% of the average price as quoted on the NASD Over-the-Counter
Bulletin Board for the five days prior to the maturity date of the note. All
interest is paid monthly in arrears. As of September 30, 2004 this note remains
unpaid. All interest payments have been paid timely. The Company plans to meet
its current and future obligations through the sales of common stock and loans
from accredited investors. There can be no assurance that sufficient proceeds
will be raised to meet current obligations when due.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company currently has no operations and limited
financial resources to pay its current expenses and 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 nine months ended September 30, 2004, a situation which is
expected to continue for the foreseeable future.
14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 4. CONTROLS AND PROCEDURES
(a) Our principal executive officer has concluded, based on his
evaluation of, the effectiveness of our "disclosure controls and
procedures" as of the end of the period covered by this quarterly
report on Form 10-Q (as defined under Rule 13a-15(e) and Rule 15d-15(e)
of the Securities Exchange Act of 1934) were effective as of such date
to ensure that information we are required to disclose in the reports
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and include controls and procedures designed to ensure
that information we are required to disclose in such reports is
accumulated and communicated to management, including our principal
executive, as appropriate, to allow timely decisions regarding required
disclosure.
(b) During our last fiscal quarter and subsequent to our evaluation,
there were no significant changes in internal controls or other factors
that have materially affected, or reasonably likely to materially
affect our internal controls over financial reporting.
15
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings or claims
against the Company
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in default on the September 2002 60-day promissory notes sold to
accredited investors in the amount of $100,000 as of September 30, 2004. 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 nonpayment 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 nine
months ended September 30, 2004, options for 800,000 shares were exercised by
the note holders. At September 30, 2004, the Company had reserved 1,075,000
shares of the Company's common stock for issuance against exercise of the
options granted pursuant to the default penalty. Subsequent to September 30,
2004, all options were exercised and $50,000 of these notes was repaid and
$50,000 of these notes was converted to a new 8% note due in June 2005 with all
interest paid at maturity.
Notes issued from March through August 2003, for $225,000, are in default and
bear interest at 20% per annum. In October 2004, $55,000 of these notes was
repaid and $170,000 of these notes was extended to April 1, 2005 and therefore,
no longer in default. Notes issued in February and March 2004, for $125,000 is
in default. Two of these notes, for $50,000, require an additional interest
payment of $250 per $25,000 invested for each 30 day period they remain unpaid.
At September 30, 2004, $95,000 of these notes remain unpaid, however $70,000 was
repaid in October 2004 and the balance of $25,000 was extended to a maturity
date of April 1, 2005, the interest rate reduced to 8% and therefore no longer
in default.
Cumulative dividends payable on Series A Convertible Redeemable Preferred Stock
totaled $468,959 at September 30, 2004, of which $35,763 represents dividends
for the nine months then ended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
One Current Report on Form 8-K was filed by the Company during the
quarter ended September 30, 2004.
Date filed: September 13, 2004
Items: 3.02 - Sale of 7,282,913 of unregistered shares of the
Company's Common Stock to Aholt, Jr. Family Trust
5.02 - Appointment of Robert Aholt, Jr. as Chief
Operating Officer
9.01 - Exhibits
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. (Registrant)
By: /s/ Mark Weinreb
-------------------
Mark Weinreb, President and Chief Executive Officer
Date: November 12, 2004
17
Exhibit 31.1
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Phase III Medical,
Inc.;
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;
4. The registrant's other certifying officer(s) (if any) 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 quarterly report based on such
evaluation; and
c) presented in this quarterly 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;
5. I have disclosed, based on our most recent evaluation of internal control
over financial reporting to the registrant's auditors and 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: November 12, 2004
/s/ Mark Weinreb
- ------------------------
Name: Mark Weinreb
Title: Chief Executive Officer of Phase III Medical, Inc.
A signed original of this written statement required by Section 302 has been
provided to Phase III Medical, Inc. and will be retained by Phase III Medical,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32.1
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 period ended September 30, 2004 filed with the
Securities and Exchange Commission on the date hereof (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: November 12, 2004
/s/Mark Weinreb
---------------
Mark Weinreb
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code) and is not being filed as part of the Form
10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to Phase III Medical, Inc. and will be retained by Phase III Medical,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.