UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
(State or other jurisdiction of 22-2343568
incorporation or organization) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the Registrant as of June 30, 2004 was approximately $ 2.8
million. (For purposes of determining this amount, only directors, executive
officers, and 10% or greater stockholders have been deemed affiliates).
On March 15, 2005, 43,065,336 shares of the Registrant's common stock, par value
$0.001 per share, were outstanding.
Documents incorporated by reference: None
This Annual Report on Form 10-K 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
Annual 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.
PART I
ITEM 1. BUSINESS
Phase III Medical, Inc. ("Phase III" or the "Company") (formerly known as
Corniche Group Incorporated) provides capital and guidance to companies, in
multiple sectors of the healthcare and life science industries, in return for a
percentage of revenues, royalty fees, licensing fees and other product sales of
the target companies. Through June 30, 2002, the Company was a provider of
extended warranties and service contracts via the Internet at
warrantysuperstore.com. 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.
In 2004, the Company launched its website: www.phase3med.com. The Company's
information as filed with the Securities and Exchange Commission is available
via a link on the website.
HISTORY
The Company was incorporated under the laws of the State of Delaware in
September 1980 under the name Fidelity Medical Services, Inc. On July 28, 1983
the Company changed its name to Fidelity Medical, Inc. From its inception
through March 1995, the Company was engaged in the development and sale of
medical imaging products through a wholly owned subsidiary. As a result of a
reverse merger on March 2, 1995 with Corniche Distribution Limited and its
subsidiaries, the Company was engaged in the retail sale and wholesale
distribution of stationery and related office products in the United Kingdom.
Effective March 25, 1995 the Company sold its medical imaging products
subsidiary. On September 28, 1995 the Company changed its name to Corniche Group
Incorporated. In February 1996, the Company's United Kingdom operations were
placed in receivership by creditors. Thereafter through March 1998 the Company
was inactive. On March 4, 1998, the Company entered into a Stock Purchase
Agreement with certain individuals (the "Initial Purchasers") whereby the
Initial Purchasers acquired in aggregate 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock. Thereafter the Initial
Purchasers endeavored to establish for the Company new business operations in
the property and casualty specialty insurance and warranty/service contracts
markets. On September 30, 1998 the Company acquired all of the capital stock of
Stamford Insurance Company, Ltd. ("Stamford"). On April 30, 2001 the Company
sold Stamford and is no longer involved in property and casualty specialty
insurance.
On January 7, 2002, the Company entered into a Stock Contribution Exchange
Agreement, as amended (the "Exchange 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, including the Company obtaining
financing via an equity private placement, which ultimately could not be met and
as a result, the Exchange Agreement was formally terminated by the Company and
StrandTek in June 2002. In January 2002, the Company advanced to StrandTek a
loan of $1,000,000 on an unsecured basis, which was 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 Exchange
Agreement 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 from each corporate defendant, in the
amount of $291,405 against each individual defendant and dismissing defendants'
counterclaims.
Because the February 2002 $250,000 loan was unsecured and not guaranteed, the
Company established an allowance of $250,000 at December 31, 2002. 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.
Between July 2003 and December 2003, guarantors Veltman, Buckles and Arnett paid
their judgments in full, with payments totaling approximately $295,000, $295,000
and $297,000 respectively. In December 2003, the Company settled with defendant
Bauman for a payment of $100,000. These payments, totaling approximately
$987,000, complete the transaction and the legal action has been concluded.
On July 24, 2003, the Company changed its name to Phase III Medical, Inc., which
better describes the Company's current business plan. In connection with the
change of name, the Company changed its trading symbol to "PHSM" from "CNGI".
DISCONTINUED OPERATIONS
Through April 2001 the Company operated a property and casualty reinsurance
business through its wholly owned subsidiary, Stamford Insurance Company, Ltd.
("Stamford"). Stamford is chartered under the laws of, and is licensed to
conduct business as an insurance company by, the Cayman Islands. Stamford
provided reinsurance coverage for one domestic insurance company until the
fourth quarter of 2000 when the relationship with the carrier was terminated.
CURRENT BUSINESS OPERATIONS
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 as described below under the sub-heading
"Medical/Biotech Business".
WarrantySuperstore.com Internet Business
The Company's primary business focus, through June 2002, was the sale of
extended warranties and service contracts over the Internet covering automotive,
home, office, personal electronics, home appliances, computers and garden
equipment. The Company offered its products and services in the United States in
states that permit program marketers to be the obligor on service contracts.
This represented approximately 38 states for automobile service contracts and
most states for other product categories. While the Company managed most
functions relating to its extended warranty and service contracts, it did not
bear the economic risk to repair or replace products nor did it administer the
claims function. The obligation to repair or replace products rested with the
Company's appointed insurance carriers, Great American Insurance Company and
American Home Shield. Great American Insurance Company provided contractual
liability insurance covering the obligation to repair or replace products under
the Company's automobile and consumer products extended warranties and service
contracts and American Home Shield covered all home warranty contracts. The
Company was responsible for the marketing, recording sales, collecting payment
and reporting contract details and paying premiums to the insurance carriers. In
addition, the Company provided information to the insurance carriers' appointed
claims administrators who handle all claims under the Company's contracts,
including the payment of claims.
The Company commenced operations initially by marketing its extended warranty
products directly to the consumer through its web site. During fiscal 2000 the
Company developed enhanced proprietary software to facilitate more efficient
processing and tracking of online warranty transactions. This provided the
Company with the ability to deliver its products over the Internet through a
number of distribution channels by enabling it to supply a number of different
extended warranty service contracts on a co-branded or private label basis to
corporations, by embedding the Company's suite of products on such corporation's
web sites. This new capability was launched in January 2001. It was anticipated
that this would result in substantially reduced direct marketing costs for the
years ending December 31, 2001 and thereafter. As a result the Company had four
distinct distribution channels: (i) direct sales to consumers, (ii) co-branded
distribution, (iii) private label distribution and (iv) manufacturer/retailer
partnerships.
During the first half of fiscal 2001, management became concerned by the slow
progress being made by its warrantysuperstore.com business. Accordingly,
alternative strategies for the Company were evaluated by the Board of Directors,
including the acquisition of new business operations. As a result, the Company
entered into the StrandTek Transaction but, as previously reported, the closing
conditions were not met and the Exchange Agreement was terminated by written
agreement between the parties. 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.
MEDICAL/BIOTECH BUSINESS
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. Under his
direction, the Company entered a new line of business where it provides capital
and guidance to companies, in multiple sectors of the healthcare and life
science industries, in return for a percentage of revenues, royalty fees,
licensing fees and other product sales of the target companies. The Company
continues 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. In accordance with its business plan, the Company,
in 2003 raised $514,781 of capital, including $214,781, net of expenses of
$67,719, through the sale of Common Stock, and $295,000, net of commissions of
$30,000, from the sale of notes. In addition, the Company received a total of
approximately $987,000 from the settlement with the StrandTek guarantors. A
significant portion of the Standtek proceeds was used to pay outstanding
liabilities for legal expenses, employment terminations, travel and
entertainment expenses and consultants. The balance of the proceeds was used for
operating expenses and the retirement of certain debt. In the year ended
December 31, 2004, the Company raised $1,114,375, net of expenses, of capital
though the sales of Common Stock, and $660,000 from the sale of notes.
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 has provided 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. As of December 31, 2004, the
Company has provided $805,324 to PSI pursuant to the royalty agreement. The
Company is obligated to fund up to an additional $194,676 of expenses. The proof
of concept study is continuing and there is no assurance of a favorable outcome.
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. A definitive agreement was never reached. However, on
March 31, 2004, the Company entered into a joint venture agreement. NeoStem,
Inc. pioneers adult stem cell therapeutics, including the collection and storage
of stem cells. The joint venture provides for the Company to assist NeoStem in
finding uses of and customers for NeoStem's services and/or technology. The
Company's initial efforts will concentrate on developing programs utilizing
NeoStem's services and/or technology through the Department of Homeland Security
and/or other government agencies.
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 of $84,000 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.
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.
RISK FACTORS
The risks described below are not the only risks facing the Company. Additional
risks that the Company does not yet know of or that it currently thinks are
immaterial may also impair its business operations. If any of the risks occur,
its business strategy, financial condition or operating results could be
adversely affected.
PHASE III HAS A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT AND IT WILL CONTINUE TO INCUR LOSSES.
Since its inception in 1980, the Company has generated only limited revenues
from sales and has incurred substantial net losses of $1,748,372, $1,044,145 and
$1,159,838 for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, the Company had a stockholders' deficit of approximately
$1,900,000. The Company expects to incur additional operating losses as well as
negative cash flow from its new business operations until revenues from the
purchase of royalty interests are received.
THE COMPANY HAS LIQUIDITY PROBLEMS.
At December 31, 2004, the Company had a cash balance of $27,868, deficit working
capital of $1,238,949 and a stockholders' deficit of $1,931,787. In addition,
the Company sustained losses of $1,748,372, $1,044,145 and $1,159,838 for the
three fiscal years ended December 31, 2004, 2003 and 2002, respectively. The
Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern. The financial statements of the Company do not reflect any adjustments
relating to the doubt of its ability to continue as a going concern. On
September 22, 2003, the Company commenced an equity private placement to
accredited investors pursuant to Regulation D to raise up to $4,000,000 through
the sale of up to 40,000,000 shares of its Common Stock in increments of $5,000
or 50,000 shares. Through July 31, 2004, the Company sold only 14,957,913
shares, resulting in proceeds to the Company of $1,319,781, net of offering
costs of $67,719. This amended private placement was terminated in July 2004.
Additional financing is needed. There can be no assurance that the Company will
be able to sell sufficient quantities of equity securities or borrow money so as
to have sufficient funds to continue to operate.
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN IS QUESTIONABLE.
The Company's auditors, Holtz Rubenstein Reminick LLP, modified its opinion in
order to disclose the substantial doubt about the Company's ability to continue
as a going concern. It will be more difficult for the Company to raise capital
on favorable terms and fund the agreements currently in place or new agreements
as a result of the substantial doubt about the Company's ability to continue as
a going concern.
THE COMPANY WILL CONTINUE TO EXPERIENCE CASH OUTFLOWS.
The Company continues to incur expenses, including the salary of its President,
COO, rent, legal and accounting fees, insurance and general administrative
expenses. The Company's new business activities are in the development stage and
will therefore result in additional cash outflows in the coming period. It is
not possible at this time to state whether the Company will be able to finance
these cash outflows or when the Company will achieve a positive cash position,
if at all.
THE COMPANY'S LIMITED OPERATING HISTORY MAY IMPAIR ITS ABILITY TO PLAN.
The Company's limited operating history in its planned business activities may
hinder its ability to evaluate its business and entails risks that the Company
may fail to adequately address business issues with which it has limited
experience. There is no way to predict when, if ever, the Company will achieve
profitability or positive cash flow.
BECAUSE OF ITS FINANCIAL POSITION, THERE IS SUBSTANTIAL DOUBT ABOUT ITS ABILITY
TO OPERATE AS A GOING CONCERN.
The Company has no cash generating revenues. As of December 31, 2004, the
Company had a stockholders' deficit of $1,931,787 and had a working capital
deficiency of $1,238,949. Although the Company continues to raise funds through
the issuance of promissory notes, which have been substantially spent, the
Company's financial condition still raises substantial doubt about its ability
to operate as a going concern.
THE COMPANY WILL NEED ADDITIONAL FINANCING AND IS UNCERTAIN OF ITS ACCESS TO
CAPITAL FUNDING.
The Company's proposed new business will require substantial capital to identify
and make alliances with one or more medical companies based on the Company's
current operating plan for its new business. In addition, the Company's cash
requirements may vary materially from those now planned because of results in
research, consulting with experts and modeling sales forecasts for the potential
products of potential business partners.
RISKS RELATING TO THE COMPANY'S PROPOSED NEW BUSINESS
THE COMPANY HAS ONLY TWO BUSINESS PARTNERS TO DATE AND IS UNCERTAIN OF ITS
FUTURE PROFITABILITY WITH ITS INTENDED VENTURE TO GENERATE REVENUES FROM SUCH
RELATIONSHIPS.
The Company's ability to achieve profitability in its new business is dependent
in part on the agreements, if any, entered into with business partners.
Currently the Company has entered into one agreement with PSI, and one agreement
with NeoStem and since the agreements are in its early stages, it is premature
to predict any favorable outcome. There can be no assurance that any additional
agreements will be entered into. The failure to enter into any such necessary
agreements could delay or prevent the Company's new business from achieving
profitability and would have a material adverse effect on the business,
financial position and results of operations of the Company. Further, there can
be no assurance that the Company's operations will become profitable even if the
Company enters into agreements with business partners.
THE PSI ARRANGEMENT MAY NOT BE SUCCESSFUL.
The Company's contract with its first business partner, PSI, demonstrates
certain of the risks of the Company's business. PSI is attempting 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 Company is providing funding and consulting services for PSI to
conduct a proof of concept study. No assurances can be given that the proof of
concept program will be successful, that any viable technology will arise from
that program, that the Company or PSI will be able to commercialize any product
or technology that is successfully developed, or that there will be market
acceptance of any such product or technology sufficient to generate any material
revenues for the Company. Even if everything is successful, it will be a long
time before the Company receives any royalty revenues from the PSI project.
THERE ARE RISKS RELATING TO POTENTIAL CORPORATE COLLABORATIONS.
The Company's new business strategy includes identifying and partnering with
various pharmaceutical and/or biotechnology companies that are developing a drug
or medical device. There can be no assurance the Company will enter into any
additional relationships with these business partners and, even if the Company
does enter into such relationships, that the arrangements will be on favorable
terms or that the Company's relationship will be successful. In some cases, the
Company will generate income from its relationship with these companies only
after its potential business partners' product has achieved significant
pre-clinical and/or clinical development, has procured requisite regulatory
approvals and/or has established its manufacturing capabilities.
The Company's potential business partners' business strategy may include
entering into collaborations or marketing and distribution arrangements with
corporate partners for the development (including clinical development),
commercialization, marketing and distribution of certain of their product
candidates. The Company's potential business partners may be dependent on such
corporate collaborations to fund clinical testing, to make certain regulatory
filings and to manufacture and market products resulting from the collaboration.
There can be no assurance that such arrangements with a corporate collaboration
will be scientifically, clinically or commercially successful. In the event that
any such arrangements are made and then terminated, such actions could adversely
affect the Company's business partners' ability to develop, commercialize,
market and distribute certain of their product candidates.
If the Company's potential business partners breach or terminate their
agreements with the Company, or fail to develop or commercialize their products
or fail to develop or commercialize their products in a timely manner, the
development of their products may be adversely affected, and thus not create an
economic benefit for the Company.
There can be no assurance that the Company's potential business partners will
not change their strategic focus or pursue alternative technologies or develop
alternative products either on their own or in collaboration with others. The
Company's business will also be affected by the effectiveness of its potential
business partners' corporate partners in marketing their products.
THERE ARE COMPANIES, UNIVERSITIES AND RESEARCH INSTITUTIONS THAT MAY BE
RESEARCHING AND TRYING TO DEVELOP PRODUCTS THAT ARE SIMILAR TO THE PRODUCTS OF
THE COMPANY'S POTENTIAL BUSINESS PARTNERS.
Competition in the medical, pharmaceutical and biotechnology industries, the
sector in which the Company plans to establish new business operations, is
intense. The Company's potential business partners may face competition from
companies with far greater financial, marketing, technical and research
resources, name recognition, distribution channels and market presence than the
Company's potential business partners who are marketing existing products or
developing new products that are similar to the products developed by the
Company's potential business partners. There can be no assurance that the
Company's potential business partners' products will be able to compete
successfully with existing products or products under development by other
companies, universities and other institutions.
THE COMPANY'S POTENTIAL BUSINESS PARTNERS MAY DEPEND ON THIRD PARTIES.
The Company's potential business partners may rely entirely on third parties for
a variety of functions, including certain functions relating to research and
development, manufacturing, clinical trials management, regulatory affairs and
sales, marketing and distribution. There can be no assurance that the Company's
potential business partners will be able to establish and maintain any of these
relationships on acceptable terms or enter into these arrangements without undue
delays or expenditures. In addition, the business partners may require, and seek
to raise, additional capital with third parties in order to develop products and
meet their working capital needs. There is no guarantee that the business
partners will be able to raise such additional capital, and any agreements
previously made between the business partners and the Company may make the
business partners less attractive to third parties in this regard.
THERE ARE UNCERTAINTIES ASSOCIATED WITH PRE-CLINICAL AND CLINICAL TESTING.
The grant of regulatory approvals for the commercial sale of any of the
Company's potential business partners' potential products will depend in part on
the Company's potential business partners and/or their collaborators
successfully conducting extensive pre-clinical and clinical testing to
demonstrate their products safety and efficacy in humans. The results of
pre-clinical studies by the Company's potential business partners and/or their
collaborators may be inconclusive and may not be indicative of results that will
be obtained in human clinical trials. In addition, results attained in early
human clinical trials relating to the products under development by the
Company's potential business partners may not be indicative of results that will
be obtained in later clinical trials. As results of particular pre-clinical
studies and clinical trials are received, the Company's potential business
partners and/or their collaborators may abandon projects with which the Company
assisted in developing which they might otherwise have believed to be promising.
The Company's potential business partners may be involved in developing drugs on
which they plan to file investigational new drug applications ("INDs") with the
FDA or make equivalent filings outside of the United States. There can be no
assurance that necessary pre-clinical studies on these products will be
completed satisfactorily, if at all, or that the Company's potential business
partners otherwise will be able to make their intended filings. Clinical testing
is very expensive, and the Company's potential business partners and/or their
collaborators will have to devote substantial resources for the cost of clinical
trials.
The Company's potential business partners may have no experience in conducting
clinical trials and may have to rely, in part, on academic institutions and on
clinical research organizations to conduct and monitor certain clinical trials.
There can be no assurance that such entities will conduct the clinical trials
successfully.
Failure to commence or complete any planned clinical trials by the Company's
potential business partners would have a material adverse effect on the
Company's new business.
THE COMPANY'S POTENTIAL BUSINESS PARTNERS AND THEIR PRODUCTS WILL BE SUBJECT TO
GOVERNMENT REGULATIONS AND THERE IS NO ASSURANCE OF REGULATORY APPROVAL.
The Company's potential business partners and their products will be subject to
comprehensive regulation by the FDA in the United States and by comparable
authorities in other countries. These national agencies and other federal,
state, and local entities regulate, among other things, the pre-clinical and
clinical testing, safety, effectiveness, approval, manufacture, labeling,
marketing, export, storage, record keeping, advertising, and promotion of the
Company's potential business partners' products.
The process of obtaining FDA approvals can be costly, time consuming, and
subject to unanticipated delays and the Company's potential business partners
may have had only limited experience in filing and pursuing applications
necessary to gain regulatory approvals. There can be no assurance that such
approvals will be granted on a timely basis, or at all.
The Company's potential business partners may also be subject to numerous and
varying foreign regulatory requirements governing the design and conduct of
clinical trials and the managing and marketing of their products. The approval
procedure varies among countries and can involve additional testing, and the
time required to obtain approval may differ from that required to obtain FDA
approval.
There can be no assurance that the Company's potential business partners or
their partners will qualify for regulatory approvals or receive necessary
approvals to commercialize product candidates in any market. Delays in receipt
of or failure to receive regulatory approvals, or the loss of previously
received approvals, would have a material adverse effect on the Company's
potential business partners' business, and therefore, on the Company's business.
THE COMPANY'S NEW VENTURE MAY REQUIRE IT TO REGISTER AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940.
The Company is not registered as an investment company under the Investment
Company Act of 1940, as amended (or any similar state laws) (the "Company Act").
The Company does not believe (i) it is an "investment company" pursuant to the
Company Act, or (ii) that it will hold "securities" pursuant to the Company Act
or the Securities Act of 1933, as amended. However, the Securities and Exchange
Commission ("SEC") may disagree in the futue with the Company's position and
deem the Company to be an "investment company" under the Company Act and require
the Company to register as an investment company. If this were to occur, the
Company's day-to-day operations would become subject to the regulatory and
disclosure requirements imposed by the Company Act. The Company does not have
the infrastructure to operate as an investment company.
RISKS RELATING TO INTELLECTUAL PROPERTY
IF THE COMPANY OR ITS BUSINESS PARTNERS ARE UNABLE TO OBTAIN PATENT PROTECTION
FOR THE PRODUCTS THAT RESULT FROM THE MEDICAL DEVELOPMENT BUSINESS, THE VALUE OF
THE MEDICAL DEVELOPMENT BUSINESS WILL BE ADVERSELY AFFECTED. IF THE COMPANY OR
ITS BUSINESS PARTNERS INFRINGE PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF
THIRD PARTIES, THEY MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE THE PRODUCTS
AND SERVICES THAT WILL COMPRISE THE MEDICAL DEVELOPMENT BUSINESS OR THE COST OF
DOING SO MAY INCREASE.
Patent positions of pharmaceutical and biotechnology companies are generally
uncertain and involve complex legal, scientific and factual questions. The
ability of the Company or its business partners to develop and commercialize
products and services depends in significant part on the Company's or its
business partners' ability to (i) obtain patents, (ii) obtain licenses to the
proprietary rights of others on commercially reasonable terms, (iii) operate
without infringing upon the proprietary rights of others, (iv) prevent others
from infringing on the Company's or its business partners' proprietary rights,
and (v) protect trade secrets.
THERE IS SIGNIFICANT UNCERTAINTY ABOUT THE VALIDITY AND PERMISSIBLE SCOPE OF
PATENTS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRY, WHICH MAY MAKE IT
DIFFICULT FOR THE COMPANY OR ITS BUSINESS PARTNERS TO OBTAIN PATENT PROTECTION
FOR DISCOVERIES.
The validity and permissible scope of patent claims in the pharmaceutical and
biotechnology fields, including the genomics field, involve important unresolved
legal principles and are the subject of public policy debate in the United
States and abroad. There is also some uncertainty as to whether human clinical
data will be required for issuance of patents for human therapeutics. If the
Company is involved in a project in this field and if such data are required,
the Company's or its business partners' ability to obtain patent protection
could be delayed or otherwise adversely affected.
THIRD PARTIES MAY OWN OR CONTROL PATENTS OR PATENT APPLICATIONS AND REQUIRE THE
COMPANY OR ITS BUSINESS PARTNERS TO SEEK LICENSES, WHICH COULD INCREASE THE
COMPANY'S OR ITS BUSINESS PARTNERS' DEVELOPMENT AND COMMERCIALIZATION COSTS, OR
PREVENT THE COMPANY OR ITS BUSINESS PARTNERS FROM DEVELOPING OR MARKETING THE
COMPANY'S OR ITS BUSINESS PARTNERS' PRODUCTS OR SERVICES.
The Company or its business partners may not have rights under some patents or
patent applications related to some of their existing or proposed products,
processes or services. Third parties may own or control these patents and patent
applications in the United States and abroad. Therefore, in some cases, in order
to develop, manufacture, sell or import some of the Company's or its business
partners' existing and proposed products, processes or services, the Company or
its business partners may choose to seek, or be required to seek, licenses under
third-party patents issued in the United States and abroad or those that might
issue from United States and foreign patent applications. In such event, the
Company or its business partners would be required to pay license fees or
royalties or both to the licensor. If licenses are not available to the Company
or its business partners on acceptable terms, the Company or its business
partners may not be able to develop, manufacture, sell or import these products,
processes or services.
THE COMPANY OR ITS BUSINESS PARTNERS MAY BECOME INVOLVED IN EXPENSIVE PATENT
LITIGATION OR OTHER PROCEEDINGS, WHICH COULD RESULT IN THE COMPANY OR ITS
BUSINESS PARTNERS INCURRING SUBSTANTIAL COSTS AND EXPENSES OR SUBSTANTIAL
LIABILITY FOR DAMAGES OR REQUIRE THE COMPANY OR ITS BUSINESS PARTNERS TO STOP
THEIR DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
There has been substantial litigation and other proceedings regarding the patent
and other intellectual property rights in the pharmaceutical and biotechnology
industries. The Company or its business partners may become a party to patent
litigation or other proceedings regarding intellectual property rights.
The cost to the Company or its business partners of any patent litigation or
other proceeding, even if resolved in the Company's or its business partners'
favor, could be substantial. Some of the Company's or its business partners'
competitors may be able to sustain the cost of such litigation or proceedings
more effectively than the Company or its business partners because of their
substantially greater financial resources. If a patent litigation or other
proceeding is resolved against the Company or its business partners, the Company
or its business partners may be enjoined from developing, manufacturing, selling
or importing their products, processes or services without a license from the
other party and the Company or its business partners may be held liable for
significant damages. The Company or its business partners may not be able to
obtain any required license on commercially acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on the
Company's or its business partners' ability to compete in the marketplace.
Patent litigation and other proceedings may also absorb significant management
time.
COMPETITION
Competition in the medical, pharmaceutical and biotechnology industries, the
sector in which the Company has established new business operations, is intense.
The Company's potential business partners may face competition from companies
with far greater financial, marketing, technical and research resources, name
recognition, distribution channels and market presence than the Company's
potential business partners who are marketing existing products or developing
new products that are similar to the products developed by the Company's
potential business partners. There can be no assurance that the Company's
potential business partners' products will be able to compete successfully with
existing products or products under development by other companies, universities
and other institutions.
EMPLOYEES
As of December 31, 2004, the Company had four employees.
ITEM 2. PROPERTIES
On February 21, 2003 the Company began leasing office space in Melville, New
York at an original annual rental of $18,000. The lease was extended for an
additional twelve months and expires on March 31, 2005. The annual rental
increased to approximately $19,200 on April 1, 2004 and continues until the
expiration date. The lease has been renewed until March 2006 with an annual
rental of approximately $20,100. This space will be sufficient for the Company's
needs until the business plan of the Company has been successfully executed.
ITEM 3. LEGAL PROCEEDINGS
As discussed in Note 3 of the accompanying notes to the financial statements,
StrandTek defaulted on the payment of $1,250,000 plus accrued interest due to
the Company on July 31, 2002. The Company ceased accruing interest as of July
31, 2002 for financial statement purposes. 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 loan, plus interest, costs and fees, and sought recovery against
the individual defendants pursuant to their partial guarantees.
Between July 2003 and December 2003, guarantors Veltman, Buckles and Arnett paid
their judgments in full, with payments totaling approximately $295,000, $295,000
and $297,000 respectively. In December 2003, the Company settled with defendant
Bauman for a payment of $100,000. These payments, totaling approximately
$987,000, complete the transaction and the legal action has been concluded.
The Company is not aware of any material pending legal proceedings or claims
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's Common Stock is traded on the OTC
Bulletin Board under the symbol "PHSM" since July 24, 2003. Prior to that
date, the Company's Common Stock traded under the symbol "CNGI." The
following table sets forth the high and low bid prices of the Company's
Common Stock for each quarterly period within the two most recent fiscal
years and the most recent quarter, as reported by Nasdaq Trading and
Market Services. On March 15, 2005, the closing bid price for the
Company's Common Stock was $0.04. Information set forth in the table below
represents inter-dealer prices without retail mark-up, mark-down, or
commission, and may not necessarily represent actual transactions.
2004 High Low
First Quarter $0.18 $0.13
Second Quarter 0.22 0.06
Third Quarter 0.10 0.07
Fourth Quarter 0.10 0.05
2003 High Low
First Quarter $0.13 $ 0.3
Second Quarter 0.15 0.06
Third Quarter 0.31 0.08
Fourth Quarter 0.31 0.11
(b) Holders. As of March 15, 2005, there were approximately 1,500 holders of
record of the Company's Common Stock.
(c) Dividends. Holders of Common Stock are entitled to dividends when, as, and
if declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any cash dividends on its Common Stock
and, for the foreseeable future, intends to retain future earnings, if
any, to finance the operations, development and expansion of its business.
Future dividend policy is subject to the discretion of the Board of
Directors.
SERIES A 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.
On January 29, 2002 notice was given that, pursuant to the Company's Restated
Certificate of Incorporation, as amended, the Company has called for redemption
and will redeem (the "Redemption") on the date of the closing of the StrandTek
Transaction (the "Redemption Date"), all shares of the Company's Series A
Convertible Preferred Stock outstanding on that date at a redemption price of
$1.05, plus accrued and unpaid dividends from July 1, 1995
through and including the Redemption Date of approximately $0.47 per share. The
Redemption, among other financial, legal and business conditions, was a
condition precedent to the closing of the StrandTek Transaction. Similarly,
completion of the Redemption was subject to closing the StrandTek Transaction.
Upon termination of the StrandTek Transaction, the Company rescinded the Notice
of Redemption.
At December 31, 2004, 681,174 shares of Series A Preferred Stock were
outstanding. If the preferred shareholders do not convert their shares into
Common Stock, and if the Company were required to redeem any significant number
of shares of Series A Preferred Stock, the Company's financial condition may be
materially affected.
RECENT SALES OF UNREGISTERED SECURITIES
In September 2002, the Company sold to accredited investors, pursuant to
Regulation D, 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 terms of 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 25,000 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 has the
option to purchase an additional 25,000 shares of the Company's Common Stock for
an aggregate purchase price of $125. As of December 31, 2003 a total of
1,000,000 of such shares resulting in net proceeds to the Company of $5,000 were
exercised because the notes remained unpaid. As of December 31, 2004, options to
purchase an additional 1,875,000 shares of Common Stock at an aggregate purchase
price of $9,375 were exercised pursuant to the default penalty. As of December
31, 2004 all but two of these notes and related interest has been repaid and
there are no additional options to purchase Common Stock outstanding. Two of the
notes, totaling $50,000 was sold to an unrelated third party who agreed to
cancel the two notes and replace them with a new note with does not contain the
default penalty. This new note included a previous note of $25,000 and on
October 1, 2004 a new promissory note in the amount $75,000 bearing interest at
8% per annum was executed. This note, plus accrued interest, is due June 30,
2005.
In February 2003, the Company sold to accredited investors, pursuant to
Regulation D, a series of 30-day promissory notes in the aggregate principal sum
of $50,000. The notes bear interest at 20% per annum payable at maturity. In
November 2003, the Company repaid all $50,000 of such promissory notes together
with all accrued interest of $6,854.
On March 17, 2003, the Company commenced a private placement offering, pursuant
to Regulation D, 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, were eligible to purchase these promissory
notes. The Company raised the full $250,000 through the sale of such promissory
notes, resulting in net proceeds to the Company of $225,000, net of offering
costs. The notes contain a default provision which raises the interest rate to
20% if the notes are not paid when due. The Company issued $250,000 of these
notes and as of December 31, 2004, $170,000 of the principle amount of these
notes remain unpaid. The due date of these notes has been extended to April 1,
2005 and bears interest at 20%. All interest payments have been made and are
current.
On September 22, 2003, the Company commenced an equity private placement
pursuant to Regulation D to raise up to $4,000,000 through the sale of up to
40,000,000 shares of its Common Stock in increments of $5,000 or 50,000 shares.
Such shares were not registered and will be subject to restrictions on resale.
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 shares. The placement closed on December 31, 2003 upon the sale
of 2,825,000 shares, resulting in proceeds to the Company of $214,781, net of
offering costs of $67,719. The investment banker, Robert M. Cohen & Company, has
been fully paid for its efforts.
The Company amended its equity private placement (see Note 7 to the Audited
Financial Statements) pursuant to Regulation D to raise up to $4,000,000 through
the sale of up to 40,000,000 shares of Common Stock in increments of $5,000 or
50,000 shares. Such shares were not registered and will be subject to
restrictions on resale. 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 amended private placement
closed on July 31, 2004. As of July 31, 2004, 12,132,913 shares of common stock
have been sold with net proceeds to the Company of $1,105,000.
In February 2004, the Company sold 30 day 20% notes pursuant to Regulation D in
the amount of $75,000 to two accredited investors to fund current operations.
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. These notes and interest have been repaid.
In March 2004, the Company sold a 30 day 20% note pursuant to Regulation D in
the amount of $50,000 to a director who qualifies as an accredited investor to
fund current operations. As of December 31, 2004, $25,000 has been repaid and
$25,000 remains unpaid.
In May 2004, the Company sold a 30 day 20% note pursuant to Regulation D in the
amount of $40,000 to an accredited investor to fund current operations. This
note 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. As of December 31, 2004, the $25,000 note has been
repaid and the two notes totaling $80,000 remain unpaid.
In August 2004, the Company sold a 30 day 20% note in the amount of $30,000 and
a six month 20% note in the amount of $25,000 to two accredited investors to
fund current operations. As of December 31, 2004, $30,000 has been repaid and
$25,000 remains unpaid. All related interest has been paid.
In August 2004, the Company sold a six month 20% $100,000 convertible note. This
note at maturity will be converted 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. In March 2005, this
note was converted into 1,960,784 shares of common stock. All interest payments
were made on the note.
In September 2004, 7,282,913 shares of common stock were purchased by Robert
Aholt, Jr., Chief Operating Officer of the Company for an aggregate purchase
price of $650,000.
In December 2004, the Company sold two six month 8% notes to an officer and a
director totaling $60,000 to fund current operations. In addition, the Company
sold a six month 15% note and a six month 20% note totaling $40,000 to two
accredited investors to fund operations. At December 31, 2004 these notes remain
unpaid.
ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth below are
derived from audited financial statements of the Company. The information set
forth below should be read in conjunction with the Company's audited financial
statements and notes thereto. See Item 8 "Financial Statements and Supplementary
Data" and Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operation". On February 4, 1999 the Company changed its fiscal
year-end from March 31 each year to December 31 each year. The selected
financial data set out below has not been retroactively restated to reflect such
change in fiscal year-end date and accordingly is presented as historically
reported in the financial statements of the Company. The requirement to provide
geographical information for the operations of the Company is not practical.
Statement of Operations: Year Ended Year Ended Year Ended Year Ended Year Ended
($'000 except net loss per share which is December 31, December 31, December 31, December 31, December 31,
stated in $) 2004 2003 2002 2001 2000
Earned revenues $ 49 $ 65 $ 81 $ 107 $ 27
Direct costs 34 44 60 70 33
Gross profit 15 21 21 37 (6)
Operating (loss) (1,474) (894) (1,149) (1,606) (2,516)
Loss before discontinued operations and
preferred dividends (1,748) (1,044) (1,160) (1,792) (2,296)
Net loss attributable to common
stockholders (1,748) (1,068) (1,208) (2,081) (2,075)
Basic and diluted earnings per share:
Loss from continuing operations
Income (loss) from discontinued operations (.05) (0.05) (0.05) (0.08) (0.16)
-- -- -- (0.01) (0.02)
Net loss attributable to common shareholders
(.05) (0.05) (0.05) (0.09) (0.14)
Weighted average number of shares
outstanding 32,541,845 23,509,343 22,344,769 22,284,417 14,902,184
As of As of As of As of As of
Balance Sheet Data: December 31, December 31, December 31, December 31, December 31,
$'000 2004 2003 2002 2001 2000
Working Capital (Deficiency) $ (1,239) $ (794) $ (82) $ 1,085 $ 2,079
Total Assets 99 312 1,183 1,836 3,757
Current Liabilities 1,288 1,023 1,141 489 458
Long Term Debt -- -- 9 32 53
(Accumulated Deficit) (12,510) (10,762) (9,694) (8,486) (6,406)
Total Stockholders' (Deficit)/ Equity (1,932) (1,503) (824) 373 2,450
Add long term liab.
Selected Quarterly Financial Data
$'000 Quarter Quarter Quarter Quarter Quarter Quarter
(except net loss per share Ended Ended Ended Ended Ended Ended
which is stated in $) 12/31/04 9/30/04 6/30/04 3/31/04 12/31/03 9/30/03
Earned Revenues $12 $3 $7 $27 $15 $15
Direct Costs 8 2 5 19 8 11
Gross profit 4 1 2 8 7 4
Operating Loss (263) (417) (413) (381) (369) (197)
Net Loss Attributable to
Common Stockholders (300) (500) (492) (456) (437) (216)
Net loss per share (.00) (.01) (.02) (.02) (0.02) (0.01)
$'000 Quarter Quarter Quarter Quarter Quarter Quarter
(except net loss per share Ended Ended Ended Ended Ended Ended
which is stated in $) 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02
Earned Revenues $17 $18 $ 19 $ 20 $ 18 $ 24
Direct Costs 12 13 13 14 14 19
Gross profit 5 5 5 6 5 5
Operating Loss (205) (123) (357) (225) (201) (366)
Net Loss Attributable to
Common Stockholders (260) (155) (389) (231) * (246) (342)
Net loss per share (0.01) (0.01) -- (0.01) (0.01) (0.02)
* Includes impairment charges of $54,732 in fiscal 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the audited
financial statements and notes thereto, included in Item 8 of this report, and
is qualified in its entirety by reference thereto.
GENERAL
During the first half of fiscal 2001, management became concerned by the slow
progress being made by its warrantysuperstore.com business. Accordingly,
alternative strategies for the Company were evaluated by the Board of Directors,
including the acquisition of new business operations. As a result, on January 7,
2002 the Company entered into the StrandTek Transaction as previously reported.
Consummation of the StrandTek Transaction was conditioned upon certain closing
conditions, including the Company obtaining financing via an equity private
placement, which ultimately could not be met and as a result in June 2002, the
Exchange Agreement was formally terminated by written agreement between the
Company and StrandTek. In June 2002, management also determined, in light of
continuing operating losses, to discontinue its warranty and service contract
business and to seek new business opportunities for the Company.
NEW BUSINESS OPPORTUNITIES
Management had been exploring new business opportunities for the Company and 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. Mr. Weinreb was
appointed to finalize and execute the Company's new business plan. The Company
now provides capital and guidance to companies, in multiple sectors of the
healthcare and life science industries, in return for a percentage of revenues,
royalty fees, licensing fees and other product sales of the target companies.
The Company continues 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.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition: Stamford's reinsurance premiums are recognized on a pro
rata basis over the policy term. The deferred policy acquisition costs are the
net cost of acquiring new and renewal insurance contracts. These costs are
charged to expense in proportion to net premium revenue recognized. The
provisions for losses and loss-adjustment expenses include an amount determined
from loss reports on individual cases and an amount based on past experience for
losses incurred but not reported. Such liabilities are necessarily based on
estimates, and while management believes that the amount is adequate, the
ultimate liability may be in excess of or less than the amounts provided. The
methods for making such estimates and for establishing the resulting liability
are continually reviewed, and any adjustments are reflected in earnings
currently.
Income Taxes and Valuation Reserves: We are required to estimate our income
taxes in each of the jurisdictions in which we operate as part of preparing our
financial statements. This involves estimating the actual current tax in
addition to assessing temporary differences resulting from differing treatments
for tax and financial accounting purposes. These differences, together with net
operating loss carryforwards and tax credits, are recorded as deferred tax
assets or liabilities on our balance sheet. A judgment must then be made of the
likelihood that any deferred tax assets will be realized from future taxable
income. A valuation allowance may be required to reduce deferred tax assets to
the amount that is more likely than not to be realized. In the event we
determine that we may not be able to realize all or part of our deferred tax
asset in the future, or that new estimates indicate that a previously recorded
valuation allowance is no longer required, an adjustment to the deferred tax
asset is charged or credited to net income in the period of such determination.
RESULTS OF CONTINUING OPERATIONS
The Company's "Critical Accounting Policies" are described in Note 2 to the
audited financial statements and notes thereto, included in Item 8 of this
report. The Company recognizes revenue from its warranty service contracts
ratably over the length of the 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.
FISCAL 2004 COMPARED TO FISCAL 2003
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $49,000 in fiscal 2004 compared to
$65,000 in fiscal 2003. The revenues generated in the year were derived entirely
from revenues deferred over the life of the contracts sold in prior years.
Similarly, direct costs incurred were $34,000 and $44,000 for fiscal years 2004
and 2003 respectively, which relate to costs previously deferred over the life
of such contracts.
General and administrative expenses totaled $764,000 during the year ended
December 31, 2004 as compared to $685,000 for fiscal 2003, an increase of
$79,000 or 11.5%. The increase was primarily attributable to increases in
salaries and related expenses ($189,000), directors and officer's liability
insurance ($31,000), rent ($12,000) and investor relations ($29,000) partially
offset by decreases in legal ($59,000), consultants ($63,000), director's fees
($13,000) travel and entertainment ($17,000), stockholder's meetings ($12,000),
transfer agent fees ($5,000) and miscellaneous items ($13,000).
In accordance with the PSI agreement, the Company paid PSI $725,324 in fiscal
2004 as compared to $80,000 in fiscal 2003.
Interest income decreased from $89,000 in fiscal 2003 to less than $1,000 in
fiscal 2004 due to the lack of funds. Interest expense increased in fiscal 2004
to $227,000 from $215,000 in fiscal 2003 due to the higher level of debt and
certain debt being in default and therefore subject to a higher interest rate.
In addition, the Company recorded interest expense in fiscal 2004 relating to
the Series A preferred in the amount of approximately $48,000 as compared to
approximately $24,000 in 2003 due to a recent accounting pronouncement.
For the reasons cited above, the net loss before preferred stock dividend
increased to $1,748,000 in fiscal 2004 from the comparable loss of $1,044,000
for fiscal 2003.
FISCAL 2003 COMPARED TO FISCAL 2002
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $65,000 in fiscal 2003. The revenues
generated in the year were derived almost entirely from revenues deferred over
the life of the contracts sold in prior years. Similarly, direct costs of
$44,000 incurred in fiscal 2003, relate to costs previously deferred over the
life of such contracts.
General and administrative expenses totaled $685,000 during the year ended
December 31, 2003 as compared to $912,000 for fiscal 2002, a decrease of
$227,000 or 24.9%. The decrease was primarily attributable to decreases in
employee termination costs ($145,000), legal ($86,000), travel and entertainment
($65,000), directors fees ($25,000), rents ($33,000) and depreciation ($16,000)
partially offset by increases in insurance ($66,000) and salaries as a result of
the employment agreement by and between the Company and Mark Weinreb ($41,000).
Costs generally were significantly lower as the Company wound down its
operations and closed its office facilities in Texas in July 2002.
The Company realized a loss from the unsecured, un-guaranteed note receivable
from StrandTek of $150,000 in fiscal 2003. Through March 1, 2004, the Company
made payments to PSI of $240,000. The Company's minimum commitment to PSI
pursuant to the royalty agreement with PSI is $1,000,000.
Interest income increased by $18,000 to $89,000 in fiscal 2003 as compared to
fiscal 2002 due to the collection of the StrandTek note receivable and the
additional funds received from the sale of Common Stock and notes. Interest
expense increased in fiscal 2003 to $215,000 from $23,000 in fiscal 2002 due to
the higher level of debt and certain debt being in default and therefore subject
to a higher interest rate. In addition, the Company recorded interest expense in
fiscal 2003 relating to the Series A preferred in the amount of approximately
$24,000 due to a recent accounting pronouncement.
For the reasons cited above, the net loss before preferred stock dividend
decreased to $1,044,000 in fiscal 2003 from the comparable loss of $1,160,000
for fiscal 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 as indicated:
Twelve Months Ended
-------------------
December 31, 2004 December 31, 2003
Cash used in
operating activities $(1,459,653) $(1,021,913)
Cash (used by) provided by
investing activities (3,288) 847,419
Cash provided by
financing activities 1,279,862 366,186
At December 31, 2004, the Company had a cash balance of $27,868, deficit working
capital of $1,238,949 and a stockholders' deficit of $1,931,787. In addition,
the Company sustained losses of $1,748,372, $1,044,145 and $1,159,838 for the
three fiscal years ended December 31, 2004, 2003 and 2002, respectively. The
Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern.
On September 22, 2003, the Company commenced an equity private placement to
accredited investors pursuant to Regulation D to raise up to $4,000,000 through
the sale of up to 40,000,000 shares of its Common Stock in increments of $5,000
or 50,000 shares. Through July 31, 2004, the Company sold only 14,957,913
shares, resulting in proceeds to the Company of $1,319,781, net of offering
costs of $67,719. This amended private placement was terminated in July 2004.
Additional financing is needed. There can be no assurance that the Company will
be able to sell sufficient quantities of equity securities or borrow money so as
to have sufficient funds to continue to operate. Management has sold promissory
notes which bear interest at between 8% and 20% per annum to fund the Company
until such time as sufficient proceeds are received from the private placement
of its Common Stock. No assurance can be given that future borrowings will be
available.
The following table reflects a summary of the Company's contractual cash
obligations as of December 31, 2004:
Payments due by period
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
Notes payable $ 475,000 $ 475,000 $ 0 $ 0 $ 0
Operating leases 24,900 19,875 5,025 0 0
Employment agreements 668,340 374,950 293,390 0 0
Series A mandatorily redeemable convertible
preferred stock 572,208 47,684 143,052 143,052 238,420
Purchase obligations 194,676 194,676 0 0 0
---------- ---------- -------- -------- --------
Total $1,925,124 $1,064,501 $298,415 $ 0 $ 0
========== ========== ======== ======== ========
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation in the fiscal year ended December 31, 2004, a situation which is
expected to continue for the foreseeable future.
SEASONALITY
The Company does not believe that its operations are seasonal in nature.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be
filed under this Item are presented commencing on page F-1 of the Annual Report
on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported on the Company's Form 8-K filed January 8, 2004, as
amended on February 3, 2004, on January 6, 2004, upon recommendation and
approval of the Company's and Board of Directors, the Company dismissed Travis,
Wolff & Company, LLP ("Travis Wolff") and engaged Holtz Rubenstein Reminick LLP
("Holtz") as the Company's independent auditors for the fiscal year ended
December 31, 2003.
Travis Wolff's audit report on the Company's financial statements for the year
ended December 31, 2002 contained a qualified opinion as to the uncertainty of
the Company's ability to continue as a going concern. No modifications were made
to the financial statements as a result of this uncertainty.
During the years ended December 31, 2002 and 2001 and through January 6, 2004,
there were no disagreements with Travis Wolff on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which if not resolved to Travis Wolff's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on the Company's financial statements for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 31, 2002 and 2001 and through January 6, 2004,
the Company did not consult Holtz with respect to the application of accounting
principles as to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the Company's financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
ITEM. 9A. CONTROLS AND PROCEDURES
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.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company's internal controls 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company as of March 8, 2005:
Name Age Position
- ---- --- --------
Mark Weinreb 52 Director, President & Chief Executive Officer
Robert Aholt, Jr. 43 Chief Operating Officer
Wayne Marasco 51 Director
Joseph Zuckerman 53 Director
Michael Lax 51 Director
Mark Weinreb
President, Chief Executive Officer and Director
Mr. Weinreb joined the Company on February 6, 2003 as a Director, Chief
Executive Officer and President. In 1976, Mr. Weinreb joined Bio Health
Laboratories, Inc., a state-of-the-art medical diagnostic laboratory providing
clinical testing services for physicians, hospitals, and other medical
laboratories. He progressed to become the laboratory administrator in 1978 and
then an owner and the laboratory's Chief Operating Officer in 1982. Here he
oversaw all technical and business facets, including finance, laboratory science
technology and all the additional support departments. He left Bio Health Labs
in 1989 when he sold the business to a biotechnology company listed on the New
York Stock Exchange. In 1992, Mr. Weinreb founded Big City Bagels, Inc., a
national chain of franchised upscale bagel bakeries and became Chairman and
Chief Executive Officer of such entity. The company went public in 1995 and in
1999 he redirected the company and completed a merger with an Internet service
provider. In 2000, Mr. Weinreb became the Chief Executive Officer of Jestertek,
Inc., a 12-year old software development company pioneering gesture recognition
and control using advanced inter-active proprietary video technology. In 2002,
he left Jestertek after arranging additional financing. Mr. Weinreb received a
Bachelor of Arts degree in 1975 from Northwestern University and a Master of
Science degree in 1982 in Medical Biology, from C.W. Post, Long Island
University.
Robert Aholt, Jr.
Chief Operating Officer
Mr. Aholt joined the Company in September of 2004 as Chief Operating Officer. He
is responsible for all operational aspects of the Company and is an integral
part of the management team. Prior to joining the Company, Mr. Aholt was
Principal and Chief Financial Officer of Systems Development, Inc. a private
consulting firm focusing on strategic and technology consulting for Fortune 500
companies. As a co-founder of Systems Development in 1993, Mr. Aholt helped
build the company into a multi-million dollar consulting practice. As CFO, he
oversaw all financial and operational aspects of the firm. Prior to Systems
Development, Mr. Aholt was CFO of IW Communications Group, a public relations
firm that helps companies target Asian communities for public relations
outreach. Mr. Aholt has also worked as a controller of First Affiliated
Securities, a regional brokerage firm in Southern California. Mr. Aholt received
a Bachelor of Arts degree from the University of California at Santa Barbara in
1985 and a Masters of Business Administration from the University of Southern
California in 1988.
Wayne Marasco, M.D., Ph.D.
Director
Dr. Marasco joined the Board of Directors of the Company in June 2003. In August
2004 was the appointed the Company's Senior Scientific Advisor. Dr. Marasco is
an Associate Professor in the Department of Cancer Immunology & AIDS at the
Dana-Farber Cancer Institute and Associate Professor of Medicine in the
Department of Medicine, Harvard Medical School. Dr. Marasco is a licensed
physician- scientist with training in Internal Medicine and specialty training
in infectious diseases. His clinical practice sub-specialty is in the treatment
of immunocompromised (cancer, bone marrow and solid organ transplants) patients.
Dr. Marasco's research laboratory is primarily focused on the areas of antibody
engineering and gene therapy. New immuno- and genetic- therapies for HIV-1
infection / AIDS, HTLV-1, the etiologic agent in Adult T-cell Leukemia, and
other emerging infectious diseases such as SARS and Avian Influenza are being
studied. Dr. Marasco's
laboratory is recognized internationally for its pioneering development of
intracellular antibodies (sFv) or "intrabodies" as a new class of molecules for
research and gene therapy applications. He is the author of more than 70 peer
reviewed research publications, numerous chapters, books and monographs and has
been an invited speaker at many national and international conferences in the
areas of antibody engineering, gene therapy and AIDS. Dr. Marasco is also the
Scientific Director of the National Foundation for Cancer Research Center for
Therapeutic Antibody Engineering (the "Center"). The Center is located at the
Dana-Faber Cancer Institute and will work with investigators globally to develop
new human monoclonal antibody drugs for the treatment of human cancers.
In 1995, Dr. Marasco founded IntraImmune Therapies, Inc., a gene therapy and
antibody engineering company. He served as the Chairman of the Scientific
Advisory Board until the company was acquired by Abgenix in 2000. He has also
served as a scientific advisor to several biotechnology companies working in the
field of antibody engineering, gene discovery and gene therapy. He is an
inventor on numerous issued and pending patent applications.
Joseph Zuckerman, M.D.
Director
Joseph D. Zuckerman joined the Board of Directors of the Company in January
2004. Since 1997, Dr. Zuckerman has been Chairman of the NYU-Hospital for Joint
Diseases Department of Orthopaedic Surgery and the Walter A. L. Thompson
Professor of Orthopaedic Surgery at the New York University School of Medicine.
He is responsible for one of the largest departments of orthopaedic surgery in
the country, providing orthopaedic care at five different hospitals including
Tisch Hospital, the Hospital for Joint Diseases, Bellevue Hospital Center, the
Manhattan Veteran's Administration Medical Center and Jamaica Hospital. He is
also the Director of the Orthopaedic Surgery Residency Program, which trains
more than 60 residents in a five year program.
Dr. Zuckerman holds leadership positions in national organizations and is
President of the American Shoulder and Elbow Surgeons and Chair of the Council
on Education for the American Academy of Orthopaedic Surgeons. He recently
developed and successfully implemented a sponsorship program between the
hospital and the New York Mets. His clinical practice is focused on shoulder
surgery and hip and knee replacement and he is the author or editor of ten
textbooks, 60 chapters and more than 200 articles in the orthopaedic and
scientific literature.
Michael Lax
Director
Michael Lax joined the Board of Directors of the Company in March 2004 and
graduated from the University of Rochester with degrees in Chemical and
Mechanical Engineering. Upon his graduation in 1975, Mr. Lax went to work for
Kodak as a Process and Product Development Engineer. Since 1988, Mr. Lax has
been the President and Chief Executive Officer of Autronic Plastics, Inc. and
its subsidiaries, a plastic manufacturing concern specializing in plastic
product design, mold construction and manufacturing of industrial and precision
components such as medical devices, office products, life safety products and
entertainment packaging. Autronic Plastics, Inc.'s clients include Pfizer,
Borders Books & Music, Blockbuster, Circuit City, Nintendo, and Cooper Lighting
Company. Mr. Lax's 28 years of experience at Autronic Plastics, Inc. have
centered on creative ideation, concept development and managing executions to
ensure that the integrity of the initial designs come alive. Taking the company
in a new direction, Mr. Lax founded Clear-Vu Products in 1990 to further
specialize in the entertainment-packaging sector.
Mr. Lax has been awarded numerous patents for packaging designs, solid state
illumination, and life safety products. In addition, his work and collaborations
have received numerous design awards including a Gold Industrial Design
Excellence Award from the Industrial Designers Society of America.
COMMITTEES OF THE BOARD OF DIRECTORS
Composition of the Board of Directors. Because of the Company's recent
reorganization and implementation of its new business plan, and its ongoing
efforts to engage qualified board members under its new business plan, the
Company does not have a separately designated audit committee or compensation
committee at this time. Accordingly, the Company's Board of Directors also has
determined that the Company does not have an audit committee financial expert.
The Company continues to seek new board members in order to implement its
reorganization and new business plan, and appoint a separately designated audit
committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
These persons are required by the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) reports that they file. Based
solely on the Company's review of these reports and written representations
furnished to the Company, the Company believes that in 2003 each of the
reporting persons complied with these filing requirements, except that a report
on Form 4 reporting one transaction in February 2003 with respect to Mark
Weinreb due on February 8, 2003 was not filed until February 17, 2003, a report
on Form 5 reporting four transactions for the year ended December 31, 2002 with
respect to James J. Fyfe due on February 14, 2003 was not filed until June 10,
2003 and a report on Form 5 reporting four transactions for the year ended
December 31, 2002 with respect to Paul L. Harrison due on February 14, 2003 was
not filed until June 10, 2003. The following Forms 3 and 4 were filed late:
Forms 3 for Joseph Zuckerman and Michael Lax upon becoming directors of the
Company and for Robert Aholt upon becoming an officer of the Company, and 2
Forms 4 for Joseph Zuckerman relating to option grants. These late filings were
inadvertent and required filings were made promptly after noting the failures to
file. The following Forms 3 and 4 were filed late: Forms 3 for Joseph Zuckerman
and Michael Lax upon becoming directors of the Company and for Robert Aholt upon
becoming an officer of the Company, and 2 Forms 4 for Joseph Zuckerman relating
to option grants.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller (or persons performing similar functions). A copy of such
Code of Ethics has been filed as Exhibit 14.1 to Annual Report on Form 10-K for
the year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid during the three
years ended December 31, 2004 to the Company's Chief Executive Officer. No other
executive officer of the Company earned in excess of $100,000 for services
rendered during fiscal 2004.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Position Notes Year Salary Options/SAR's Compensation
--------------------------- ----- ---- ------ ------------- ------------
Mark Weinreb
Chief Executive Officer 2004 $223,192 2,550,000 $12,000
(Appointed February 6, 2003) (1) 2003 $157,154 2,500,000 $12,000
Notes:
(1) All other compensation comprises monthly automobile allowances.
OPTION GRANTS
The following table provides certain information with respect to options granted
to the Company's chief executive officer during the fiscal years ended December
31, 2004:
Option Grants in Last Fiscal Year
Percent of Potential Realizable Value
Total at Assumed Annual Rates of
Number of Options Market Stock Price Appreciation
Securities Granted to Exercise Price on for Option Term(1)
Underlying Employees Price Date of --------------------------
Options In per Share Grant Expiration
Name Granted(2) Fiscal Year ($) ($) Date 5% 10%
- --------------------------------------- ----------- ---------- -------- ----------- ------- --------
Mark Weinreb 2,500,000 100% $0.03 $0.03 2/6/13 $53,275 $129,257
50,000 6% $0.10 $0.10 9/14/14 $8,552 $13,617
- ----------
(1) The Securities and Exchange Commission (the "SEC") requires disclosure of
the potential realizable value or present value of each grant. The 5% and
10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the SEC and do not represent the Company's estimate
or projection of the Company's future Common Stock prices. The disclosure
assumes the options will be held for the full ten-year term prior to
exercise. Such options may be exercised prior to the end of such ten-year
term. The actual value, if any, an executive officer may realize will
depend on the excess of the stock price over the exercise price on the
date the option is exercised. There can be no assurance that the stock
price will appreciate at the rates shown in the table.
(2) These options vested immediately.
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning options exercised during
2004 and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table at December 31, 2004.
Option Values at December 31, 2004
Number of
Securities Underlying
Shares Unexercised Options Value of
Acquired at December 31, 2004 In-the-Money Options at
On (# of shares) December 31, 2004 ($)(1)
Exercise Value ----------------------------- -------------------------------
Name (# shares) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ---------- -------- ----------- ------------- ----------- -------------
Mark Weinreb -- -- 2,500,000 -- $75,000 --
-- -- 50,000 -- -- --
- ----------
(1) Based on $0.06 per share, the closing price of the Company's Common Stock,
as reported by the OTC Bulletin Board, on December 30, 2004.
EMPLOYMENT AGREEMENTS
On February 6, 2003, Mr. Weinreb was appointed President and Chief Executive
Officer of the Company and the Company entered into an employment agreement with
Mr. Weinreb. The employment agreement has an initial term of three years, with
automatic annual extensions unless terminated by the Company or Mr. Weinreb at
least 90 days prior to an applicable anniversary date. The Company has agreed to
pay Mr. Weinreb an annual salary of $180,000 for the initial year of the term,
$198,000 for the second year of the term, and $217,800 for the third year of the
term. In addition, he is entitled to an annual bonus in the amount of $20,000
for the initial year in the event, and concurrently on the date, that the
Company has received debt and/or equity financing in the aggregate amount of at
least $1,000,000 since the beginning of his service, and $20,000 for each
subsequent year of the term, without condition.
In addition, the Company, pursuant to its newly adopted 2003 Equity
Participation Plan, entered into a Stock Option Agreement with Mr. Weinreb (the
"Initial Option Agreement"). Under the Initial Option Agreement, the Company
granted Mr. Weinreb the right and option, exercisable for 10 years, to purchase
up to 2,500,000 shares of the Company's Common Stock at an exercise price of
$0.03 per share and otherwise upon the terms set forth in the Initial Option
Agreement. In addition, in the event that the closing price of the Company's
Common Stock equals or exceeds $0.50 per share for any five consecutive trading
days during the term of the employment agreement (whether during the initial
term or an annual extension), the Company has agreed to grant to Mr. Weinreb, on
the day immediately following the end of the five day period, an option for the
purchase of an additional 2,500,000
shares of the Company's Common Stock for an exercise price of $0.50 per share,
pursuant to the 2003 Equity Participation Plan and a Stock Option Agreement to
be entered into between the Company and Mr. Weinreb containing substantially the
same terms as the Initial Option Agreement, except for the exercise price and
that the option would be treated as an "incentive stock option" for tax purposes
only to the maximum extent permitted by law (the "Additional Option Agreement").
The Company has agreed to promptly file with the Securities and Exchange
Commission a Registration Statement on Form S-8 (the "Registration Statement")
pursuant to which the issuance of the shares covered by the 2003 Equity
Participation Plan, as well as the resale of the Common Stock issuable upon
exercise of the Initial Option Agreement, are registered. Additionally, the
Company has agreed, following any grant under the Additional Option Agreement,
to promptly file a post-effective amendment to the Registration Statement
pursuant to which the Common Stock issuable upon exercise thereof shall be
registered for resale. Mr. Weinreb has agreed that he will not resell publicly
any shares of the Company's Common Stock obtained upon exercise of any Initial
Agreement or the Additional Option Agreement prior to the first anniversary of
the date of the employment agreement.
In connection with the hiring of Mr. Weinreb and in anticipation of its new
business line, on July 24, 2003, the Company held a meeting of stockholders to
elect two directors, to approve and ratify the Company's 2003 Equity
Participation Plan pursuant to which 15,000,000 shares of the Company's Common
Stock are authorized to be issued, approve an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
Common Stock to 250,000,000, and approve a change of the Company's name to
"Phase III Medical, Inc."
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 of $84,000 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.
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.
DIRECTOR COMPENSATION
All current independent directors have individually received options to purchase
300,000 shares of the Company's Common Stock pursuant to the Company's 2003
Equity Participation Plan at prices ranging from $0.05 to $0.15. In addition to
these options, all independent directors are reimbursed for out of pocket travel
expenses and will receive an annual option grant to purchase 50,000 shares of
the Company's Common Stock on the date of the Company's annual stockholder's
meeting; provided; however, that no director may receive more than one grant of
these options in any calendar year. Upon achieving certain target increases in
stock price for a defined period of time during an existing independent
directors tenure, the Company has agreed to grant each director an additional
option to purchase 100,000 shares of the Company's Common Stock substantially
upon the same terms of the options to purchase 300,000 shares of the Company's
Common Stock previously granted, except for the exercise price of such options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to the number of shares of the
Company's Common Stock beneficially owned, as of March 15, 2005, by (i) each
beneficial owner of more than five percent of the outstanding Common Stock, (ii)
each current named executive officer and director and (iii) all current
executive officers and directors of the Company as a group. All shares are owned
both beneficially and of record unless otherwise indicated. Unless otherwise
indicated, the address of each beneficial owner is c/o Phase III Medical, Inc.,
330 South Service Road, Suite 120, Melville, New York 11747.
Number and Percentage of Shares of Common Stock Owned
Percentage
of Common Stock
# of Shares Beneficially Owned (See
Name and Address of Beneficial Owner Notes Beneficially Owned Note 1)
Joel San Antonio
56 North Stanwich Road
Greenwich, CT 06831 3,752,500 8.7%
Mark Weinreb (2) (6) 2,590,000 5.7%
Wayne Marasco (3) (6) 1,525,000 3.5%
Michael Lax (4) (6) 300,000 .7%
Joseph Zuckerman, M.D. (5) (6) 600,000 1.4%
Robert Aholt, Jr. (6) 9,721,376 22.6%
All current directors and officers as a group
(five persons) (2) (3) (4) (5) 14,736,376 31.2%
Notes:
(1) Based on 43,065,336 shares of Common Stock outstanding on March 15, 2005.
(2) Includes 2,550,000 currently exercisable options to purchase Common Stock.
(3) Includes 1,025,000 currently exercisable options to purchase Common Stock.
(4) Includes 300,000 currently exercisable options to purchase Common Stock.
(5) Includes 350,000 currently exercisable options to purchase Common Stock.
(6) Address is 330 South Service Road, Suite 120, Melville, NY 11747 EQUITY
COMPENSATION PLAN INFORMATION
The following table gives information about the Company's Common Stock that may
be issued upon the exercise of options, warrants and rights under the Company's
2003 Equity Participation Plan as of December 31, 2004. This plan was the
Company's only equity compensation plan in existence as of December 31, 2004
(c)
Number of Securities
Remaining Available For
(a) (b) Future Issuance Under
Number of Securities to Weighted-Average
Equity Compensation be Issued Upon
Exercise Exercise Price of Plan (Excluding
of Outstanding Options, Outstanding
Options, Securities Reflected In
Plan Category Warrants and Rights Warrants and Rights Column (a))
------------- ------------------- ------------------- ------------------------
Equity Compensation Plans
Approved by
Shareholders ............ 6,675,000 $ 0.08 8,325,000
Equity Compensation Plans
Not Approved by ......... 0 0 0
Shareholders
--------- --------- ---------
TOTAL ................... 6,675,000 $ 0.08 8,325,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
All audit and audit-related work and all non-audit work performed by the
Company's independent accountants is approved in advance by the Board of
Directors of the Company, including the proposed fees for such work. The Audit
Committee is informed of each service actually rendered.
Audit Fees. Audit fees billed or expected to be billed to the Company by the
Company's principal accountant for the audit of the financial statements
included in the Company's Annual Reports on Form 10-K, and reviews of the
financial statements included in the Company's Quarterly Reports on Form 10-Q,
for the years ended December 31, 2004 and 2003 totaled approximately $25,000 and
$48,185, respectively.
Audit-Related Fees. The Company was billed $0 and $0 by the Company's principal
accountant for the fiscal years ended December 31, 2004 and 2003, respectively,
for assurance and related services that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported under the caption Audit Fees above.
Tax Fees. The Company was billed or expected to be billed an aggregate of $7,350
and $5,072 by the Company's principal accountant for the fiscal years ended
December 31, 2004 and 2003, respectively, for tax services, principally advice
regarding the preparation of income tax returns.
All Other Fees. The Company incurred fees for the fiscal years ended December
31, 2004 and 2003, respectively, for permitted non-audit services of $0 and
$3,230, respectively.
The Company's Board of Directors pre-approved the Company's engagement of Holtz
Rubenstein Reminick LLP to act as the Company's independent auditor for the
fiscal year ended December 31, 2004 and 2003. The Company's Board of Directors
pre-approved Travis Wolff & Company, L.L.P. to act as the Company's independent
auditor for the fiscal years ended December 31, 2002. The Company's independent
auditors performed all work only with its full time permanent employees.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) Financial Statements:
Reference is made to the Index to Financial Statements and Financial Statement
Schedule on Page F-1.
(a)(2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements and Financial Statement
Schedule on Page F-1.
All other schedules have been omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Financial
Statements or Notes thereto.
Allan please update
(a)(3) Exhibits:
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation filed September 29, 1980 (1) 3
(c) Amendment to Certificate of Incorporation filed July 28, 1983 (2) 3(b)
(d) Amendment to Certificate of Incorporation filed February 10, 1984 (2) 3(d)
(e) Amendment to Certificate of Incorporation filed March 31, 1986 (3) 3(e)
(f) Amendment to Certificate of Incorporation filed March 23, 1987 (4) 3(g)
(g) Amendment to Certificate of Incorporation filed June 12, 1990 (5) 3.8
(h) Amendment to Certificate of Incorporation filed September 27, 1991 (6) 3.9
(i) Certificate of Designation filed November 12, 1994 (7) 3.8
(j) Amendment to Certificate of Incorporation filed September 28, 1995 (9) 3(j)
(k) Certificate of Designation for the Series B Preferred Stock
dated May 18, 1998 (10) C 3(f)
(l) Amendment to Certificate of Incorporation dated May 18, 1998 (10) A
(m) Amendment to Certificate of Incorporation filed July 24, 2003 (15) 3.1
(n) By-laws of the Corporation, as amended on April 25, 1991 (6)
4 (a) Form of Underwriter's Warrant (6) 4.9.1
(b) Form of Promissory Note - 1996 Offering (9) 4(b)
(c) Form of Promissory Note - 1997 Offering (9) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering (9) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering (9) 4(e)
(f) Form of Promissory Note - September 2002 Offering (13) 4.1
(g) Form of Promissory Note - February 2003 Offering (13) 4.2
(h) Form of Promissory Note - March 2003 Offering (13) 4.3
10 (a) 1992 Stock Option Plan (8) B
(b) Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (10) B (c)
1998 Employee Stock Option Plan (10) D (d) Stock Contribution Exchange
Agreement with StrandTek International, Inc.
dated January 7, 2002, as amended on February 11, 2002 (11) 10(o)
(e) Supplemental Disclosure Agreement to Stock Contribution Exchange
Agreement with StrandTek International, Inc. dated January 7, 2002 (11) 10(p)
(f) Employment Agreement dated as of February 6, 2003 by and between
Corniche Group Incorporated and Mark Weinreb (12) 99.2
(g) Stock Option Agreement dated as of February 6, 2003 between
Corniche Group Incorporated and Mark Weinreb (12) 99.3
(h) Corniche Group Incorporated 2003 Equity Participation Plan (12) 99.4
(i) Royalty Agreement, dated as of December 5, 2003, by and between
Parallel Solutions, Inc. and Phase III Medical, Inc. (13)(14) 10.1
(j) Form of Stock Option Agreement (13) 10.2
(k) Employment Agreement dated as of September 13, 2004 between Phase III Medical,
Inc. and Robert Aholt, Jr. (16) 10.3
(l) Stock Purchase Agreement, dated as of September 13, 2004, between Phase III
Medical, Inc. and the Aholt, Jr. Family Trust (16) 10.4
(m) Form of Promissory Note - Robert Aholt, Jr. dated August 30, 2004 (16) 10.5
(n) Letter Agreement dated as of August 12, 2004 by and between Phase III Medical,
Inc. and Dr. Wayne A. Marasco (16) 10.6
(o) Board of Directors Agreement by and between Phase III Medical, Inc. and Michael
Lax (16) 10.7
(p) Board of Directors Agreement by and between Phase III Medical, Inc. and Joseph
Zuckerman (16) 10.8
14 (a) Code of Ethics for Senior Financial Officers (13) 14.1
23 (a) Consent of Holtz Rubenstein Reminick LLP (16) 23.1
31 (a) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (16) 31.1
32 (a) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (16) 32.1
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's registration statement on Form S-18,
File No. 2-69627, which exhibit is incorporated here by reference.
(2) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's registration statement on Form S-2,
File No. 2-88712, which exhibit is incorporated here by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's registration statement on Form S-2,
File No. 33-4458, which exhibit is incorporated here by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's annual report on Form 10-K for the
year ended September 30, 1987, which exhibit is incorporated here by
reference.
(5) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's registration statement on Form S-3,
File No. 33-42154, which exhibit is incorporated here by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
Company's registration statement on Form S-1, File No. 33-42154, which
exhibit is incorporated here by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's annual report on Form 10-K for the
year ended September 30, 1994, which exhibit is incorporated here by
reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated March 30, 1992,
which exhibit is incorporated here by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's annual report on Form 10-K for the
year ended March 31, 1996, which exhibit is incorporated here by
reference.
(10) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the Company's annual report on Form 10-K for the
year ended December 31, 2001, which exhibit is incorporated here by
reference.
(12) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of the Company on Form 8-K,
dated February 6, 2003, which exhibit is incorporated here by reference.
(13) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of the Company on Form 10-K,
dated December 31, 2003, which exhibit is incorporated here by reference.
(14) Certain portions of this exhibit have been omitted based upon a request
for confidential treatment. The omitted portions of this exhibit have been
filed separately with the Securities and Exchange Commission on a
confidential basis.
(15) Filed with the Securities and Exchange Commission as an exhibit, numbered
as indicated above, to the current report of the Company on Form 8-K,
dated July 24, 2003, which exhibit is incorporated here by reference.
(16) Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Phase III Medical, Inc.
By: /s/ Mark Weinreb
-----------------------
Mark Weinreb, President
Dated: March 31, 2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Signatures Title Date
- ---------- ----- ----
/s/ Mark Weinreb Director, President and Chief Executive
- ----------------------- Officer March 31, 2005
Mark Weinreb
/s/ Robert Aholt, Jr. Chief Operating Officer March 31, 2005
- -----------------------
Robert Aholt, Jr.
/s/ Wayne Marasco Director March 31, 2005
- -----------------------
Wayne Marasco
/s/ Joseph Zuckerman Director March 31, 2005
- -----------------------
Joseph Zuckerman
/s/ Michael Lax Director March 31, 2005
- -----------------------
Michael Lax
Phase III Medical, Inc.
Table of Contents
Page
----------
Report of Independent Registered Public Accounting Firm - F - 1
Holtz Rubenstein Reminick LLP
Report of Independent Registered Public Accounting Firm - F - 2
Travis, Wolff & Company, L.L.P.
Financial Statements:
F - 3
Balance Sheets at December 31, 2004 and 2003
Statements of Operations F - 4
Years Ended December 31, 2004, 2003 and 2002
Statements of Stockholder's (Deficit) F - 5
Years Ended December 31, 2004, 2003 and 2002
Statements of Cash Flows F - 6
Years Ended December 31, 2004, 2003 and 2002
F - 8 - F - 21
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Phase III Medical, Inc.
We have audited the accompanying balance sheets of Phase III Medical, Inc. as of
December 31, 2004 and 2003 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
two-year period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phase III Medical, Inc. as of
December 31, 2004 and 2003 and the results of its operations and cash flows for
each of the years in the two year period ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
February 18, 2005
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Phase III Medical, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 2002 of
Phase III Medical, Inc. (the "Company"). These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Phase III Medical, Inc. for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
Phase III Medical, Inc. will continue as a going concern. As discussed in the
accompanying notes to the consolidated financial statements, the Company sold
its insurance subsidiary in July 2001. Additionally, the Company discontinued
sales of its extended warranty service contracts through its website in December
2001. 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 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ TRAVIS, WOLFF & COMPANY, L.L.P.
Dallas, Texas
March 11, 2003
F-2
PHASE III MEDICAL, INC.
Balance Sheets
December 31,
-------------------------------
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,868 $ 210,947
Prepaid expenses and other current assets 21,233 18,024
------------ ------------
Total current assets 49,101 228,971
Property and equipment, net 3,446 1,935
Deferred acquisition costs 43,897 77,782
Other assets 3,000 3,000
------------ ------------
$ 99,444 $ 311,688
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable - preferred
stock $ 480,880 $ 433,196
Accounts payable 149,169 87,896
Accrued liabilities 88,883 92,115
Notes payable 475,000 400,000
Convertible debentures, related party - net of
debt discount of $5,882 94,118 --
Current portion of long-term debt -- 9,513
------------ ------------
Total current liabilities 1,288,050 1,022,720
Unearned revenues 62,007 110,568
Series A mandatorily redeemable convertible preferred stock 681,174 681,174
COMMITMENTS AND CONTINGENCIES
Stockholders' deficit:
Preferred stock; authorized, 5,000,000 shares Series B convertible redeemable
preferred stock, liquidation value, 10 shares of common stock per share,
$.01 par value; authorized, 825,000 shares; issued and outstanding, 10,000
shares
at December 31, 2004 and at December 31, 2003 100 100
Common stock, $.001par value; authorized, 250,000,000 shares; issued and
outstanding, 41,029,552 at December 31, 2004
and 26,326,460 shares at December 31, 2003 41,031 26,327
Additional paid-in capital 10,537,408 9,232,753
Accumulated deficit (12,510,326) (10,761,954)
------------ ------------
Total stockholders' deficit (1,931,787) (1,502,774)
------------ ------------
$ 99,444 $ 311,688
============ ============
The accompanying notes are an integral part of these financial statements
F-3
PHASE III MEDICAL, INC.
Statements of Operations
Years ended December 31,
--------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Earned revenues $ 48,561 $ 64,632 $ 81,348
Direct Costs (33,885) (43,608) (60,565)
------------ ------------ ------------
Gross Profit 14,676 21,024 20,783
Selling, general and administrative (763,640) (685,353) (911,950)
Purchase of medical royalty stream (725,324) (80,000) --
Realized loss on note receivable (150,000) --
Provision for uncollectible note receivable and
accrued interest -- -- (258,103)
------------ ------------ ------------
Operating loss (1,474,288) (894,329) (1,149,270)
Other income (expense):
Realized loss on marketable securities -- -- (3,490)
Property and equipment impairment charge -- -- (54,732)
Interest income 199 88,923 70,676
Interest expense - Series A mandatorily
redeemable convertible preferred stock (47,684) (23,842) --
Interest expense (226,599) (214,897) (23,022)
------------ ------------ ------------
(274,084) (149,816) (10,568)
Provision for income taxes -- -- --
------------ ------------ ------------
Loss before preferred dividend (1,748,372) (1,044,145) (1,159,838)
Preferred dividend -- (23,842) (47,684)
------------ ------------ ------------
Net Loss attributable to common stockholders $ (1,748,372) $ (1,067,987) $ (1,207,522)
============ ============ ============
Basic earnings per share
Net loss attributable to common stockholders $ (0.05) $ (0.05) $ (0.05)
============ ============ ============
Weighted average common shares outstanding 32,541,845 23,509,343 22,344,769
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-4
PHASE III MEDICAL, INC.
Statements of Stockholders' Deficit
Series B
Convertible
Preferred Stock Common Stock
------------------------------ -----------------------
Shares Amount Shares Amount
------------ ------------ ---------- -------
Balance at December 31,
2001 20,000 $ 200 22,290,710 $22,291
Issuance of common stock
to directors -- -- 8,000 8
Conversion of Series B
convertible
preferred stock into
common stock (10,000) (100) 100,000 100
Series A convertible
stock dividends -- -- -- --
Stock options granted
with debt -- -- -- --
Net loss -- -- -- --
------------ ------------ ---------- -------
Balance at December 31,
2002 10,000 100 22,398,710 22,399
Issuance of common stock
for cash, net of
offering costs -- -- 2,825,000 2,825
Issuance of common stock
upon exercise of
common stock options -- -- 1,000,000 1,000
Issuance of common stock
for services -- -- 100,000 100
Issuance of common stock
to directors -- -- 2,750 3
Series A convertible
stock dividends -- -- -- --
Stock options granted
with debt -- -- -- --
Net loss -- -- -- --
------------ ------------ ---------- -------
Balance at December 31,
2003 10,000 100 26,326,460 26,327
Issuance of common stock
for cash, net of
offering costs 12,132,913 12,133
Issuance of common stock
upon exercise of
common stock options 1,875,000 1,875
Issuance of common stock
options for services
Issuance of common stock
for services 187,500 188
Interest expense on loans
in default
Debt discount on loan
from officer
Issuance of common stock
for Interest 30,000 30
Issuance of common stock
to officer for services 477,679 478
Net loss
------------ ------------ ---------- -------
Balance at December 31,
2004 10,000 $ 100 41,029,552 $41,031
============ ============ ========== =======
Additional
Paid-in Accumulated
Capital Deficit Total
----------- ------------ -----------
Balance at December 31,
2001 $ 8,837,687 $ (8,486,445) $ 373,733
Issuance of common stock
to directors 1,113 -- 1,121
Conversion of Series B
convertible
preferred stock into
common stock -- -- --
Series A convertible
stock dividends -- (47,684) (47,684)
Stock options granted
with debt 8,773 -- 8,773
Net loss -- (1,159,838) (1,159,838)
----------- ------------ -----------
Balance at December 31,
2002 8,847,573 (9,693,967) (823,895)
Issuance of common stock
for cash, net of
offering costs 211,956 -- 214,781
Issuance of common stock
upon exercise of
common stock options 4,000 -- 5,000
Issuance of common stock
for services 2,900 -- 3,000
Issuance of common stock
to directors 300 -- 303
Series A convertible
stock dividends -- (23,842) (23,842)
Stock options granted
with debt 166,024 -- 166,024
Net loss -- (1,044,145) (1,044,145)
----------- ------------ -----------
Balance at December 31,
2003 9,232,753 (10,761,954) (1,502,774)
Issuance of common stock
for cash, net of
offering costs 1,092,867 1,105,000
Issuance of common stock
upon exercise of
common stock options 7,500 9,375
Issuance of common stock
options for services 15,000 15,000
Issuance of common stock
for services 14,062 14,250
Interest expense on loans
in default 127,137 127,137
Debt discount on loan
from officer 17,647 17,647
Issuance of common stock
for Interest 4,170 4,200
Issuance of common stock
to officer for services 26,272 26,750
Net loss (1,748,372) (1,748,372)
----------- ------------ -----------
Balance at December 31,
2004 $10,537,408 $(12,510,326) $(1,931,787)
=========== ============ ===========
The accompanying notes are an integral part of these financial statements
F-5
PHASE III MEDICAL, INC.
Statements of Cash Flows
Years ended December 31,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities: $(1,748,372) $(1,044,145) $(1,159,838)
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Property and equipment impairment charge -- 54,732
Common shares issued and stock options granted
as payment for interest expense and for
services rendered 187,337 169,327 9,894
Depreciation 1,777 646 16,766
Amortization of debt discount 11,765
Series A mandatorily redeemable
convertible preferred stock dividends 47,684 23,842 --
Unearned revenues (48,561) (64,632) (84,579)
Deferred acquisition costs 33,885 46,053 59,744
Realized loss on note receivable 150,000 --
Provision for uncollectible note receivable and
accrued interest -- -- 258,103
Changes in operating assets and liabilities :
marketable securities -- -- 1,503,374
Prepaid expenses and other current assets (3,209) 22,070 (28,463)
Other assets (3,000) 4,175
Accounts payable, accrued expenses
and other current liabilities 58,041 (322,074) 371,468
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,459,653) (1,021,913) 1,005,376
Cash flows from investing activities:
Acquisition of property and equipment (3,288) (2,581) (1,133)
Notes receivable -- 850,000 (1,250,000)
Proceeds from sale of property and equipment -- -- 3,795
----------- ----------- -----------
Net cash (used in) provided by investing activities (3,288) 847,419 (1,247,338)
Cash flows from financing activities:
Net proceeds from issuance of capital stock 1,114,375 219,781 --
Stockholder advances -- (106,000) 106,000
Net proceeds from notes payable 75,000 275,000 125,000
Proceeds from notes payable - related party 100,000 -- --
Repayment of long-term debt (9,513) (22,595) (21,051)
----------- ----------- -----------
Net cash provided by financing activities 1,279,862 366,186 209,949
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (183,079) 191,692 (32,013)
Cash and cash equivalents at beginning of year 210,947 19,255 51,268
----------- ----------- -----------
Cash and cash equivalents at end of year $ 27,868 $ 210,947 $ 19,255
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-6
PHASE III MEDICAL, INC.
Statements of Cash Flows - continued
Years ended December 31,
-----------------------------------------------
2004 2003 2002
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 106,574 $ 26,483 $ 8,804
============ ============ ============
Supplemental schedule of non-cash investing
and financing activities
Issuance of common stock for services rendered $ 32,027 $ 3,303 $ 1,121
============ ============ ============
Compensatory element of stock options $ 127,137 $ 166,024 $ 8,773
============ ============ ============
Net accrual of dividends on Series A preferred stock $ -- $ 23,842 $ 47,684
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-7
Note 1 - The Company
Phase III Medical, Inc. (hereinafter referred to as the "Company") was known as
Corniche Group Incorporated until it changed its name on July 24, 2003. The
Company was incorporated in Delaware on September 18, 1980 under the name
Fidelity Medical Services, Inc. From its inception through March 1995, the
Company was engaged in the development, design, assembly, marketing, and sale of
medical imaging products. As a result of a reverse merger with Corniche
Distribution Limited and its Subsidiaries ("Corniche") the Company was engaged
in the retail sale and wholesale distribution of stationery products and related
office products, including office furniture, in the United Kingdom. Effective
March 25, 1995, the Company sold its wholly-owned medical imaging products
subsidiary. On September 28, 1995 the Company changed its name to Corniche Group
Incorporated. In February 1996, the Company's United Kingdom operations were
placed in receivership by their creditors. Thereafter, through May 1998, the
Company had no activity. On March 4, 1998, the Company entered into a Stock
Purchase Agreement ("Agreement"), approved by the Company's stockholders on May
18, 1998, with certain individuals (the "Initial Purchasers") whereby the
Initial Purchasers acquired an aggregate of 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock, par value $0.01 per share.
Thereafter the Initial Purchasers endeavored to establish for the Company new
business operations in the property and casualty specialty insurance and the
service contract markets. On September 30, 1998, the Company acquired all of the
capital stock of Stamford Insurance Company, Ltd. ("Stamford") from Warrantech
Corporation ("Warrantech") for $37,000 in cash in a transaction accounted for as
a purchase. On April 30, 2001, the Company sold Stamford for a consideration of
$372,000. During 2001, the Company recorded a loss of approximately $479,000 on
the sale of Stamford. The closing was effective May 1, 2001 and transfer of
funds was completed on July 6, 2001.
On January 7, 2002, the Company entered into a Stock Contribution Exchange
Agreement (the "Exchange Agreement") and a Supplemental Disclosure Agreement
(together with the Exchange Agreement, the "Agreements") 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"). The Exchange Agreement was amended on
February 11, 2002. Had the transactions contemplated by the Agreements closed,
StrandTek would have become a majority owned subsidiary of the Company and the
former shareholders of StrandTek would have controlled the Company. Consummation
of the StrandTek Transaction was conditioned upon a number of closing
conditions, including the Company obtaining financing via an equity private
placement, which ultimately could not be met and, as a result, the Agreements
were formally terminated by the Company and StrandTek in June 2002.
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 provides capital and guidance to companies, in
multiple sectors of the healthcare and life science industries, in return for a
percentage of revenues, royalty fees, licensing fees and other product sales of
the target companies. Mr. Weinreb was appointed to finalize and execute the
Company's new business plan.
F-8
Note 1 - The Company - (Continued)
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 will provide 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.
The Company continues 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.
At December 31, 2004, the Company had a cash balance of $27,868, deficit working
capital of $1,238,949 and a stockholders' deficit of $1,931,787. In addition,
the Company sustained losses of $1,748,372, $1,044,145 and $1,159,838 for the
three fiscal years ended December 31, 2004, 2003 and 2002 respectively. The
Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern. The consolidated financial statements of the Company do not reflect any
adjustments relating to the doubt of its ability to continue as a going concern.
Management is presently selling notes which bear interest at rates between 8%
and 20% per annum to fund the Company until such time as sufficient proceeds, if
any, are received from the private placement of its common stock. On September
22, 2003 the Company commenced an equity private placement to raise up to $4
million through the sale of up to 40 million shares of its Common Stock in
increments of $5,000 or 50,000 shares. Since February 2003, the Company sold
14,957,913 shares, resulting in net proceeds to the Company of $1,319,781, of
which 7,282,913 shares with net proceeds of $650,000 were to Robert Aholt, Jr.,
Chief Operating Officer of the Company. There can be no assurance that the
Company will be able to sell securities and may have to rely on its ability to
borrow funds from new and or existing investors.
Note 2 - Summary of Significant Accounting Policies
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
Cash Equivalents: Short-term cash investments, which have a maturity of ninety
days or less when purchased, are considered cash equivalents in the consolidated
statement of cash flows.
Concentrations of Credit-Risk: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash. The Company places its cash accounts with high credit quality financial
institutions, which at times may be in excess of the FDIC insurance limit.
Property and Equipment: The cost of property and equipment is depreciated over
the estimated useful lives of the related assets of 3 to 5 years. The cost of
computer software programs are amortized over their estimated useful lives of
five years. Depreciation is computed on the straight-line method. Repairs and
maintenance expenditures that do not extend original asset lives are charged to
expense as incurred.
Note 2 - Summary of Significant Accounting Policies - (Continued)
Income Taxes: The Company, in accordance with SFAS 109, "Accounting for Income
Taxes", recognizes (a) the amount of taxes payable or refundable for the current
year and, (b) deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an enterprise's financial
statement or tax returns. Comprehensive income (loss)
F-9
Comprehensive income (loss): Refers to revenue, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income as these amounts are recorded directly
as an adjustment to stockholders' equity. At December 31, 2004, 2003 and 2002
there were no such adjustments required.
Pro Forma Effect of Stock Options: Financial Accounting Standards Board
Interpretation No. 44 is an interpretation of APB Opinion No. 25 and SFAS No.
123 which requires that effective July 1, 2000, all options issued to
non-employees after January 12, 2000 be accounted for under the rules of SFAS
No. 123. Assuming the fair market value of the stock at the date of grant to be
$.03 in February 2003, $.05 in May, June and July 2003, $.18 in September 2003,
$.15 in January 2004, $.14 in March 2004, $.11 in May 2004 and $.10 in September
and November 2004, 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 between 3% and 10%, the Company would have recorded
compensation expense of $218,597, $205,760 and $43,593, respectively, for the
years ended December 31, 2004, 2003 and 2002 as calculated by the Black-Scholes
option pricing model. The weighted average fair value per option of options
granted during 2004 and 2003 was $0.11 and $0.06, respectively. There were no
employee stock options granted in 2002.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
As such, proforma net loss and net loss per share would be as follows:
2004 2003 2002
----------- ----------- -----------
Net loss as reported $(1,748,372) $(1,067,987) $(1,159,838)
Additional compensation (218,597) (205,760) (43,593)
Adjusted net loss $(1,966,969) $(1,273,747) $(1,203,431)
=========== =========== ===========
Net loss per share as reported $ (.05) $ (.05) $ (0.05)
=========== =========== ===========
Adjusted net loss per share $ (.06) $ (.05) $ (0.05)
=========== =========== ===========
F-10
Note 2 - Summary of Significant Accounting Policies - (Continued)
Recently Issued Accounting Pronouncements - In December 2003, the FASB issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as revised. A Variable Interest
Entity ("VIE") is an entity with insufficient equity investment or in which the
equity investors lack some of the characteristics of a controlling financial
interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the
expected losses of the VIE must consolidate the VIE. The full adoption of FIN 46
in fiscal 2004 did not have a material effect on the Company's financial
position and results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("SFAS
No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair
value were required. The provisions of this statement are effective for small
business filers the first interim reporting period that begins after June 15,
2005.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29,
which differed from the International Accounting Standards Board's ("IASB")
method of accounting for exchanges of similar productive assets. Statement No.
153 replaces the exception from fair value measurement in APB No. 29, with a
general exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The statement is to be applied
prospectively and is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company does not believe that
SFAS No. 153 will have a material impact on its results of operations or cash
flows.
Earnings Per Share: Basic earnings per share is based on the weighted effect of
all common shares issued and outstanding, and is calculated by dividing net
income available to common stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share, which is calculated
by dividing net income available to common stockholders by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of all
potentially dilutive securities outstanding, is not presented as it is
anti-dilutive in all periods presented.
Advertising Policy: All expenditures for advertising is charged against
operations as incurred.
Revenue Recognition: Stamford's reinsurance premiums are recognized on a pro
rata basis over the policy term. The deferred policy acquisition costs are the
net cost of acquiring new and renewal insurance contracts. These costs are
charged to expense in proportion to net premium revenue recognized. The
provisions for losses and loss-adjustment expenses include an amount determined
from loss reports on individual cases and an amount based on past experience for
losses incurred but not reported. Such liabilities are necessarily based on
estimates, and while management believes that the amount is adequate, the
ultimate liability may be in excess of or less than the amounts provided. The
methods for making such estimates and for establishing the resulting liability
are continually reviewed, and any adjustments are reflected in earnings
currently.
The Company had sold via the Internet through partnerships and directly to
consumers, extended warranty service contracts for seven major consumer
products. The Company recognizes revenue ratably over the length of the
contract. The Company purchased insurance to fully cover any losses under the
service contracts from a domestic carrier. The insurance premium and other costs
related to the sale are amortized over the life of the contract.
Purchase of Royalty Interests: 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.
Note 3 - Notes Receivable
F-11
In January 2002, the Company advanced to StrandTek a loan of $1 million on an
unsecured basis, which was 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 (as discussed in Note 1)
in June 2002. StrandTek failed to pay the notes on the due date and the Company
commenced legal proceedings against StrandTek and the guarantors to recover the
principal, accrued interest and costs of recovery. The Company ceased accruing
interest on July 31, 2002. Subsequent to July 31, 2002, the notes accrue
interest at the default rate of 12% per annum. The Company provided an allowance
for the $250,000 unsecured loan and interest of $8,103 at December 31, 2002. On
July 24, 2003 the Company entered into a Forbearance Agreement with personal
guarantors Veltmen and Buckles pursuant to which they made payments totaling
$590,640, including interest of $90,640. A similar Forbearance Agreement was
reached with personal guarantor Arnett as of July 28, 2003 pursuant to which he
paid $287,673, including interest of $37,673. A Settlement Agreement was reached
with personal guarantor Bauman as of December 23, 2003 pursuant to which he paid
$100,000 in full settlement of the judgment against him in the amount of
$291,406. The payment was received on December 30, 2003 as stated in the
agreement. These payments, totaling approximately $987,000 were paid as full
satisfaction for the outstanding amounts owed to the Company. Accordingly, the
Company recorded a realized loss on these notes of $150,000 in 2003.
Note 4 - Accrued Liabilities
Accrued liabilities are as follows:
December 31,
--------------------------
2004 2003
---------- ----------
Professional fees $ 31,760 $ 49,009
Interest on notes payable 11,530 27,835
Salaries and related taxes 45,368 --
Other 225 15,271
---------- ----------
$ 88,883 $ 92,115
========== ==========
Note 5 - 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 year ended December 31, 2004, 1,875,000
options granted pursuant to the default penalty were exercised resulting in net
proceeds of $9,375. Interest expense on these notes approximated $127,000 and
$166,000 for the years ended December 31, 2004 and 2003 respectively. See Note
7.
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. In November 2003, the Company
repaid all $50,000 of such promissory notes together with all accrued interest
of $6,854.
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
F-12
Note 5 - Notes Payable - (Continued)
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 the full $250,000 through the sale of such promissory notes,
resulting in net proceeds to the Company of $225,000, net of offering costs. The
notes contain a default provision which raises the interest rate to 20% if the
notes are not paid when due. The Company issued $250,000 of these notes. As of
December 31, 2004, $170,000 remain outstanding and although no longer in
default, due to an extension of the due date to April 1, 2005, the notes bear
interest at 20%.
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 would 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 of principal outstanding for each 30 day
period or part thereof. As of December 31, 2004, $25,000 of these notes remains
unpaid, the interest rate has been reduced to 8% and the due date has been
extended to April 1, 2005. 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. As of December 31, 2004, $25,000 has been
repaid and 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 December 31, 2004,
$25,000 of these notes remains unpaid. All interest payments have been paid
timely. In December 2004, the Company sold four notes to four accredited
investors totaling $100,000 with interest rates that range from 8% to 20%. As of
December 31, 2004, these notes remain unpaid. All interest payments have been
made timely.
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 year ended December 31, 2004 the amortization of debt
discount approximated $12,000. All interest is paid monthly in arrears. As of
December 31, 2004 this note remains unpaid. All interest payments have been paid
timely.
A summary of notes payable and convertible debentures is as follows:
January 1, Less: Debt
2004 Proceeds Repayments Discounts December 31, 2004
---------- -------- ---------- --------- -----------------
September 2002 Notes $125,000 $ -- $(125,000) $ -- $ --
March 2003 Notes 250,000 (80,000) -- 170,000
Consultant Note 25,000 50,000 -- 75,000
2004 Notes 510,000 (280,000) -- 230,000
Related Party Note -- 100,000 -- (5,882) 94,118
-------- --------- --------- --------- --------
Total $400,000 $ 660,000 $(485,000) $ (5,882) $569,118
======== ========= ========= ========= ========
Note 6 - Series A Mandatorily Redeemable Convertible Preferred Stock
In connection with the settlement of securities class action litigation in 1994,
the Company issued 1,000,000 shares of Series A $0.07 Convertible Preferred
Stock (the "Series A Preferred Stock") with an aggregate value of $1,000,000.
The following summarizes the terms of Series A Preferred Stock as more fully set
forth in the Certificate of Designation. The Series A Preferred Stock has a
liquidation value of $1 per share, is non-voting and convertible into common
stock of the Company at a price of $5.20 per share. Holders of Series A
Preferred Stock are entitled to receive cumulative cash dividends of $0.07 per
share, per year, payable semi-annually.
F-13
The Note 6 - Series A Mandatorily Redeemable Convertible Preferred Stock -
(Continued)
Series A Preferred Stock is callable by the Company at a price of $1.05 per
share, plus accrued and unpaid dividends. In addition, if the closing price of
the Company's common stock exceeds $13.80 per share for a period of 20
consecutive trade days, the Series A Preferred Stock is callable by the Company
at a price equal to $0.01 per share, plus accrued and unpaid dividends.
The Certificate of Designation for the Series A Preferred Stock also states that
at any time after December 1, 1999 the holders of the Series A Preferred Stocks
may require the Company to redeem their shares of Series A Preferred Stock (if
there are funds with which the Company may do so) at a price of $1.00 per share.
Notwithstanding any of 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.
At December 31, 2004, 2003 and 2002, 681,174 shares of Series A Preferred Stock
were outstanding, and accrued dividends on these outstanding shares were
$480,880, $433,196, and $385,512 respectively.
On January 29, 2002, notice was given that, pursuant to the Company's Restated
Certificate of Incorporation, as amended, the Company called for redemption on
the date of closing the StrandTek Transaction, all shares of Series A Preferred
Stock outstanding on that date at a redemption price of $1.05, plus accrued and
unpaid dividends of approximately $0.47 per share. The redemption, among other
financial, legal and business conditions, was a condition of closing the
StrandTek Transaction. Similarly, the redemption was subject to closing the
StrandTek Transaction. Upon termination of the StrandTek Transaction, the
Company rescinded the notice of redemption.
Note 7 - Stockholders' Equity
(a) Series B Convertible Redeemable Preferred Stock:
The total authorized shares of Series B Convertible Redeemable Preferred
Stock is 825,000. The following summarizes the terms of the Series B Stock
whose terms are more fully set forth in the Certificate of Designation.
The Series B Stock carries a zero coupon and each share of the Series B
Stock is convertible into ten shares of the Company's common stock. The
holder of a share of the Series B Stock is entitled to ten times any
dividends paid on the common stock and such stock has ten votes per share
and votes as one class with the common stock.
The holder of any share of Series B Convertible Redeemable Preferred Stock
has the right, at such holder's option (but not if such share is called
for redemption), exercisable after September 30, 2000, to convert such
share into ten (10) fully paid and non-assessable shares of common stock
(the "Conversion Rate"). The Conversion Rate is subject to adjustment as
stipulated in the Agreement. Upon liquidation, the Series B Stock would be
junior to the Company's Series A Preferred Stock and would share ratably
with the common stock with respect to liquidating distributions.
During the year ended December 31, 2000, holders of 805,000 shares of the
Series B Preferred Stock converted their shares into 8,050,000 shares of
the Company's common stock. During the year ended December 31, 2002, the
holders of 10,000 shares of the Series B Preferred Stock converted their
shares into 100,000 shares of the Company's common stock.
At December 31, 2004 and 2003, 10,000 Series B Preferred Shares were
issued and outstanding. The Company's right to repurchase or redeem shares
of Series B Stock was eliminated in fiscal 1999 pursuant to the terms of
the Agreement and the Certificate of Designation.
(b) Common Stock:
At the 2003 annual meeting, the stockholders approved an amendment
increasing the authorized common stock to 250 million shares from 75
million shares.
F-14
(b) Common Stock: - (Continued)
In 2002, the Company issued 8,000 shares of its common stock whose fair
value was $1,121 and in 2003 2,750 shares of its common stock whose fair
value was $303 to its board members for director's fees.
In 2003, the Company issued 1,000,000 shares of its common stock,
resulting in net proceeds to the Company of $5,000 and 1,875,000 shares of
its common stock in 2004, resulting in net proceeds to the Company of
$9,375 as a result of the exercise of stock options granted pursuant to
the default provisions of the 60 day promissory notes discussed in Note 5.
On February 6, 2003, the Company entered into a deferment agreement with
three major creditors pursuant to which liabilities of approximately
$523,887 in the aggregate, were deferred, subject to the success of the
Company's debt and equity financing efforts. In addition, 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. The deferred
creditors were paid in full, during 2003 from the recoveries against the
StrandTek (see Note 3) personal guarantors.
On September 22, 2003 the Company commenced an equity private placement to
raise up to $4 million through the sale of up to 40 million shares of its
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, were eligible to
purchase these shares. The placement closed on December 31, 2003 upon the
sale of 2,825,000 shares, resulting in proceeds to the Company of
$214,781, net of offering costs of $67,719. The Company retained Robert M.
Cohen & Company as placement agent, on a best efforts basis, for the
offering. The Company agreed to pay the placement agent an amount equal to
10% of the proceeds of the offering as commissions for the placement
agents' services in addition to reimbursement of the placement agents'
expenses (by way of a 3% non-accountable expense allowance) and
indemnification against customary liabilities.
In January 2004, the Company amended its equity private placement. During
the year ended December 31, 2004, the Company sold 12,132,913 common
shares resulting in net proceeds to the Company of $1,105,000. Of these
shares, 7,282,913 were purchased by Robert Aholt, Jr., Chief Operating
Officer of the Company in exchange for $650,000. 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.
In March 2004, the Company issued 30,000 shares of its common stock whose
fair value was $4,200 to two note holders as additional interest.
In each of the months of August through December 2004, the Company issued
37,500 shares for a total of 187,500 shares of its common stock to its
investor relations firms for services. The fair value of these shares was
$14,250 which was charged to operations.
In December 2004, the Company issued 477,679 shares of its common stock to
its Chief Operating Officer as compensation as stated in his employment
contract. The fair value of these shares was $26,750 which was charged to
operations.
(c) 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.
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 $.12 per share to its retained placement
agent, Robert M. Cohen & Company. The warrant contains "piggyback
registration rights. The fair value of these warrants was $13,500 at
December 31, 2003.
F-15
In each of the months of August through December 2004, the Company issued
25,000 warrants for a total of 125,000 warrants which entitles the holder
to purchase one share of common stock at a price of
(c) Warrants: - (Continued)
$.05. These warrants expire in three years from date of issue and were
issued the Company's investor relations firm. The fair value of these
warrants was $3,250.
A total of 407,500 shares of common stock are reserved for issuance upon
exercise of outstanding warrants as of December 31, 2004 at prices ranging
from $.05 to $.12 and expiring through December 2008. No warrants were
exercised during any of the periods presented.
(d) Stock Option Plans:
(i) The 1998 Employee Incentive Stock Option Plan provides for the
granting of options to purchase shares of the Company's common stock to
employees. Under the 1998 Plan, the maximum aggregate number of shares
that may be issued under options is 300,000 shares of common stock. The
aggregate fair market value (determined at the time the option is granted)
of the shares for which incentive stock options are exercisable for the
first time under the terms of the 1998 Plan by any eligible employee
during any calendar year cannot exceed $100,000. Options are exercisable
at the fair market value of the common stock on the date of grant and have
five-year terms. The exercise price of each option is 100% of the fair
market value of the underlying stock on the date the options are granted
and are exercisable for a period of ten years, except that no option will
be granted to any employee who, at the time the option is granted, owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary unless (a) at the time
the options are granted, the option exercise price is at least 110% of the
fair market value of the shares of common stock subject to the options and
(b) the option by its terms is not exercisable after the expiration of
five years from the date such option is granted. The Board of Directors'
Compensation Committee administers the 1998 Plan. The 1998 Employee
Incentive Stock Option Plan was superceded by the 2003 Equity
Participation Plan in February 2003. (see below).
(ii) In April 1992, the Company adopted the 1992 Stock Option Plan to
provide for the granting of options to directors. According to the terms
of this plan, each director is granted options to purchase 1,500 shares
each year. The maximum amount of the Company's common stock that may be
granted under this plan is 20,000 shares. The plan expired by its own
terms in 2002.
Stock option activity under the 1992 and 1998 Stock Option Plans is as
follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Balances at December 31, 2000 403,000 $ 1.45
Granted 75,000 0.37
Expired (1,500) 0.31
Cancelled (175,000) 1.23
-------- --------
Balances at December 31, 2001 301,500 1.30
Granted -- --
Expired (1,500) 0.41
Cancelled (300,000) 1.31
-------- --------
Balances at December 31, 2004, 2003 and 2002 -- $ --
======== ========
F-16
(e) Stock Option Plans:- (Continued)
Under the 1998 and 1992 plans outstanding options expire 90 days after
termination of the holder's status as employee or director. 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.
(iii) At the 2003 annual meeting, the stockholders approved the 2003
Equity Participation 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. Pursuant to such plan the Company entered into a Stock Option
Agreement with Mr. Weinreb (the "Initial Option Agreement"). Under the
Initial Option Agreement, the Company granted Mr. Weinreb the right and
option, exercisable for 10 years, to purchase up to 2,500,000 shares of
the Company's common stock at an exercise price of $0.03 per share.
Additionally, in the event that the closing price of the Company's common
stock equals or exceeds $0.50 per share for any five consecutive trading
days during the term of the employment agreement (whether during the
initial term or an annual extension), the Company has agreed to grant Mr.
Weinreb, on the day immediately following the end of the five day period,
an option to purchase an additional 2,500,000 shares of the Company's
common stock at an exercise price of $0.50 per share, pursuant to the 2003
Equity Participation Plan.
Mr. Weinreb has agreed that he will not sell any shares of the Company's
common stock obtained upon exercise of the Initial Option Agreement or
Additional Option Agreement prior to the first anniversary of the date of
the employment agreement.
Additionally, the Company has granted options to purchase 2,675,000 shares
in 2004 and 1,200,000 shares in 2003 of Common Stock at exercise prices
ranging from $.05 to $.18 to members of its board of directors, employees,
consultants and its advisory board. All options were granted at an
exercise price equal to the fair value of the common stock at the date of
grant.
Stock option activity under the 2003 Equity Participation Plan is as
follows:
Range of
Exercise Weighted Average
Number of Shares (1) Price Exercise Price
Balance at December 31, 2002 -- -- --
Granted 3,700,000 $.03 - $.18 $.05
Exercised -- -- ---
Expired -- -- --
Cancelled -- -- --
--------------------- -------------- -------------------
Balance at December 31, 2003 3,700,000 $.03 - $.18 $.05
Granted 2,975,000 $.10 - $.15 $.13
Exercised --
Expired --
Cancelled --
--------------------- -------------- -------------------
Balance at December 31, 2004 6,675,000 $.03 - $.18 $ 08
===================== ============== ===================
(1) All options are exercisable for a period of ten years.
F-17
Options exercisable at December 31, 2003 - 3,700,000 at a weighted
average exercise price of $.05 Options exercisable at December 31,
2004 - 5,675,000 at a weighted average exercise price of $.07
Stock Option Plans:- (Continued)
Number Outstanding Weighted Average Remaining Number Exercisable
Exercise Price December 31, 2004 Contractual Life (years) December 31, 2004
-------------- ----------------- ------------------------ -----------------
$.03 2,500,000 8.10 2,500,000
$.05 900,000 8.44 900,000
$.10 1,375,000 9.72 1,375,000
$.11 200,000 9.40 -
$.14 300,000 9.17 300,000
$.15 1,100,000 9.05 300,000
$.18 300,000 8.70 300,000
---------
6,675,000 5,675,000
========= =========
Note 8 - Income Taxes
Deferred tax assets consisted of the following as of December 31:
2004 2003
----------- -----------
Net operating loss carryforwards $ 3,247,000 $ 2,566,000
Depreciation and amortization 1,000 1,000
Capital loss carryforward 149,000 149,000
Deferred revenue 21,000 38,000
Deferred legal and other fees 51,000 30,000
Allowance for notes receivable -- --
----------- -----------
Net deferred tax assets 3,469,000 2,784,000
Deferred tax asset valuation allowance (3,469,000) (2,784,000)
----------- -----------
$ -- $ --
=========== ===========
The provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the difference for each year
summarized below:
2004 2003 2002
---- ---- ----
Federal tax benefit at statutory rate (34.0%) (34.0%) (34.0%)
Change in valuation allowance 34.0% 34.0% 33.0%
Permanent difference -- -- 1.0%
----- ----- -----
Provision for income taxes 0.00% 0.00% 0.00%
===== ===== =====
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
utilization of net operating loss carryforwards to offset future taxable income
following a corporate ownership change. The Company's ability to utilize its NOL
carryforwards is limited following a change in ownership in excess of fifty
percentage points
F-18
during any three-year period.
Upon receipt of the proceeds from the last foreign purchasers of the Company's
common stock in January 2000, common stock ownership changed in excess of 50%
during the three-year period then ended. At December 31, 2004, the Company had
net operating loss carryforwards of approximately $9,725,727. Included in the
net operating loss carryforward is approximately $2,121,000 that has been
limited by the ownership change. The tax loss carryforwards expire at various
dates through 2024. The future tax benefit of the net operating loss
carryforwards aggregating approximately $3,154,000 at December 31, 2004 has been
fully reserved as it is not more likely than not that the Company will be able
to use the operating loss in the future.
Note 9 - Segment Information
Until April 30, 2001, the Company operated in two segments; as a reinsuror and
as a seller of extended warranty service contracts through the Internet. The
reinsurance segment has been discontinued with the sale of Stamford (see Note
1), and the Company's remaining revenues are derived from the run-off of its
sale of extended warranties and service contracts via the Internet.
Additionally, the Company is currently establishing a new business in the
medical, bio-tech sector. The Company's operations are conducted entirely in the
U.S. Although the Company has not realized any revenue from its purchase of
royalty revenue interests, the Company will be operating in two segments until
the "run-off" is completed.
Note 10 - Related Party Transactions
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 of $84,000 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
F-19
Note 10 - Related Party Transactions - (Continued)
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.
Note 11 - Commitments and Contingencies
On February 21, 2003 the Company began leasing office space in Melville, New
York at an original annual rental of $18,000. The lease has been extended for an
additional twelve months and expires on March 31, 2005. The annual rental
increased to approximately $19,200 on April 1, 2004 and continues until the
expiration date. The lease has been renewed until March 2006 with an annual
rental of approximately $20,100. Rent expense approximated $24,900, $13,000 and
$33,500 for the years ended December 31, 2004, 2003 and 2002, respectively.
On February 6, 2003, the Company entered into an employment agreement with the
President and CEO. The employment agreement has an initial term of three years,
with automatic annual extensions unless terminated by the Company or by the
President at least 90 days prior to an applicable anniversary date. The Company
has agreed to pay the President an annual salary of $180,000 for the initial
year of the term, $198,000 for the second year of the term, and $217,800 for the
third year of the term. In addition, the Company will pay an annual bonus in the
amount of $20,000 for the initial year in the event, and concurrently on the
date, that the Company has received debt and/or equity financing in the
aggregate amount of at least $1,000,000 since the beginning of the President's
service, and $20,000 for each subsequent year of the term, without condition.
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
December 31, 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. 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 year ended December
31, 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 year ended December
31, 2004, the Company paid $85,324 of such expenses.
F-20
Note 12 - Subsequent Events
In January 2005, the Company sold a 6 month 20% note in the amount of $25,000 to
an accredited investor to fund current operations.
In February 2005, the Company sold a 6 month 20% note in the amount of $10,000
to an accredited investor to fund future operations.
Note 12 - Subsequent Events - (Continued)
In February and March 2005, the Company borrowed a total of $17,000 from its
President to fund current operations. This note bears interest at 8% and will be
repaid when the Company has sufficient cash.
In February 2005, the Company issued options to purchase 200,000 shares of its
common stock to Jeff Trugman upon becoming an Advisory Board member. These
options have an exercise price of $.07 and vest 50% after one year and the
balance at the end of two years. The options have a life of ten years.
In January and February 2005, the Company issued 37,500 shares of its common
stock for a total of 75,000 shares of its common stock to its investor relations
firms for services. In addition, the Company issued 25,000 warrants which
entitles the holder to purchase one share of common stock at a price of $.05.
These warrants expire in three years from date of issue and were issued to the
Company's investor relations firm.
In March 2005, the Company issued 1,960,784 shares of its common stock to Robert
Aholt, Jr. as per the terms of his convertible note. The note in the amount of
$100,000 is deemed paid and has been recorded as equity. All related interest
payments have been made.
In March 2005, the Company sold a one year 15% note to an accredited investor in
the amount of $20,000 to fund current operations.
F-21
EXHIBIT 10.3
Employment Agreement Robert Aholt, Jr.
Exhibit 10.3
PHASE III MEDICAL, INC.
330 South Service Road
Suite 120
Melville, New York 11747
631 574.4955
September 13, 2004
Mr. Robert Aholt, Jr.
20128 Cavern Court
Saugus, California 91390
Dear Mr. Aholt:
We are pleased to extend to you an invitation to become the Chief
Operating Officer ("COO") of Phase III Medical, Inc. (the "Company").
As you know, the Company is a public company that, among other things,
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. As COO, you 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 its business.
This Letter Agreement shall be effective as of September 13, 2004 (the
"Commencement Date") and shall continue for a period of three (3) years from the
Commencement Date (the "Term"). For all services rendered by you in any capacity
required hereunder during the Term, you shall be entitled to 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, payable within normal
payroll practices of the Company, provided that all conditions to payment
specified herein have been met.
In further consideration for your services hereunder, on January 1, 2005
and on the first day of each calendar quarter thereafter during the Term, the
Company shall grant you a number of shares of common stock, $0.001 par value per
share, of the Company ("Common Stock"), with a "Dollar Value" of $26,750.00,
$27,625.00 and $28,887.50, 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 shall be the average closing price of one share of
Common Stock on the National Association of Securities Dealers, Inc.
Over-the-Counter
Bulletin Board (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 quoted on the Bulletin Board or
otherwise listed or quoted on an exchange or association, the Price shall 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 shall 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.
At the end of each year, the parties will discuss variations in the cash
and stock proportions of your compensation. In the absence of an alternative
mutual agreement, the foregoing shall apply.
Your employment with the Company shall automatically terminate upon your
death or Disability (as defined below). The Company may terminate your
employment prior to the end of the Term with or without Cause (as defined below)
immediately upon written notice to you. You may terminate your employment upon
thirty (30) days' prior written notice to the Company. For purposes of this
Letter Agreement, the terms set forth below shall have the meanings ascribed to
them below:
"Cause" shall mean (i) willful malfeasance or willful misconduct by you in
connection with your employment; (ii) your gross negligence in performing
any of your duties under this Letter Agreement; (iii) your conviction of,
or entry of a plea of guilty to, or entry of a plea of nolo contendre with
respect to, any crime other than a traffic violation or infraction which
is a misdemeanor; (iv) your material breach of any written policy
applicable to all employees adopted by the Company that is not cured to
the reasonable satisfaction of the Company within fifteen (15) business
days after notice thereof; or (v) material breach by you of any of your
agreements in this Letter Agreement which is not cured to the reasonable
satisfaction of the Company within fifteen (15) business days after notice
thereof.
"Disability" shall mean your inability to perform an essential function of
your duties and responsibilities to the Company by reason of a physical or
mental disability or infirmity, which inability has continued for a period
of more than six (6) consecutive months, or for a period aggregating more
than six (6) months, whether or not continuous, during any nine (9) month
period. The existence of a Disability shall be determined by the Company
in its absolute discretion.
"Good Reason" shall mean (i) the Company's reassignment of your base of
operations outside of Los Angeles, California without your consent, (ii)
the material reduction by the Company of your duties during the Term,
(iii) the Company's material breach of the Company's obligations under
this Letter Agreement, or (iv) the Company not retaining you as COO.
In the event your employment is terminated prior to the end of the Term
due to your death or Disability, by the Company with or without Cause or upon
your resignation from your position as COO for Good Reason, earned but unpaid
cash compensation and
unreimbursed expenses due as of the date of such termination (the "Employment
Termination Date") shall be payable in full. In addition, in the event your
employment is terminated prior to the end of the Term for any of the reasons
identified in the preceding sentence other than by the Company with Cause, you
or your executor of your last will or the duly authorized administrator of your
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 you are
then currently receiving and (ii) to receive, during the one (1) year period
following the Employment Termination (the "Severance Period"), the stock grants
that you would have been entitled to receive had your 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 your resignation for
Good Reason, such severance payment and grant shall be subject to your execution
and delivery to the Company of a release of all claims against the Company. No
other payments shall be made, nor benefits provided, by the Company in
connection with the termination of employment prior to the end of the Term,
except as otherwise required by law.
The Company shall pay or reimburse you for all reasonable travel or other
expenses (including, without limitation, digital subscriber line (DSL), car (at
$750 per month), cell phone and insurance expenses) incurred by you in
connection with the performance of your duties and obligations under this Letter
Agreement, subject to your presentation of appropriate vouchers in accordance
with such procedures as the Company may from time to time establish (including
any procedures established to preserve any deductions for Federal income
taxation purposes to which the Company may be entitled). I will also pay the
executive search firm that you engaged up to $5,000 of the amounts that you owe
to such firm.
All payments provided for under this Letter Agreement shall be paid in
cash from the general funds of the Company. The Company shall not be required to
establish a special or separate fund or other segregation of assets to assure
such payments, and, if the Company shall make any investments to aid it in
meeting its obligations hereunder, you shall have no right, title or interest
whatever in or to any such investments except as may otherwise be expressly
provided in a separate written instrument relating to such investments.
You acknowledge that, as COO, you will have access to the Company's
confidential information and that all confidential information shall be and
remain the sole property of the Company and that you will not at any time, now
or in the future, disclose, disseminate or otherwise make public any of the
confidential information without the express written permission of the Company.
You acknowledge and agree that your services pursuant to this Letter
Agreement are unique and extraordinary; that the Company will be dependent upon
you for development, financial, marketing and other expertise; and that you will
have access to and control of confidential information of the Company. You
further acknowledge that the business of the Company is international in scope
and cannot be confined to any particular geographic area. You further
acknowledge that the scope and duration of the restrictions set forth in this
paragraph are reasonable in light of the specific nature and duration of the
transactions contemplated by this Letter Agreement. For the foregoing reasons
and to induce the Company to enter this Letter Agreement, you covenant and agree
that during the Term and
the period beginning at the end of the Term and ending one (1) year after the
end of the Term, you shall not unless with written consent of the Company:
(i) engage in any business directly related to the business of
providing capital and guidance to companies, within the
medical pharmaceutical and biotechnology sector, or in any
other business conducted by the Company during the Term
(collectively, the "Prohibited Activity") in the world for
your own account;
(ii) become interested in any individual, corporation, partnership
or other business entity (a "Person") engaged in any
Prohibited Activity in the world, directly or indirectly, as
an individual, partner, shareholder, officer, director,
principal, agent, employee, trustee, consultant or in any
other relationship or capacity; provided, however, that you
may own directly or indirectly, solely as an investment,
securities of any Person which are traded on any national
securities exchange if you (x) are not a controlling person
of, or a member of a group which controls, such person or (y)
do not, directly or indirectly, own 5% or more of any class of
securities of such person; or
(iii) directly or indirectly hire, employ or retain any person who
at any time during the last twelve (12) months of the Term was
an employee of the Company or directly or indirectly solicit,
entice, induce or encourage any such person to become employed
by any other person.
You hereby acknowledge that the covenants and agreements
contained in the immediately preceding paragraph are
reasonable and valid in all respects and that the Company is
entering into this Letter Agreement on such acknowledgment. If
you breach, or threaten to commit a breach, of any of the
restrictive covenants set forth in this Letter Agreement (the
"Restrictive Covenants"), the Company shall have the following
rights and remedies, each of which rights and remedies shall
be independent of the other and severally enforceable, and all
of which rights and remedies shall be in addition to, and not
in lieu of, any other rights and remedies available to the
Company under law or in equity: (i) the right and remedy to
have the Restrictive Covenants specifically enforced by any
court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that money damages will
not provide an adequate remedy to the Company; and (ii) the
right and remedy to require you to account for and pay over to
the Company such damages as are recoverable at law as the
result of any transactions constituting a breach of any of the
Restrictive Covenants.
You hereby represent and warrant that (i) you have the legal capacity to
execute and perform this Letter Agreement, (ii) this Letter Agreement is a valid
and binding agreement enforceable against you according to its terms, (iii) the
execution and performance of this Letter Agreement does not violate the terms of
any existing agreement or understanding to which you are a party or by which you
may be bound and (iv) you have, and will, maintain during the Term, all
requisite licenses, permits and approvals necessary to perform the duties of COO
set forth herein. You also hereby agree that you shall not participate in any
medical, health, and insurance plans which may from time to time be in effect
for employees of, or
consultants to, or other agents of, the Company. You hereby acknowledge to the
Company that you desire to, and are capable of, securing such benefits
independent of your relationship with the Company.
This Letter Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of New York, without reference to the
choice of law principles thereof. Any claim, controversy or dispute between the
parties hereto, arising out of, relating to, or in connection with this Letter
Agreement or any aspect of your services to the Company hereunder, including but
not limited to the termination of this Letter Agreement and any and all claims
in tort or contract, shall be submitted to arbitration in Melville, New York,
pursuant to the American Arbitration Association ("AAA") National Arbitration
Rules for the Resolution of Employment Disputes. This provision shall apply to
claims against the Company and/or its affiliates and their respective current or
former employees, agents, managers, officers and/or directors. Any issue about
whether a claim is covered by this Letter Agreement shall be determined by the
arbitrator. There shall be one arbitrator, who (a) shall be chosen from a panel
provided by the AAA and who shall apply the substantive law of the State of New
York, (b) may award injunctive relief or any other remedy available from a
judge, including attorney fees and costs to the prevailing party, and (c) shall
not have the power to award punitive damages. Judicial review of the
arbitrator's award shall be strictly limited to the issue of whether said award
was obtained through fraud, corruption or misconduct.
This Letter Agreement shall be binding upon, and shall inure to the
benefit of, the Company and you and its and your respective permitted
successors, assigns, heirs, beneficiaries and representatives. This Letter
Agreement is personal to you and may not be assigned by you without the prior
written consent of the Company. Any attempted assignment in violation of this
paragraph shall be null and void. This Letter Agreement shall constitute the
entire agreement among the parties with respect to the matters covered hereby
and shall supersede all previous written, oral or implied understandings among
them with respect to such matters.
We are excited about your involvement with the Company and look forward to
a long and mutually rewarding scientific and business relationship.
For our records, I would appreciate your countersigning the attached copy
of this Letter Agreement and returning the same to me at your earliest
convenience.
Sincerely,
PHASE III MEDICAL, INC.
By:
-----------------------------
Mark Weinreb, President & CEO
Accepted and agreed to:
- -----------------------------
Robert Aholt
EXHIBIT 10.4
Aholt Stock Purchase Agreement
Exhibit 10.4
Phase III Medical, Inc.
SUBSCRIPTION AGREEMENT
This SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of September 13,
2004, is by and between Phase III Medical, Inc., a Delaware corporation (the
"Company"), and Aholt Jr. Family Trust dated 2/17/97 (the "Investor").
WHEREAS, the Company desires to issue and sell to the Investor, and the
Investor desires to purchase from the Company, shares of common stock, $0.001
par value per share, of the Company (the "Common Stock"), upon and subject to
the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and agreements of the parties set forth in this Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
1. Purchase and Sale of the Shares.
1.1. Agreement to Sell and Purchase Shares. Subject to the terms and
conditions hereof, the Company agrees to issue and sell to the Investor and the
Investor agrees to purchase from the Company, at the Closing (as defined below),
an aggregate of 7,282,913(1) shares of Common Stock (the "Shares"), for an
aggregate purchase price of $650,000 (the "Purchase Price"), payable in
immediately available funds at the Closing.
1.2. Delivery of Shares; Legend.
(a) As soon as reasonably practicable after the Closing, the
Company shall deliver to the Investor one or more certificates, registered in
the name of the Investor, representing the Shares. Delivery of certificates
representing the Shares shall be made against receipt by the Company of a check
payable to the order of the Company or a wire transfer of U.S. funds to an
account designated by the Company in the full amount of the Purchase Price.
- ----------
(1) The aggregate number of shares shall be equal to the quotient of $650,000
divided by the Per Share Purchase Price. The Per Share Purchase Price shall be
equal to 85% of the average of the closing price of one share of Common Stock on
the NASD Over-The-Counter Bulletin Board for the five (5) days immediately
preceding the date of this Agreement. Notwithstanding the foregoing, the Per
Share Purchase Price shall not be more than $0.10 per share nor less than $0.085
per share.
(b) The certificates representing the Shares delivered
pursuant to Section 1.2(a), and any securities issued in exchange for or in
respect thereof, shall bear a legend to the following effect.
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH STATE SECURITIES LAWS."
1.3. Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place on the date hereof at the
offices of the Company.
1.4 Additional Purchase/Conversion of Note. The Investor has also
loaned to the Company on or about August 30, 2004 the sum of $100,000 pursuant
to a six month promissory note bearing interest at 20% per annum (the "Note").
The Investor and the Company hereby irrevocably agree that upon the Maturity of
that Note, the Company shall repay the Note in shares of its Common Stock, at a
conversion price equal to a per share purchase price equal to 85% of the average
of the closing price of one share of Common Stock on the NASD Over-the-Counter
Bulletin Board for the five (5) days immediately preceding the Maturity Date of
the Note, or, if the Company's Common Stock is not then traded on the OTC
Bulletin Board, at 85% of fair market value as determined by the Board of
Directors of the Company.
2. Representations, Warranties and Covenants of the Investor.
2.1. Authorization; Enforceability. The Investor is (i) a bona fide resident of
the state contained in the address set forth on the signature page as the
Investor's home address, (ii) at least 21 years of age and (iii) legally
competent to execute this Agreement. This Agreement has been duly executed and
delivered by the Investor and, assuming the due authorization, execution and
delivery of this Agreement by the other party hereto, constitutes the legal,
valid and binding obligation of the Investor, enforceable against the Investor
in accordance with its terms, subject to the effects of any applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
general laws of applicability affecting creditors' rights generally and to
general equitable principles.
2.2. No Conflict. The execution, delivery and performance by the Investor of
this Agreement will not result in the violation by the Investor of any law,
statute, rule, regulation, order, writ, injunction, judgment or decree of any
court or governmental authority to or by which the Investor is bound, and will
not conflict with, or result in a breach or violation of, any of the terms or
provisions of, or constitute (with due notice or lapse of time or both) a
default under, any lease, loan agreement, mortgage, security agreement, trust
indenture or other agreement or instrument to which the Investor is a party or
by which he is bound or to which any of his properties or assets is subject.
2.3. Governmental Consents. No consent, approval, authorization or other order
of any governmental authority or other third party is required to be obtained by
the Investor in connection with the authorization, execution, delivery and
performance by the Investor of this Agreement.
2.4. Investment Representations.
(a) The Investor hereby represents and warrants to the Company
that the Investor is an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). Specifically, the Investor certifies that (initial all
appropriate spaces on the following pages):
_________ (1) The Investor is an accredited investor because
(Initial) he has an individual net worth, or with his spouse
has a joint net worth, in excess of $1,000,000.
For purposes of this Agreement, "net worth" means
the excess of total assets at fair market value,
including home, home furnishings and automobiles,
over total liabilities.
_________ (2) The Investor is an accredited investor because
(Initial) he has individual income (exclusive of any income
attributable to his spouse) of more than $200,000
in each of the past two years, or joint income
with his spouse in excess of $300,000 in each of
those years, and such investor reasonably expects
to reach the same income level in the current
year.
_________ (3) The Investor is an accredited investor because
(Initial) he is a director, executive officer or managing
member of the Company.
(b) The Investor hereby certifies that he is not a
non-resident alien for purposes of income taxation (as such term is defined in
the Internal Revenue Code of 1986, as amended, and Income Tax Regulations). The
Investor hereby agrees that if any of the information in this Section 2.4(b)
changes, the Investor will notify the Company within 60 days thereof. The
Investor understands that the information contained in this Section 2.4(b) may
be disclosed to the Internal Revenue Service by the Company and that any false
statement contained in this Section 2.4(b) could be punished by fine,
imprisonment or both.
(c) The Investor will not sell or otherwise transfer the Shares without
registration under the Securities Act or an exemption therefrom, and fully
understands and agrees that he must bear the economic risk of his investment for
an indefinite period of time because, among other reasons, the Shares have not
been registered under the Securities Act or under the securities laws of certain
states and, therefore, cannot be resold, pledged, assigned or otherwise disposed
of unless they are subsequently registered under the Securities Act and under
applicable securities laws of such states or an exemption from such registration
is
available. The Investor understands that the Company is under no obligation to
register the Shares on his behalf or to assist him in complying with any
exemption from such registration under the Securities Act, except that if any
sale proposed by the Investor is exempt from registration, the Company will
cause its counsel, at the Company's expense, to provide an appropriate opinion
to that effect to the Company's transfer agent. It also understands that sales
or transfers of the Shares are further restricted by state securities laws. The
Investor further understands that the Company is not registered as an investment
company under the Investment Company Act of 1940, as amended.
(d) The Investor acknowledges that in making a decision to subscribe for
the Shares, the Investor has relied solely upon independent investigations made
by the Investor. The Investor understands the business objectives and policies
of, and the strategies which may be pursued by, the Company. The Investor's
investment in the Shares is consistent with the investment purposes and
objectives and cash flow requirements of the Investor and will not adversely
affect the Investor's overall need for diversification and liquidity. The
Investor acknowledges that he is not subscribing pursuant hereto for any Shares
as a result of or subsequent to (a) any advertisement, article, notice or other
communications published on-line, in any newspaper, magazine or similar media or
broadcast over television or radio, or (b) any seminar or meeting whose
attendees, including the Investor, had been invited as a result of, subsequent
to or pursuant to any of the foregoing.
(e) The Investor has not reproduced, duplicated or delivered this
Agreement to any other person, except professional advisors to the Investor or
as instructed by the Company.
(f) The Investor has such knowledge and experience in financial and
business matters that the Investor is capable of evaluating the merits and risks
of the Investor's investment in the Shares and is able to bear such risks, and
has obtained, in the Investor's judgment, sufficient information from the
Company or its authorized representatives to evaluate the merits and risks of
such investment. The Investor has evaluated the risks of investing in the Shares
and has determined that the Shares is a suitable investment for the Investor.
(g) The Investor can afford a complete loss of the investment in the
Shares, can afford to hold the investment in the Shares for an indefinite period
of time, and acknowledges that distributions may be paid in cash or in kind.
(h) The Investor's overall commitment to investments that are not readily
marketable is not disproportionate to his net worth, and his investment in the
Shares will not cause such overall commitment to become excessive.
(i) The Investor has adequate means of providing for his current needs and
contingencies and has no need for liquidity in its investment in the Shares.
(j) The Investor is acquiring the Shares subscribed for herein for his own
account, for investment purposes only and not with a view to distribute or
resell such Shares in whole or in part.
(k) The Investor agrees and is aware that:
(1) the Company has a limited operating history under its current business plan;
(2) no federal or state agency has passed upon the Shares or made any findings
or determination as to the fairness of this investment;
(3) there are substantial risks of loss of investment incidental to the purchase
of the Shares; and
(4) the Shares cannot be resold readily because the Shares have not been
registered by the Securities and Exchange Commission and the Shares cannot be
resold without (A) the Company's consent, which may require an effective
registration statement, or (B) an opinion of counsel that an exemption of
registration is available, and the Investor may have to bear the risk of this
investment for an indefinite period of time.
(l) The Investor and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Shares, which have been
requested by the Investor. The Investor and his advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
complete and satisfactory answers to any such inquiries. The Investor has had
access to all additional information necessary to verify the accuracy of the
information set forth in this Agreement and any other materials furnished
herewith, and has taken all the steps necessary to evaluate the merits and risks
of an investment as proposed hereunder. Except as set forth in this Agreement,
the Company has made no representation or warranty on which the Investor has
relied to enter into this Agreement and acquire the Shares.
(m) The Investor does not have a present intention to sell the Shares nor
a present arrangement or intention to effect any distribution of any of the
Shares to or through any person or entity for purposes of selling, offering,
distributing or otherwise disposing of any of the Shares.
(n) The Investor understands that the legend set forth in Section 1.2(b),
to the effect that the Shares have not been registered under the Securities Act
or applicable state securities laws, shall be placed on the certificate
evidencing the Shares and appropriate notations to such effect will be made in
the Company's stock books.
(o) The Investor understands that the net proceeds to the
Company from this subscription will be used by the Company for general operating
expenses.
2.5. Brokers. There is no broker, investment banker, financial
advisor, finder or other person which has been retained by or is authorized to
act on behalf of the Investor who is entitled to any fee or commission in
connection with the execution of this Agreement.
3. Indemnification. The Investor agrees to indemnify and hold harmless the
Company, and its managers, officers, directors, employees, agents and
shareholders, and each other person, if any, who controls or is controlled by,
within the meaning of Section 15
of the Securities Act, any thereof, against any and all loss, liability, claim,
damage, cost and expense whatsoever (including, but not limited to, legal fees
and disbursements and any and all other expenses whatsoever incurred in
investigating, preparing for or defending against any litigation, arbitration
proceeding, or other action or proceeding, commenced or threatened, or any claim
whatsoever) arising out of or in connection with, or based upon or resulting
from, (a) any false representation or warranty or breach or failure by the
Investor to comply with any covenant or agreement made by the Investor in this
Agreement or in any other document furnished by the Investor to any of the
foregoing in connection with this transaction or (b) any action for securities
law violations instituted by the Investor which is finally resolved by judgment
against the Investor.
4. Power of Attorney. The Investor, as a shareholder of the Company,
hereby appoints the Company as its true and lawful representative and
attorney-in-fact, in its name, place and stead to make, execute, sign,
acknowledge, swear to and file:
(a) any Company certificate, business certificate, fictitious name certificate,
amendment thereto, or other instrument or document of any kind necessary or
desirable to accomplish the business, purpose and objectives of the Company, or
required by any applicable federal, state, or local or foreign law; and
(b) any and all instruments, certificates and other documents which may be
deemed necessary or desirable to effect the winding-up and termination of the
Company (including, but not limited to, a notice of dissolution of the
Shareholder).
This power of attorney is coupled with an interest, is irrevocable, and shall
survive and shall not be affected by the subsequent death, disability,
incompetency, termination, bankruptcy, insolvency or dissolution of the
Investor; provided, however, that this power of attorney will terminate upon the
substitution of another shareholder of the Company for the Investor, upon the
withdrawal of the Investor from the Company or upon the redemption of all of the
Shares owned by the Investor.
5. Miscellaneous.
5.1. Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
or when mailed by certified or registered mail, return receipt requested and
postage prepaid, and addressed to the address of such party set forth below or
to such changed address as such party may have fixed by written notice to the
other given in accordance with this Section 5.1; provided, however, that any
notice of change of address shall be effective only upon receipt:
If to the Company:
Phase III Medical, Inc.
330 South Service Road, Suite 120
Melville, NY 11747
Attn: Mark Weinreb, President and CEO
If to the Investor:
the same address as indicated on the signature page hereto.
5.2. Entire Agreement; Amendment. This Agreement sets forth the
entire agreement and understanding between the parties as to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them. This Agreement may be amended
only by mutual written agreement of the Company and the Investor. No course of
dealing between or among any persons having any interest in this Agreement will
be deemed effective to modify, amend or discharge any part of this Agreement or
any rights or obligations of any person under or by reason of this Agreement.
5.3. Successors and Assigns. This Agreement shall be binding upon
the Investor and his heirs, legal representatives, successors, and permitted
assigns and shall inure to the benefit of the Company and its successors and
assigns. The Investor shall not assign any of its obligations hereunder without
the prior written consent of the Company.
5.4. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York without regard to its choice
of law provisions.
5.5. Jurisdiction. The Investor hereby irrevocably agrees that any
suit, action or proceeding with respect to this Agreement and any or all
transactions relating hereto and thereto may be brought in U.S. federal and
state courts in the State of New York. The Investor hereby irrevocably submits
to the jurisdiction of such courts with respect to any such suit, action or
proceeding and agrees and consents that service of process as provided by U.S.
federal and New York law may be made upon the Investor in any such suit, action
or proceeding brought in any of said courts, and may not claim that any such
suit, action or proceeding has been brought in an inconvenient forum. The
Investor hereby further irrevocably consents to the service of process out of
any of the aforesaid courts, in any such suit, action or proceeding, by the
mailing of copies thereof, by certified or registered mail, return receipt
requested, addressed to the Investor at the address of the Investor then
appearing on the records of the Company. Nothing contained herein shall affect
the right of the Company to commence any action, suit or proceeding or otherwise
to proceed against the Investor in any other jurisdiction or to serve process
upon the Investor in any manner permitted by any applicable law in any relevant
jurisdiction.
5.6. Additional Information and Subsequent Changes to
Representations.
(a) The Company may request from time to time such information
as it may deem necessary to determine the eligibility of the Investor to hold
Stock or to enable the Company's compliance with applicable regulatory
requirements or tax status, and the Investor shall provide such information as
may reasonably be requested.
(b) The Investor agrees to notify the Company promptly if there is any
change with respect to any of the information or representations given or made
by the Company pursuant to this Agreement and to provide the Company with such
further information as the Company may reasonably require. In addition, the
Investor agrees that at any time in the
future at which the Investor may acquire additional shares of Common Stock, the
Investor shall be deemed to have reaffirmed, as of the date of such acquisition
of additional shares of Common Stock, each and every representation made by the
Investor in this Agreement, except to the extent modified in writing by the
Investor and consented to by the Company.
5.7. Severability. In the event that any provision of this Agreement or the
application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless the provision held
invalid shall substantially impair the benefit of the remaining portion of this
Agreement.
5.8. Headings. The headings of the sections hereof are inserted as a matter of
convenience and for reference only and in no way define, limit or describe the
scope of this Agreement or the meaning of any provision hereof.
5.9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto to the same extent as if delivered personally.
[Signature Pages Follow]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above under penalties of perjury.
COMPANY:
PHASE III MEDICAL, INC.
By:
---------------------------------
Name:
Title:
INVESTOR:
- ------------------------------------
Robert Aholt, Jr. Trustee
Aholt Jr. Family Trust dated 2/17/97
Address: 20128 Cavern Court
Saugus, California 91390
Tax I.D. Number: xxx-xx-xxxx
EXHIBIT 10.5
Aholt Promissory Note
Exhibit 10.5
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THE NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MUST BE HELD
INDEFINITELY and MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT
IS SUBSEQUENTLY REGISTERED UNDER SAID ACT or, in the opinion of counsel to the
company, an exemption from registration under said act is available.
PROMISSORY NOTE
$100,000 August 30, 2004
FOR VALUE RECEIVED, Phase III Medical, Inc., a Delaware corporation, ("Maker")
promises to pay to Robert Aholt ("Payee"), in lawful money of the United States
of America, the principal sum of One Hundred Thousand Dollars ($100,000.00 ),
together with interest thereon accruing at an annual rate equal to 20%, in the
manner provided below. Interest shall be calculated on the basis of a year of
365 or 366 days, as applicable, and charged for the actual number of days
elapsed.
1. PAYMENTS
1.1 Principal and interest.
Interest on the unpaid principal amount shall be payable monthly in
arrears until the entire principal amount shall be paid in full. All
principal and accrued interest shall be paid in full on February 30,
2005 (6 months after the date of issuance of this Note).
1.2 Manner of Payment
All payments of principal and interest on this Note shall be made by
check at Robert Aholt, 20128 Cavern Court, Saugus, CA, 91390, or at
such other place in the United States of America as Payee shall
designate to Maker in writing. If any payment of principal or
interest on this Note is due on a day which is not a
Business Day, such payment shall be due on the next succeeding
Business Day. "Business Day" means any day other than a Saturday,
Sunday or legal holiday in the State of New York.
1.3 Prepayment
Maker may, without premium or penalty, at any time and from time to
time, prepay all or any portion of the outstanding principal balance
due under this Note, provided that each such prepayment is
accompanied by accrued interest on the amount of principal prepaid
calculated to the date of such prepayment.
Any partial prepayments shall be applied first to accrued interest
and then to principal.
2. DEFAULTS
2.1 Events of Default
The occurrence of any one or more of the following events with
respect to Maker shall constitute an event of default hereunder
("Event of Default"):
(a) If Maker shall fail to pay when due any payment of principal
or interest on this Note.
(b) If, pursuant to or within the meaning of the United States
Bankruptcy Code or any other federal or state law relating to
insolvency or relief of debtors (a "Bankruptcy Law"), Maker
shall (i) commence a voluntary case or proceeding; (ii)
consent to the entry of an order for relief against it in an
involuntary case; (iii) consent to the appointment of a
trustee, receiver, assignee, liquidator or similar official;
(iv) make an assignment for the benefit of its creditors; or
(v) admit in writing its inability to pay its debts as they
become due.
(c) If a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (i) is for relief against Maker
in an involuntary case; (ii) appoints of a trustee, receiver,
assignee, liquidator or similar official for the Maker or
substantially all of the Maker's properties; or (iii) orders
the liquidation of the Maker, and in each case the order is
not dismissed within 90 days.
2.2 Remedies
Upon the occurrence of an Event of Default hereunder (unless all
Events of Default have been cured or waived by Payee), Payee may, at
its option, (i) by written notice to Maker, declare the entire
unpaid principal balance of this Note, together with all accrued
interest thereon, immediately due and payable, and (ii) exercise all
and any rights and remedies available to it under applicable law,
including, without limitation, the right to collect from maker all
sums due under
this Note. Maker shall pay all reasonable costs and expenses
incurred by or on behalf of Payee in connection with Payee's
exercise of any or all of its rights and remedies under this Note,
including, without limitation, reasonable attorneys' fees and
expenses.
3. REPRESENTATIONS BY PAYEE
Payee represents and warrants to Maker as follows:
(a) Payee has received and examined all information, including financial
statements, of or concerning Maker which Payee considers necessary
to making an informed decision regarding this Note. In addition,
Payee has had the opportunity to ask questions of, and receive
answers from, the officers and agents of Maker concerning Maker and
to obtain such information, to the extent such persons possessed the
same or could acquire it without unreasonable effort or expense, as
Payee deemed necessary to verify the accuracy of the information
referred to herein.
(b) The Payee acknowledges and understands that (i) the Maker will use
the proceeds of this Note in its the establishment of new business
operations; (ii) the proceeds of this Note will not be sufficient to
provide Maker with the necessary funds to achieve its current
business plan; (iii) the Maker does not have sufficient cash
available to repay this Note; (iv) this Note will not be guaranteed
nor will it be secured by any assets of Maker nor senior to any
other indebtedness of Maker; and (v) Payee bears the economic risk
of never being repaid on this Promissory Note.
(c) The Payee hereby certifies that Payee is an "Accredited Investor"
(as that term is defined by Regulation D under the Securities Act of
1933, as amended) because at least one of the following statements
is applicable to Payee:
(i) Payee is an Accredited Investor because the Payee had
individual income of more than $200,000 in each of the
two prior calendar years and reasonably expects to have
individual income in excess of $200,000 during the
current calendar year.
(ii) The Payee is an Accredited Investor because the Payee
and his spouse together had income of more than $300,000
in each of the two prior calendar years and reasonably
expect to have joint income in excess of $300,000 during
the current calendar year.
(iii) The Payee is an Accredited Investor because the Payee
has an individual net worth, or the Payee and his spouse
have a joint net worth of more than $1,000,000.
(d) Payee is acquiring this Note for his own account, for investment
purposes only, and not with a view to the resale or distribution of
all or any part thereof.
(e) Payee acknowledges that this Note (i) has not been registered under
applicable securities laws, (ii) will be a "restricted security" as
defined in applicable securities laws, (iii) has been issued in
reliance on the statutory exemptions from registration contemplated
by applicable securities laws based (in part) on the accuracy of
Payee's representations contained herein, and (iv) will not be
transferable without registration under applicable securities laws,
unless an exemption from such registration requirements is
available.
(f) Payee has reviewed and understands Maker's (i) Annual Report on Form
10-K for the fiscal year ended December 31, 2003; (ii) Quarterly
Reports on Form10-Q for the quarters ended March 31, June 30,
September 30, 2003, and March 31, June 30, 2004; (iii) proxy
statement for its 2003 annual meeting of shareholders and (iv) all
Current Report on Form 8-K filed since the filing of its last Form
10-K.
4. MISCELLANEOUS
4.1 Waiver
The rights and remedies of Payee under this Note shall be cumulative
and not alternative. No waiver by Payee of any right or remedy under
this Note shall be effective unless it is in writing and signed by
Payee. Neither the failure nor any delay in exercising any right,
power or privilege under this Note will operate as a waiver of such
right, power or privilege and no single or partial exercise of any
such right, power or privilege by Payee will preclude any other or
further exercise of such right, power or privilege or the exercise
of any other right, power or privilege. To the maximum amount
permitted by applicable law, (i) no claim or right of Payee arising
out of this Note can be discharged by Payee, in whole or in part, by
a waiver or renunciation of the claim or right unless in a writing,
signed by Payee; (b) no waiver that may be given by Payee will be
applicable except in the specific instance for which it is given;
and (c) no notice to or demand on Maker will be deemed to be a
waiver of any obligation of Maker or of the right of Payee to take
further action without notice or demand as provided in this Note.
Maker acknowledges that this Note and Maker's obligations under this
Note are, and shall at all times continue to be, absolute and
unconditional in all respects, and shall at all times be valid and
enforceable. To the extent permitted by applicable law, Maker hereby
absolutely, unconditionally and irrevocably forever waives any and
all right to assert any defense, set-off, off-set, counterclaim,
cross-claim, or claim of any nature whatsoever with respect to this
Note or Maker's obligations hereunder.
4.2 Notices
Any notice or communication to be given hereunder by any party, to
the other party shall be in writing and shall be deemed to have been
given when personally delivered, or one day after the date sent by
recognized overnight courier or transmitted by facsimile, which
transmission by facsimile has been confirmed or 3 (three) days after
the date sent by registered or certified mail, postage prepaid, as
follows:
If to Maker, addressed to it at:
Phase III Medical, Inc.
330 South Service Road
Suite 120
Melville, NY 11747
Attn: Mark Weinreb
Facsimile Number: (631) 574 4956
If to Payee, addressed to:
Name: Robert Aholt
Address: 20128 Cavern Court
Saugus, CA 91390
Or persons or addresses as may be designated in writing by the party
to receive such notice.
4.3 Severability
If any provision of this Note is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Note will remain in full force and effect. Any provision of this
Note held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
4.4 Governing Law.
This Promissory Note will be governed by the laws of the State of
New York without regard to conflicts of laws principles.
4.5 Assignment; Parties in Interest
This Note shall bind Maker and its successors and assigns. This Note
shall not be assigned or transferred by Maker, without the express
prior written consent of Payee, and this Note will inure to the
benefit of Payee and his heirs, estates, representatives,
administrators, successors and assigns.
4.6 Section Headings, Construction
The headings of Sections in this Note are provided for convenience
only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding
Section or Sections of this Note unless otherwise specified.
All words used in this Note will be construed to be of such gender
or number as the circumstances require. Unless otherwise expressly
provided, the words "hereof" and "hereunder" and similar references
refer to this Note in its entirety and not to any specific section
or subsection hereof.
4.7 Savings Clause
If, at any time, the rate of interest under this Note shall be
deemed by any competent court of law, governmental agency or
tribunal to exceed the maximum rate of interest permitted by the
laws of any applicable jurisdiction or the rules or regulations of
any regulatory authority or agency, then during such time as such
rate of interest would be deemed excessive, that portion of each
interest payment attributable to that portion of such interest rate
that exceeds the maximum rate of interest so permitted shall be
deemed a voluntary prepayment of principal or, if all principal has
been paid, that portion of each interest payment attributable to
that portion of such interest rate that exceeds the maximum rate of
interest so permitted shall be promptly refunded to Maker.
4.8 Waiver of Jury Trial
MAKER AND PAYEE EACH HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRAIL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS NOTE, IT BEING AGREED THAT ALL
SUCH TRAILS SHALL BE CONDUCTED SOLELY BY A JUDGE. MAKER AND PAYEE
EACH CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF EITHER HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS.
MAKER AND PAYEE EACH AGREE AND ACKNOWLEDGE THAT IT HAS BEEN
REPRESENTED BY INDEPENDENT COUNSEL IN CONNECTION WITH THIS NOTE OR
BEEN ADVISED THAT IT SHOULD BE REPRESENTED BY INDEPENDENT COUNSEL IN
CONNECTION WITH THIS NOTE. IF MAKER OR PAYEE HAS DECIDED NOT TO BE
REPRESENTED BY INDEPENDENT COUNSEL IN CONNECTION WITH THIS NOTE, IT
IRREVOCABLY AND FOREVER WAIVES ANY AND ALL DEFENSES OR RIGHTS
ARISING OUT OF OR RELATED TO SAID DECISION.
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date
first stated above.
PHASE III MEDICAL, INC.
Bye :
--------------------------------
Name: Mark Weinreb
Title: President and Chief Executive Officer
Accepted and agreed to:
- -----------------------------------
Payee: Robert Aholt
EXHIBIT 10.6
Marasco Letter Agreement
Exhibit 10.6
PHASE III MEDICAL, INC.
330 South Service Road
Suite 120
Melville, New York 11747
631 574.4955
August 12, 2004
Wayne A. Marasco, M.D., Ph.D.
Department of Cancer Immunology & AIDS
Dana-Farber Cancer Institute - Harvard Medical School
44 Binney Street
Boston, MA 02115
Dear Dr. Marasco:
We are pleased to extend to you an invitation to become the Senior
Scientific Advisor ("SSA") of Phase III Medical, Inc. (the "Company").
As you know, the Company is a public company that, among other things,
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. As SSA, you 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 its business.
You will report your reviews and evaluations to the Chief Executive Officer and
President who will have direct responsibilities for Business Development
decisions. In keeping with Harvard Medical School's new policies on Conflicts of
Interest and Commitment for full-time Faculty Members (accepted May 26, 2004),
your position will not include any fiduciary or other responsibilities that are
required to operate a material segment of the operations of the business.
This Letter Agreement shall be effective as of August 12, 2004 (the
"Commencement Date") and shall continue for a period of three (3) years from the
Commencement Date (the "Term"). For all services rendered by you in any capacity
required hereunder during the Term, you shall be entitled to an annual salary of
$84,000 for the first year of the Term, $92,400 for the second year of the Term,
and $101,640 for the third year of the Term payable within normal payroll
practices of the Company, provided that all conditions to payment specified
herein have been met. In addition to the annual cash compensation stated in the
preceding sentence, you shall also be entitled to five (5%) percent of all
collected revenues ("additional cash compensation") derived from the Company's
royalty or other revenue sharing agreements, provided that the amount of annual
salary and additional cash compensation (in the form of such revenue sharing)
shall not exceed $200,000 per year during the Term. Such additional cash
compensation shall be payable quarterly within 45 days of the end of each
quarter, provided that all conditions to payment specified herein have been met.
Although the annual cash compensation and additional cash compensation
stated above shall begin to accrue as of the Commencement Date, you 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 light of such
repayment restrictions, and in further consideration for your services
hereunder, upon execution of this Letter Agreement, you will be granted an
option, fully vested, to purchase 675,000 shares of the Company's common stock
at an exercise price of ten 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. In addition,
in the event that the closing price of the Company's common stock equals or
exceeds fifty cents per share for any five consecutive trading days during the
Term, the Company shall grant you, on the day immediately following the end of
the five day period, pursuant to the 2003 Equity Participation Plan and a Stock
Option Agreement, an option for the purchase of an additional 1,000,000 shares
of common stock substantially upon the terms of the initial option and in the
form of the initial option agreement, except that the exercise price shall be
fifty cents per share. You will not be entitled to any further option grants as
a director of the Company under any existing or future plans, but you will be
entitled to participate in any future option plans established by the board for
the officers of the Company so long as you remain as SSA.
The Company shall pay or reimburse you for all reasonable travel or other
expenses incurred by you in connection with the performance of your duties and
obligations under this Letter Agreement, subject to your presentation of
appropriate vouchers in accordance with such procedures as the Company may from
time to time establish (including any procedures established to preserve any
deductions for Federal income taxation purposes to which the Company may be
entitled).
This Letter Agreement shall automatically terminate upon your death or
permanent disability. In addition, the Company may also terminate this Agreement
with or without cause immediately upon written notice to you. A termination for
cause would occur in the event that you, after written notice and an opportunity
to cure, consistently and willfully refuse to perform the services required by
you under this Letter Agreement. You may terminate this Letter Agreement upon
thirty days' prior written notice to the Company. In the event this Letter
Agreement terminates due to your death, permanent disability or upon notice from
the Company with or without cause, earned but unpaid cash and additional cash
compensation and unreimbursed expenses due as of the date of termination of this
Letter Agreement shall be payable in full. However, no other payments shall be
made, nor benefits provided, by the Company under this Letter Agreement except
as otherwise required by law. In the event that the Company decides to terminate
your employment without cause prior to the end of the three year term, you will
be entitled to receive a severance payment equal to one
year's salary, paid at the same level of salary as you are then currently
receiving and as a single payment to be paid promptly after the last day of
employment as SSA, in exchange for your execution of a release of all other
claims against the Company.
You acknowledge that, as SSA, you will have access to the Company's
confidential information and that all confidential information shall be and
remain the sole property of the Company and that you will not at any time, now
or in the future, disclose, disseminate or otherwise make public any of the
confidential information without the express written permission of the Company.
You hereby represent and warrant that (i) you have the legal capacity to
execute and perform this Letter Agreement, (ii) this Letter Agreement is a valid
and binding agreement enforceable against you according to its terms, (iii) the
execution and performance of this Letter Agreement does not violate the terms of
any existing agreement or understanding to which you are a party or by which you
may be bound and (iv) you have, and will, maintain during the Term, all
requisite licenses, permits and approvals necessary to perform the duties of SSA
set forth herein. You also hereby agree that you shall not participate in any
medical, health, and insurance plans which may from time to time be in effect
for employees of, or consultants to, or other agents of, the Company. You hereby
acknowledge to the Company that you desire to, and are capable of, securing such
benefits independent of your relationship with the Company.
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of New York, without reference to the choice of law
principles thereof. Any claim, controversy or dispute between the parties
hereto, arising out of, relating to, or in connection with this Letter Agreement
or any aspect of your services to the Company hereunder, including but not
limited to the termination of this Letter Agreement and any and all claims in
tort or contract, shall be submitted to arbitration in Melville, New York,
pursuant to the American Arbitration Association ("AAA") National Arbitration
Rules for the Resolution of Employment Disputes. This provision shall apply to
claims against the Company and/or its affiliates and their respective current or
former employees, agents, managers, officers and/or directors. Any issue about
whether a claim is covered by this Letter Agreement shall be determined by the
arbitrator. There shall be one arbitrator, who (a) shall be chosen from a panel
provided by the AAA and who shall apply the substantive law of the State of New
York, (b) may award injunctive relief or any other remedy available from a
judge, including attorney fees and costs to the prevailing party, and (c) shall
not have the power to award punitive damages. Judicial review of the
arbitrator's award shall be strictly limited to the issue of whether said award
was obtained through fraud, corruption or misconduct.
This Letter Agreement shall be binding upon, and shall inure to the
benefit of, the Company and you and its and your respective permitted
successors, assigns, heirs, beneficiaries and representatives. This Letter
Agreement is personal to you and may not be assigned by you without the prior
written consent of the Company. Any attempted assignment in violation of this
paragraph shall be null and void. This Letter Agreement shall constitute the
entire agreement among the parties with respect to the matters covered hereby
and shall supersede all previous written, oral or implied understandings among
them with respect to such matters.
The Company acknowledges the Dana-Farber Cancer Institute's standard
consulting agreement provisions. These provisions, which were attached as
Exhibit A to a Board of Director's Engagement Letter dated May 19, 2003 by the
Company, as agreed to and accepted by you, have been reviewed and approved by
the Company.
The company recognizes the constraints on your time and agrees that your
efforts on behalf of the Company, as a Director and SSA, will not require more
than four (4) hours per week, scheduled to accommodate your existing
commitments.
We are excited about your involvement with the Company and look forward to
a long and mutually rewarding scientific and business relationship.
For our records, I would appreciate your countersigning the attached copy
of this Letter Agreement and returning the same to me at your earliest
convenience.
Sincerely,
Mark Weinreb, President & CEO
Date Signed: November 18, 2004
Accepted and agreed to:
- -----------------------------
Wayne A. Marasco, M.D., Ph.D.
Date Signed: November 18, 2004
EXHIBIT 10.7
Lax Board of Directors Agreement
Exhibit 10.7
PHASE III MEDICAL, INC.
330 South Service Road
Suite 120
Melville, New York 11747
631.574.4955
March 2, 2004
Michael Lax
1303 Ridge Road
Laurel Hollow, NY 11791
Dear Mr. Lax:
We are pleased to extend to you an invitation to become a Director of the
Phase III Medical, Inc. (the "Company").
As you know, the Company is a public company that, among other items, is
entering the medical sector by acquiring or participating in one or more
biotechnology and/or medical companies or technologies, owning one or more drugs
or medical devices that may or may not yet be available to the general public
and/or acquiring rights to one or more of such drugs or medical devices or the
royalty streams therefrom.
We are requesting that you serve as a Director for an initial term until
our next annual meeting of shareholders. In consideration of your agreeing to
accept the Directorship, you will be granted an option, fully vested, to
purchase Three Hundred Thousand (300,000) shares of the Company's common stock
at an exercise price of Fourteen ($.14) 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 (10)
years and otherwise the grant will be in accordance with the Company's 2003
Equity Participation Plan and Non-Qualified Stock Option Grant Agreement.
In addition, in the event that the closing price of the Company's Common
Shares equals or exceeds One Dollar ($1.00) per share for any five (5)
consecutive trading days during your term as a Director, the Company shall grant
you, on the day immediately following the end of the five (5) day period,
pursuant to the Equity Participation Plan and a Stock Option Agreement, an
option for the purchase of an additional One Hundred Thousand (100,000) Common
Shares substantially upon the terms of the Initial Option and in the form of the
Initial Option Agreement, except that the exercise price shall be $1.00 per
share.
While a Director, you will be covered by the Company's D&O insurance
policy and, to the extent permitted by law, will also be indemnified by the
Company.
You will be responsible to attend Annual and Special Meetings of the Board
of Directors (either in person or telephonically), to attend the Annual and/or
Special Shareholder Meetings as necessary, to participate in appropriate
committees and to generally assist 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 its
business.
You acknowledge that, as member of the Board of Directors, you will have
access to the Company's Confidential Information and that all Confidential
Information shall be and remain the sole property of the Company and that you
will not at any time, now or in the future, disclose, disseminate or otherwise
make public any of the Confidential Information without the express written
permission of the Company. We will ask you to sign a confidentiality agreement
similar to that signed by our board of advisor members, attached hereto.
We are excited about your involvement with the Company and look forward to
a long and mutually rewarding scientific and business relationship.
For our records, I would appreciate your countersigning the attached copy
of this Engagement Agreement and returning the same to me at your earliest
convenience.
Sincerely,
Mark Weinreb, President & CEO
Accepted and agreed to:
- ---------------------
Michael Lax
Phase III Medical, Inc.
Confidentiality, Proprietary Information
and Inventions Agreement
I recognize that Phase III Medical, Inc., a Delaware corporation (the
"Company"), is engaged in a continuous program of 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 (the "Business"). Any
company with which the Company enters into, or seeks or considers entering into,
a business relationship in furtherance of the Business is referred to as a
"Business Partner".
I understand that as part of my performance of duties as a director of the
Company (the "Engagement"), I will have access to confidential or proprietary
information of the Company and the Business Partners, and I may make new
contributions and inventions of value to the Company. I further understand that
my Engagement creates in me a duty of trust and confidentiality to the Company
with respect to any information: (1) related, applicable or useful to the
business of the Company, including the Company's anticipated research and
development or such activities of its Business Partners; (2) resulting from
tasks performed by me for the Company; (3) resulting from the use of equipment,
supplies or facilities owned, leased or contracted for by the Company; or (4)
related, applicable or useful to the business of any partner, client or customer
of the Company, which may be made known to me or learned by me during the period
of my Engagement.
For purposes of this Agreement, the following definitions apply:
"Proprietary Information" shall mean information relating to the Business or the
business of any Business Partner and generally unavailable to the public that
has been created, discovered, developed or otherwise has become known to the
Company or in which property rights have been assigned or otherwise conveyed to
the Company or a Business Partner, which information has economic value or
potential economic value to the business in which the Company is or will be
engaged. Proprietary Information shall include, but not be limited to, trade
secrets, processes, formulas, writings, data, know-how, negative know-how,
improvements, discoveries, developments, designs, inventions, techniques,
technical data, patent applications, customer and supplier lists, financial
information, business plans or projections and any modifications or enhancements
to any of the above.
"Inventions" shall mean all Business-related discoveries, developments, designs,
improvements, inventions, formulas, software programs, processes, techniques,
know-how, negative know-how, writings, graphics and other data, whether or not
patentable or registrable under patent, copyright or similar statutes, that are
related to or useful in the business or future business of the Company or its
Business Partners or result from use of premises or other property owned, leased
or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything related to the
Business that derives actual or potential economic value from not being
generally known to the public or to other persons who can obtain economic value
from its disclosure or use.
As part of the consideration for my Engagement or continued Engagement, as the
case may be, and the compensation received by me from the Company from time to
time, I hereby agree as follows:
1. Proprietary Information and Inventions. All Proprietary
Information and Inventions related to the Business shall be the sole property of
the Company and its assigns, and the Company or its Business Partners, as the
case may be, and their assigns shall be the sole owner of all patents,
trademarks, service marks, copyrights and other rights (collectively referred to
herein as "Rights") pertaining to Proprietary Information and Inventions. I
hereby assign to the Company any rights I may have or acquire in Proprietary
Information or Inventions or Rights pertaining to the Proprietary Information or
Inventions which Rights arise in the course of my Engagement. I further agree as
to all Proprietary Information or Inventions to which Rights arise in the course
of my Engagement to assist the Company or any person designated by it in every
proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights in such Proprietary Information or Inventions as the
Company may desire, together with any assignments thereof to the Company or
persons designated by it. My obligation to assist the Company or any person
designated by it in obtaining and enforcing Rights relating to Proprietary
Information or Inventions shall continue beyond the cessation of my Engagement
("Cessation of my Engagement). In the event the Company is unable, after
reasonable effort, to secure my signature on any document or documents needed to
apply for or enforce any Right relating to Proprietary Information or to an
Invention, whether because of my physical or mental incapacity or for any other
reason whatsoever, I hereby irrevocably designate and appoint the Company and
its duly authorized officers and agents as my agents and attorneys-in-fact to
act for and in my behalf and stead in the execution and filing of any such
application and in furthering the application for and enforcement of Rights with
the same legal force and effect as if such acts were performed by me. I hereby
acknowledge that all original works of authorship that are made by me (solely or
jointly with others) within the scope of my Engagement and which are protectable
by copyright are "works for hire" as that term is defined in the United States
Copyright Act (17 USCA, Section 101).
2. Confidentiality. At all times, both during my Engagement and
after the Cessation of my Engagement, whether the cessation is voluntary or
involuntary, for any reason or no reason, or by disability, I will keep in
strictest confidence and trust all Proprietary Information, and I will not
disclose or use or permit the use or disclosure of any Proprietary Information
or Rights pertaining to Proprietary Information, or anything related thereto,
without the prior written consent of the Company, except as may be necessary in
the ordinary course of performing my duties for the Company. I recognize that
the Company has received and in the future will receive from third parties
(including Business Partners) their confidential or proprietary information
subject to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. I agree that I owe
the Company and such third parties (including Business Partners), during my
Engagement and thereafter, a duty to hold all such confidential or proprietary
information in
the strictest confidence, and I will not disclose or use or permit the use or
disclosure of any such confidential or proprietary information without the prior
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties for the Company consistent with the Company's
agreement with such third party.
3. Noncompetition and Nonsolicitation. During my Engagement, and for
a period of two (2) years after the Cessation of my Engagement, I will not
directly or indirectly, whether alone or in concert with others or as a partner,
officer, director, consultant, agent, employee or stockholder of any company or
commercial enterprise, directly or indirectly, engage in any activity in the
United States or Canada that the Company shall determine in good faith is or may
be in competition with the Company concerning its work in the Business. During
my Engagement and for a period of two (2) years after the Cessation of my
Engagement, I will not, either directly or indirectly, either alone or in
concert with others, solicit or encourage any employee of or consultant to the
Company to leave the Company or engage directly or indirectly in competition
with the Company in the Business. During my Engagement and for a period of two
(2) years after the Cessation of my Engagement, I agree not to plan or otherwise
take any preliminary steps, either alone or in concert with others, to set up or
engage in any business enterprise that would be in competition with the Company
in the Business. The following shall not be deemed to be competitive with the
Company: (i) my ownership of stock, partnership interests or other securities of
any entity not in excess of two percent (2%) of any class of such interests or
securities which is publicly traded; and (ii) my continued research engagements
for academic institutions.
4. Delivery of Company Property and Work Product. In the event of
the Cessation of my Engagement, I will deliver to the Company all biological
materials, devices, records, sketches, reports, memoranda, notes, proposals,
lists, correspondence, equipment, documents, photographs, photostats, negatives,
undeveloped film, drawings, specifications, tape recordings or other electronic
recordings, programs, data and other materials or property of any nature
belonging to the Company or its clients or customers, and I will not take with
me, or allow a third party to take, any of the foregoing or any reproduction of
any of the foregoing.
5. No Conflict. I represent, warrant and covenant that my
performance of all the terms of this Agreement and the performance of my duties
for the Company does not and will not breach any agreement to keep in confidence
proprietary information acquired by me in confidence or in trust prior to my
Engagement. I have not entered into, and I agree that I will not enter into, any
agreement, either written or oral, in conflict herewith.
6. No Use of Confidential Information. I represent, warrant and
covenant that I have not brought and will not bring with me to the Company or
use in my Engagement any materials or documents of a former employer, or any
person or entity for which I have acted as an independent contractor or
consultant, that are not generally available to the public, unless I have
obtained written authorization from any such former employer, person or firm for
their possession and use. I understand and agree that, in my service to the
Company, I am not to breach any obligation of confidentiality that I have to
former employers or other persons.
7. Equitable Relief. I acknowledge that irreparable injury may
result to the Company from my violation or continued violation of the terms of
this Agreement and, in such event, I expressly agree that the Company shall be
entitled, in addition to damages and any other remedies provided by law, to an
injunction or other equitable remedy respecting such violation or continued
violation by me.
8. Severability. If any provision of this Agreement shall be
determined by any court of competent jurisdiction to be unenforceable or
otherwise invalid as written, the same shall be enforced and validated to the
extent permitted by law. All provisions of this Agreement are severable, and the
unenforceability or invalidity of any single provision hereof shall not affect
the remaining provisions.
9. Miscellaneous. This Agreement shall be governed by and construed
under the laws of the State of New York applied to contracts made and performed
wholly within such state. No implied waiver of any provision within this
Agreement shall arise in the absence of a waiver in writing, and no waiver with
respect to a specific circumstance, event or occasion shall be construed as a
continuing waiver as to similar circumstances, events or occasions. This
Agreement, together with the Advisory Board Agreement dated this date, contains
the sole and entire agreement and understanding between the Company and myself
with respect to the subject matter hereof and supersedes and replaces any prior
agreements to the extent any such agreement is inconsistent herewith. This
Agreement can be amended, modified, released or changed in whole or in part only
by a written agreement executed by the Company and myself. This Agreement shall
be binding upon me, my heirs, executors, assigns and administrators, and it
shall inure to the benefit of the Company and each of its successors or assigns.
This Agreement shall be effective as of the first day of my being retained to
render services to the Company, even if such date precedes the date I sign this
Agreement.
10. Thorough Understanding of Agreement. I have read all of this
Agreement and understand it completely, and by my signature below I represent
that this Agreement is the only statement made by or on behalf of the Company
upon which I have relied in signing this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed on the
date written below.
DATED: March 2, 2004 Director:
-----------------------------------
Name: Michael Lax
Address: 1303 Ridge Road
Laurel Hollow, NY 11791
PHASE III MEDICAL, INC.
By:
--------------------------------
Mark Weinreb, President
EXHIBIT 10.8
Zuckerman Board of Directors Agreement
Exhibit 10.8
PHASE III MEDICAL, INC.
330 South Service Road
Suite 120
Melville, New York 11747
631.574.4955
January 20, 2004
Joseph D. Zuckerman, M.D.
Professor and Chairman
NYU-Hospital for Joint Diseases
Department of Orthopaedic Surgery
301 East 17th Street
New York, New York 10003
Dear Dr. Zuckerman:
We are pleased to extend to you an invitation to become a Director of the
Phase III Medical, Inc. (the "Company").
As you know, the Company is a public company that, among other items, is
entering the medical sector by acquiring or participating in one or more
biotechnology and/or medical companies or technologies, owning one or more drugs
or medical devices that may or may not yet be available to the general public
and/or acquiring rights to one or more of such drugs or medical devices or the
royalty streams therefrom.
We are requesting that you serve as a Director for an initial term until
our next annual meeting of shareholders. In consideration of your agreeing to
accept the Directorship, you will be granted an option, fully vested, to
purchase Three Hundred Thousand (300,000) shares of the Company's common stock
at an exercise price of Fifteen (.15(cent)) 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 (10)
years and otherwise the grant will be in accordance with the Company's 2003
Equity Participation Plan and Non-Qualified Stock Option Grant Agreement.
In addition, in the event that the closing price of the Company's Common
Shares equals or exceeds One Dollar ($1.00) per share for any five (5)
consecutive trading days during your term as a Director, the Company shall grant
you, on the day immediately following the end of the five (5) day period,
pursuant to the Equity Participation Plan and a Stock Option Agreement, an
option for the purchase of an additional One Hundred Thousand (100,000) Common
Shares substantially upon the terms of the Initial Option and in the form of the
Initial Option Agreement, except that the exercise price shall be $1.00 per
share.
While a Director, you will be covered by the Company's D&O insurance
policy and, to the extent permitted by law, will also be indemnified by the
Company.
You will be responsible to attend Annual and Special Meetings of the Board
of Directors (either in person or telephonically), to attend the Annual and/or
Special Shareholder Meetings as necessary, to participate in appropriate
committees and to generally assist 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 its
business.
You acknowledge that, as member of the Board of Directors, you will have
access to the Company's Confidential Information and that all Confidential
Information shall be and remain the sole property of the Company and that you
will not at any time, now or in the future, disclose, disseminate or otherwise
make public any of the Confidential Information without the express written
permission of the Company. We will ask you to sign a confidentiality agreement
similar to that signed by our board of advisor members, attached hereto.
We are excited about your involvement with the Company and look forward to
a long and mutually rewarding scientific and business relationship.
For our records, I would appreciate your countersigning the attached copy
of this Engagement Agreement and returning the same to me at your earliest
convenience.
Sincerely,
Mark Weinreb, President & CEO
Accepted and agreed to:
- ---------------------------
Joseph D. Zuckerman, M.D.
Phase III Medical, Inc.
Confidentiality, Proprietary Information
and Inventions Agreement
I recognize that Phase III Medical, Inc., a Delaware corporation (the
"Company"), is engaged in a continuous program of 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 (the "Business"). Any
company with which the Company enters into, or seeks or considers entering into,
a business relationship in furtherance of the Business is referred to as a
"Business Partner".
I understand that as part of my performance of duties as a director of the
Company (the "Engagement"), I will have access to confidential or proprietary
information of the Company and the Business Partners, and I may make new
contributions and inventions of value to the Company. I further understand that
my Engagement creates in me a duty of trust and confidentiality to the Company
with respect to any information: (1) related, applicable or useful to the
business of the Company, including the Company's anticipated research and
development or such activities of its Business Partners; (2) resulting from
tasks performed by me for the Company; (3) resulting from the use of equipment,
supplies or facilities owned, leased or contracted for by the Company; or (4)
related, applicable or useful to the business of any partner, client or customer
of the Company, which may be made known to me or learned by me during the period
of my Engagement.
For purposes of this Agreement, the following definitions apply:
"Proprietary Information" shall mean information relating to the Business or the
business of any Business Partner and generally unavailable to the public that
has been created, discovered, developed or otherwise has become known to the
Company or in which property rights have been assigned or otherwise conveyed to
the Company or a Business Partner, which information has economic value or
potential economic value to the business in which the Company is or will be
engaged. Proprietary Information shall include, but not be limited to, trade
secrets, processes, formulas, writings, data, know-how, negative know-how,
improvements, discoveries, developments, designs, inventions, techniques,
technical data, patent applications, customer and supplier lists, financial
information, business plans or projections and any modifications or enhancements
to any of the above.
"Inventions" shall mean all Business-related discoveries, developments, designs,
improvements, inventions, formulas, software programs, processes, techniques,
know-how, negative know-how, writings, graphics and other data, whether or not
patentable or registrable under patent, copyright or similar statutes, that are
related to or useful in the business or future business of the Company or its
Business Partners or result from use of premises or other property owned, leased
or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything related to the
Business that derives actual or potential economic value from not being
generally known to the public or to other persons who can obtain economic value
from its disclosure or use.
As part of the consideration for my Engagement or continued Engagement, as the
case may be, and the compensation received by me from the Company from time to
time, I hereby agree as follows:
1. Proprietary Information and Inventions. All Proprietary
Information and Inventions related to the Business shall be the sole property of
the Company and its assigns, and the Company or its Business Partners, as the
case may be, and their assigns shall be the sole owner of all patents,
trademarks, service marks, copyrights and other rights (collectively referred to
herein as "Rights") pertaining to Proprietary Information and Inventions. I
hereby assign to the Company any rights I may have or acquire in Proprietary
Information or Inventions or Rights pertaining to the Proprietary Information or
Inventions which Rights arise in the course of my Engagement. I further agree as
to all Proprietary Information or Inventions to which Rights arise in the course
of my Engagement to assist the Company or any person designated by it in every
proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights in such Proprietary Information or Inventions as the
Company may desire, together with any assignments thereof to the Company or
persons designated by it. My obligation to assist the Company or any person
designated by it in obtaining and enforcing Rights relating to Proprietary
Information or Inventions shall continue beyond the cessation of my Engagement
("Cessation of my Engagement). In the event the Company is unable, after
reasonable effort, to secure my signature on any document or documents needed to
apply for or enforce any Right relating to Proprietary Information or to an
Invention, whether because of my physical or mental incapacity or for any other
reason whatsoever, I hereby irrevocably designate and appoint the Company and
its duly authorized officers and agents as my agents and attorneys-in-fact to
act for and in my behalf and stead in the execution and filing of any such
application and in furthering the application for and enforcement of Rights with
the same legal force and effect as if such acts were performed by me. I hereby
acknowledge that all original works of authorship that are made by me (solely or
jointly with others) within the scope of my Engagement and which are protectable
by copyright are "works for hire" as that term is defined in the United States
Copyright Act (17 USCA, Section 101).
2. Confidentiality. At all times, both during my Engagement and
after the Cessation of my Engagement, whether the cessation is voluntary or
involuntary, for any reason or no reason, or by disability, I will keep in
strictest confidence and trust all Proprietary Information, and I will not
disclose or use or permit the use or disclosure of any Proprietary Information
or Rights pertaining to Proprietary Information, or anything related thereto,
without the prior written consent of the Company, except as may be necessary in
the ordinary course of performing my duties for the Company. I recognize that
the Company has received and in the future will receive from third parties
(including Business Partners) their confidential or proprietary information
subject to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. I agree that I owe
the Company and such third parties (including Business Partners), during my
Engagement and thereafter, a duty to hold all such confidential or proprietary
information in the
strictest confidence, and I will not disclose or use or permit the use or
disclosure of any such confidential or proprietary information without the prior
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties for the Company consistent with the Company's
agreement with such third party.
3. Noncompetition and Nonsolicitation. During my Engagement, and for
a period of two (2) years after the Cessation of my Engagement, I will not
directly or indirectly, whether alone or in concert with others or as a partner,
officer, director, consultant, agent, employee or stockholder of any company or
commercial enterprise, directly or indirectly, engage in any activity in the
United States or Canada that the Company shall determine in good faith is or may
be in competition with the Company concerning its work in the Business. During
my Engagement and for a period of two (2) years after the Cessation of my
Engagement, I will not, either directly or indirectly, either alone or in
concert with others, solicit or encourage any employee of or consultant to the
Company to leave the Company or engage directly or indirectly in competition
with the Company in the Business. During my Engagement and for a period of two
(2) years after the Cessation of my Engagement, I agree not to plan or otherwise
take any preliminary steps, either alone or in concert with others, to set up or
engage in any business enterprise that would be in competition with the Company
in the Business. The following shall not be deemed to be competitive with the
Company: (i) my ownership of stock, partnership interests or other securities of
any entity not in excess of two percent (2%) of any class of such interests or
securities which is publicly traded; and (ii) my continued research engagements
for academic institutions.
4. Delivery of Company Property and Work Product. In the event of
the Cessation of my Engagement, I will deliver to the Company all biological
materials, devices, records, sketches, reports, memoranda, notes, proposals,
lists, correspondence, equipment, documents, photographs, photostats, negatives,
undeveloped film, drawings, specifications, tape recordings or other electronic
recordings, programs, data and other materials or property of any nature
belonging to the Company or its clients or customers, and I will not take with
me, or allow a third party to take, any of the foregoing or any reproduction of
any of the foregoing.
5. No Conflict. I represent, warrant and covenant that my
performance of all the terms of this Agreement and the performance of my duties
for the Company does not and will not breach any agreement to keep in confidence
proprietary information acquired by me in confidence or in trust prior to my
Engagement. I have not entered into, and I agree that I will not enter into, any
agreement, either written or oral, in conflict herewith.
6. No Use of Confidential Information. I represent, warrant and
covenant that I have not brought and will not bring with me to the Company or
use in my Engagement any materials or documents of a former employer, or any
person or entity for which I have acted as an independent contractor or
consultant, that are not generally available to the public, unless I have
obtained written authorization from any such former employer, person or firm for
their possession and use. I understand and agree that, in my service to the
Company, I am not to breach any obligation of confidentiality that I have to
former employers or other persons.
7. Equitable Relief. I acknowledge that irreparable injury may
result to the Company from my violation or continued violation of the terms of
this Agreement and, in such event, I expressly agree that the Company shall be
entitled, in addition to damages and any other remedies provided by law, to an
injunction or other equitable remedy respecting such violation or continued
violation by me.
8. Severability. If any provision of this Agreement shall be
determined by any court of competent jurisdiction to be unenforceable or
otherwise invalid as written, the same shall be enforced and validated to the
extent permitted by law. All provisions of this Agreement are severable, and the
unenforceability or invalidity of any single provision hereof shall not affect
the remaining provisions.
9. Miscellaneous. This Agreement shall be governed by and construed
under the laws of the State of New York applied to contracts made and performed
wholly within such state. No implied waiver of any provision within this
Agreement shall arise in the absence of a waiver in writing, and no waiver with
respect to a specific circumstance, event or occasion shall be construed as a
continuing waiver as to similar circumstances, events or occasions. This
Agreement, together with the Advisory Board Agreement dated this date, contains
the sole and entire agreement and understanding between the Company and myself
with respect to the subject matter hereof and supersedes and replaces any prior
agreements to the extent any such agreement is inconsistent herewith. This
Agreement can be amended, modified, released or changed in whole or in part only
by a written agreement executed by the Company and myself. This Agreement shall
be binding upon me, my heirs, executors, assigns and administrators, and it
shall inure to the benefit of the Company and each of its successors or assigns.
This Agreement shall be effective as of the first day of my being retained to
render services to the Company, even if such date precedes the date I sign this
Agreement.
10. Thorough Understanding of Agreement. I have read all of this
Agreement and understand it completely, and by my signature below I represent
that this Agreement is the only statement made by or on behalf of the Company
upon which I have relied in signing this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed on the
date written below.
DATED: January 20, 2004 Director:
----------------------------------
Name: Joseph D. Zuckerman, M.D.
Address:
NYU-Hospital for Joint Diseases
Department of Orthopaedic Surgery
301 East 17th Street
New York, New York 10003
PHASE III MEDICAL, INC.
By:
-------------------------------
Mark Weinreb, President
~
EXHIBIT 31.1
302 Certification
Exhibit 31.1
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Annual Report on Form 10-K of Phase III Medical, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's board of directors 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 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 board of directors 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: March 31, 2005
/s/ Mark Weinreb
----------------
Mark Weinreb
Chief Executive Officer
EXHIBIT 32.1
906 Certification
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 annual report of Phase III Medical, Inc. (the "Company")
on Form 10-K for the year ended December 31, 2004 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) 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
results of operations of the Company for the periods presented.
Dated: March 31, 2005
/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.