SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to
---------------- ----------------
Commission file number 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act of 1934). Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
--- ---
55,645,530 SHARES, $.001 PAR VALUE, AS OF NOVEMBER 10, 2005
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
1
I N D E X
Page No.
Part I - Financial Information: --------
Item 1. Financial Statements (Unaudited):
Balance Sheets
At September 30, 2005 and December 31, 2004 3
Statements of Operations
For the three and nine months
ended September 30, 2005 and 2004 4
Statements of Cash Flows
for the nine months ended
September 30, 2005 and 2004 5
Notes to Unaudited Financial Statements 6 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 14 - 16
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
Part II - Other Information:
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits 18
Signatures 19
2
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2005 2004
--------------- --------------
Current assets:
Cash and equivalents $ 10,377 $ 27,868
Prepaid expenses and other current assets 24,218 21,233
------------------------------
Total current assets 34,595 49,101
Property and equipment, net 1,978 3,446
Deferred acquisition costs 24,127 43,897
Other assets 3,000 3,000
------------------------------
$ 63,700 $ 99,444
==============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable -
preferred stock $ 516,643 $ 480,880
Accounts payable and accrued expenses 380,372 235,053
Accounts payable and accrued expenses
related parties 327,261 2,999
Notes payable 400,000 390,000
Notes payable - related parties 148,000 85,000
Convertible debentures, related party -
net of debt discount of $0 and $5,882 100,000 94,118
------------------------------
Total current liabilities 1,872,276 1,288,050
Unearned revenues 33,806 62,007
Series A mandatorily redeemable convertible
preferred stock 681,174 681,174
------------------------------
Total Liabilities 2,587,256 2,031,231
------------------------------
Stockholders' Deficit:
Preferred stock; authorized, 5,000,000
shares Series B convertible redeemable
preferred stock, liquidation value, 10
shares of common stock per share; $0.01
par value; authorized, 825,000 shares;
issued and outstanding, 10,000 shares 100 100
Common stock, $.001 par value; authorized,
250,000,000 shares; issued and outstanding,
53,256,843 shares at September 30, 2005 and
41,029,552 shares at December 31, 2004 53,257 41,031
Additional paid-in capital 11,151,500 10,537,408
Accumulated deficit (13,728,413) (12,510,326)
------------------------------
Total stockholders' deficit (2,523,556) (1,931,787)
------------------------------
$ 63,700 $ 99,444
==============================
See accompanying notes to financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------------------------- -------------------------------
Earned revenues $ 8,218 $ 2,968 $ 28,201 $ 37,383
Direct costs (5,750) (1,964) (19,770) (26,108)
-----------------------------------------------------------------
Gross profit 2,468 1,004 8,431 11,275
Selling, general and administrative (538,070) (184,342) (1,112,331) (508,953)
Purchase of medical royalty stream (6,540) (234,060) (6,540) (714,060)
-----------------------------------------------------------------
Operating loss (542,142) (417,398) (1,110,440) (1,211,738)
Other income (expense):
Interest income - - - 159
Interest expense (21,288) (71,176) (71,884) (201,539)
Interest expense - Series A
mandatorily redeemable convertible (35,763) (35,763)
preferred stock (11,921) (11,921)
-----------------------------------------------------------------
Net loss attributable to common
stockholders $ (575,351) $ (500,495) $(1,218,087) $(1,448,881)
=================================================================
Net loss per common share $ (.01) $ (.01) $ (.03) $ (.05)
=================================================================
Weighted average common shares
outstanding 51,237,184 33,464,208 46,257,323 29,885,230
=================================================================
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
2005 2004
------------- --------------
Cash flows from operating activities:
Net loss $(1,218,087) $(1,448,881)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common shares issued and stock options granted for
services rendered and interest expense 239,318 152,337
Depreciation 1,468 1,933
Deferred acquisition costs 19,770 26,108
Amortization of debt discount 5,882 2,941
Series A mandatorily redeemable preferred stock dividends 35,763
Changes in operating assets and liabilities
Prepaid expenses and other current assets (2,985) 18,024
Unearned revenues (28,201) (37,383)
Accounts payable, accrued expenses and other current liabilities 469,581 164,857
----------------------------
Net cash used in operating activities (477,491) (1,120,064)
----------------------------
Cash flows from investing activities:
Acquisition of property and equipment - (3,934)
----------------------------
Net cash used in investing activities - (3,934)
----------------------------
Cash flows from financing activities:
Net Proceeds from issuance of common stock 287,000 1,109,000
Proceeds from advances on notes payable 55,000 410,000
Proceeds from advances on notes payable - related parties 48,000
Proceeds from convertible debenture, related party 100,000 100,000
Repayments of notes payable (30,000) (235,000)
Repayment of long-term debt - (9,513)
----------------------------
Net cash provided by financing activities 460,000 1,374,487
----------------------------
Net (decrease) increase in cash and cash equivalents (17,491) 250,489
Cash and cash equivalents at beginning of period 27,868 210,947
----------------------------
Cash and cash equivalents at end of period $ 10,377 $ 461,436
============================
2005 2004
------------- --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 64,166 $ 61,825
============= ==============
Supplemental Schedule of Non-cash Financing Activities:
Net accrual of dividends on Series A Preferred Stock $ 35,763 $ -
============= ==============
Issuance of common stock for services rendered $ 236,122 $ 6,000
============= ==============
Compensatory element of stock options $ 3,196 $ 127,137
============= ==============
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Phase III Medical, Inc. ("Phase III" or the "Company") provides capital as
well as consulting and guidance to companies in multiple sectors of the
healthcare and life sciences industries, in exchange for a percentage of
revenues, royalty fees, licensing fees and other product sales of the
target companies. The Company charges payments for the purchase of these
interests to expense as paid and will record revenues when payments are
received. As of September 30, 2005, the Company has not received any such
payments. 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 healthcare
and life sciences industries.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, the
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of
September 30, 2005 and December 31, 2004, the results of operations for the
three and nine months ended September 30, 2005 and 2004 and the cash flows
for the nine months ended September 30, 2005 and 2004. The results of
operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of the results to be expected for the full year.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company currently has no operations
and limited financial resources to pay its current expenses and
liabilities. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The December 31, 2004 balance sheet has been derived from the audited
financial statements at that date included in the Company's Annual Report
on Form 10-K/A. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K/A.
NOTE 3 - STOCK OPTIONS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure - an amendment of
FASB Statement No. 123 ("SFAS 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and does
not permit the use of the original SFAS No. 123 prospective method of
transition in fiscal years beginning after December 15, 2003. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results, regardless of whether, when,
or how an entity adopts preferable fair value based method of accounting.
SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular
format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent and improves the timeliness of those
disclosures by requiring their inclusion in financial reports for interim
periods. The Company has adopted the disclosure requirements of SFAS No.
148. The Company will continue to account for stock-based employee
compensation under APB Opinion No. 25 and its related interpretations.
6
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for all periods:
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Net loss as reported $ (575,351) $ (500,495) $ (1,218,087) $ (1,448,881)
Additional compensation (49,553) (7,488) (85,005) (165,273)
---------------- ---------------- ---------------- ----------------
Adjusted net loss $ (624,904) $ (507,983) $ (1,303,092) $ (1,614,154)
================ ================ ================= ================
Net loss per share as reported $ (.01) $ (.01) $ (.03) $ (.05)
================ ================ ================= ================
Adjusted net loss per share $ (.01) $ (.02) $ (.03) $ (.05)
================ ================ ================= ================
.
NOTE 4 - NOTES PAYABLE
On March 17, 2003, the Company commenced a private placement offering which
raised $250,000 in 6-month promissory notes in increments of $5,000 bearing
interest at 15% per annum. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act
of 1933, as amended (the "Securities Act"), were eligible to purchase these
promissory notes. As of September 30, 2005, $170,000, of which $15,000 is
to a related party, is outstanding from the original $250,000 and is in
default and remains unpaid. All interest payments on these notes have been
made.
On August 26, 2003, the Company borrowed $25,000 from a then consultant to
the Company. In October 2004, this note was combined with a note of $50,000
previously held by an unrelated third party. This new note accrues interest
at 8% and was due on August 31, 2005 together with the accrued interest. As
of September 30, 2005, this note remains unpaid and is in default. All
interest payments have been accrued.
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 the notes remain unpaid.
As of September 30, 2005, all of these notes together with accrued interest
have been repaid. 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 September 30, 2005, the $25,000 note has been
repaid together with accrued interest. As of September 30, 2005 the
remaining $80,000 is in default. All interest has been paid. In August
2004, the Company sold additional 30 day 20% notes in the amount of $55,000
to two accredited investors to fund current operations. As of September 30,
2005, $25,000 of these notes remains unpaid and is in default. All interest
payments have been made. In December 2004, the Company sold a 60 day 8%
note in the amount of $35,000 to the President and CEO, a 180 day 15% note
in the amount of $25,000 to a related party, a 180 day 20% note in the
amount of $15,000, of which $5,000 has been repaid and a 90 day 8% note in
the amount of $25,000 to a Director, all accredited investors, totaling
$100,000. As of September 30, 2005, these notes remain unpaid and are in
default. All interest payments have been made.
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. The remaining debt discount of
$5,882 was amortized in the first quarter of 2005. On February 20, 2005,
the note was converted into 1,960,784 shares of Common Stock as per the
prescribed formula. All interest payments have been paid.
In January 2005, the Company sold a six month 20% note in the amount of
$25,000 to an accredited investor to fund current operations. This note is
in default and remains unpaid. All interest payments have been made. In
February 2005, the Company sold a six month 20% note in the amount of
$10,000 to an accredited investor to fund current operations. This note is
in default and remains unpaid. All interest payments have been made. In
March 2005, the Company sold a 30 day 8% note in the amount of $17,000 to
the President and CEO and a one year 15% note in the amount of $20,000 to
two accredited investors to fund current operations. All interest payments
on these notes are current. The note in the amount of $17,000 remains
unpaid and is in default as of September 30, 2005.
7
In April 2005, the Company sold a one year 15% note in the amount of
$100,000 to its Executive Vice President and General Counsel. The note
contains certain rights and obligations regarding its conversion into
shares of the Company's Common Stock. All interest payments on this note
have been made.
In August 2005, the Company sold an 8% note in the amount of $10,000 to its
President and CEO, an accredited investor which is due on demand.
In September 2005, Company sold two 8% notes in the amounts of $6,000 and
$15,000 to its President and CEO, an accredited investor which are due on
demand.
A summary of the above descriptions is as follows:
Repayments/
Conversions
December 31, to Common September 30,
2004 Proceeds Stock 2005
------------ ------------ ------------ ------------
March 2003 Notes $ 155,000 $ - $ - $ 155,000
Consultant Note 75,000 - - 75,000
February - December 2004 Notes 145,000 - (30,000) 115,000
2005 Notes - 55,000 - 55,000
Notes - Related Parties 100,000 48,000 - 148,000
Convertible Debt - Related Parties 94,118 100,000 (94,118) 100,000
------------ ------------ ------------ ------------
Total $ 569,118 $ 203,000 $(124,118) $ 648,000
============ ============ ============ ============
NOTE 5 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of Designation for the Company's Series A Preferred Stock
provides that at any time after December 31, 1999 any holder of Series A
Preferred Stock may require the Company to redeem his shares of Series A
Preferred Stock (if there are funds with which the Company may legally do
so) at a price of $1.00 per share. Notwithstanding the foregoing redemption
provisions, if any dividends on the Series A Preferred Stock are past due,
no shares of Series A Preferred Stock may be redeemed by the Company unless
all outstanding shares of Series A Preferred Stock are simultaneously
redeemed. The holders of Series A Preferred Stock may convert their Series
A Preferred Stock into shares of Common Stock of the Company at a price of
$5.20 per share. At September 30, 2005 and December 31, 2004, 681,174
shares of Series A Preferred Stock were outstanding.
NOTE 6 - STOCKHOLDERS' EQUITY
(a) Common Stock:
In each of January and February 2005, the Company issued 37,500 shares of
its Common Stock, for a total of 75,000 shares, as compensation to its
public relations firm. The Company recorded $4,875 of expense as a result
of this issuance.
On February 20, 2005, the Company issued 1,960,784 shares of its Common
Stock in exchange for the conversion of the promissory note held by its
COO.
On April 1, 2005, the Company issued 800,898 shares of its Common Stock to
its COO in partial payment of salary as per his employment agreement.
On April 20, 2005, the Company sold 1,666,666 shares of its Common Stock to
its Executive Vice President and General Counsel at a price of $.06 per
share resulting in net proceeds to the Company of $100,000.
On May 4, 2005, the Company sold 100,000 shares of its Common Stock to an
unrelated third party at a price of $.06 per share resulting in net
proceeds to the Company of $6,000.
8
In May 2005, the Company sold a total of 350,000 shares of its Common Stock
to two directors at a price of $.06 per share resulting in net proceeds to
the Company of $21,000.
On June 8, 2005, the Company sold 416,666 shares of its Common Stock to an
unrelated third party at a price of $.06 per share resulting in net
proceeds to the Company of $25,000.
On July 1, 2005, the Company issued 668,750 shares of its Common Stock to
its COO in partial payment of salary as per his employment agreement. The
Company recorded an expense of $21,400 as a result of this issuance.
On each of July 1, August 1, and September 1, 2005, the Company issued
16,666 shares of its Common Stock for a total of 49,998 shares as
compensation to its public relations firm. The Company recorded an expense
of $2,833 as a result of this issuance.
On July 18, 2005, the Company sold 1,250,000 shares of its Common Stock to
its Executive Vice President and General Counsel at a price of $.06 per
share resulting in net proceeds to the Company of $75,000.
On July 20, 2005, the Company issued 3,000,000 restricted shares of its
Common Stock to its President and CEO as additional compensation as per his
employment agreement approved by the shareholders of the Company at its
annual meeting. The Company recorded an expense of $120,000 as a result of
this issuance.
On August 12, 2005, the Company issued 412,339 shares of its Common Stock
to its Executive Vice President and General Counsel as payment of deferred
compensation as per her employment agreement. The Company recorded an
expense of $24,740 as a result of this issuance.
On August 16, 2005, the Company sold 833,333 shares of its Common Stock to
a director at a price of $.06 per share resulting in net proceeds to the
Company of $50,000.
On September 14, 2005, the Company issued 500,000 shares of its Common
Stock to an Advisory Board member as compensation pursuant to her advisory
agreement. The Company recorded an expense of $40,000 as a result of this
issuance.
On September 29, 2005, the Company sold 142,857 shares of its Common Stock
to an unrelated third party at a price of $.07 per share resulting in net
proceeds to the Company of $10,000.
(b) Warrants:
The Company has issued Common Stock purchase warrants from time to time to
investors in private placements, certain vendors, underwriters, directors,
officers and advisory board members of the Company. A total of 672,500
shares of Common Stock are reserved for issuance upon exercise of
outstanding warrants as of September 30, 2005 at prices ranging from $0.05
to $8.10 and expiring through December 2008. In connection with the
September 2003 equity private placement, the Company issued a 5 year
warrant to purchase 282,500 shares of its Common Stock at an exercise price
of $0.12 per share to its retained placement agent, Robert M. Cohen &
Company. The warrant contains piggyback registration rights. On January 20,
2005, the Company issued three year warrants to purchase a total of 25,000
shares of its Common Stock at $.05 per share to Consulting For Strategic
Growth, Ltd., the Company's investor relations and public relations firm.
This issuance brings their total warrants to 150,000. The Company recorded
expense of $874 as the fair value of these warrants using the Black-Scholes
method. On September 14, 2005, the Company issued 240,000 Common Stock
purchase warrants to a member of its Advisory Board. These warrants vest at
the rate of 20,000 per month beginning with September 14, 2005. Each
warrant entitles the holder to purchase one share of the Company's Common
Stock at a price of $.08 per share. The warrant expires three years from
issuance.
(c) Stock Option Plans:
In February 2003, the Company adopted the 2003 Equity Participation Plan
(the "2003 EPP"), which was approved by stockholders at the Company's
Annual Meeting on July 24, 2003. Under this plan, the Company has reserved
15,000,000 shares of common stock for the grant of incentive stock options
and non-statutory stock options to employees and non-employee directors,
consultants and advisors. In July 2005 the plan was increased to a total of
50,000,000 shares.
9
Information with respect to options under the 2003 Equity Participation
Plan is summarized as follows:
For the Nine Months Ended
September 30, 2005
-----------------------------
Shares Prices
-----------------------------
Outstanding at beginning of period 6,685,000 $0.03 to $0.18
Granted 10,850,000 $0.07 to $.10
Expired - -
Cancelled - -
-----------------------------
Outstanding at end of period 17,535,000 $0.03 to $0.18
=============================
Options are usually granted at an exercise price at least equal to the fair
value of the Common Stock at the grant date. During the nine months ended
September 30, 2005, options to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $.07 were granted to a member of the
Company's Board of Advisors pursuant to his agreement and options to
purchase 150,000 shares at an exercise price of $.10 and 750,000 shares at
an exercise price of $.06 were granted to the Executive Vice President and
General Counsel. Options to purchase shares at an exercise price of $.06
were granted to two members of the Board of Directors totaling 4,050,000
shares. Options to purchase 4,000,000 shares at an exercise price of $.06
were granted to the President and CEO. The COO and another employee were
granted options to purchase a total of 1,700,000 shares at an exercise
price of $.06.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On March 20, 2004, the Company entered into a consulting agreement which
provides for the Company to give advice as to business development
possibilities for the services and technology of NeoStem, Inc. ("NeoStem")
(See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS). The agreement provides for the issuance of options
to purchase 300,000 shares of the Company's Common Stock at an exercise
price of $.10 per share. This option is immediately vested and expires ten
years from the date of issue. The agreement also provides for the payment
of $2,500 per month for each month after the Company has received capital
contributions of $1,000,000 from the date of the agreement. If certain
performance levels are met, the Company is obligated to issue an additional
option to purchase 500,000 shares of the Company's Common Stock for an
exercise price of $.10 per share. This agreement expired on September 20,
2005.
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. The Company has paid a total of $720,000 since
the inception of the agreement. 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. Since inception, through September 30, 2005, the
Company paid $74,060 of such expenses. In August 2005, the Company received
from PSI a letter stating that the proof of concept study under the royalty
agreement has been completed and that despite interesting preliminary in
vitro results, the study did not meet the success standards set forth in
the royalty agreement and that PSI has no definitive plans to move forward
with the program. Phase III has requested pursuant to the royalty agreement
that additional in vitro studies be performed with other molecules. PSI is
under no obligation to perform any additional studies. If no additional
studies are performed under the royalty agreement the likelihood of PSI
generating revenues in which the Company would share is substantially
reduced.
On June 16, 2005, the Company signed a revenue sharing agreement with
Healthwave, a medical billing company that utilizes advanced, proprietary
technology and connectivity to improve the efficiency of paper-and
labor-intensive routines of healthcare transaction processing. Under the
agreement, Phase III initially will fund Healthwave $125,000 (with a
potential for an additional $125,000) and will provide guidance to them
principally relating to developing and marketing Healthwave's healthcare
transaction processing services. In return, Healthwave will pay Phase III
on a monthly basis a portion of its gross revenues, with certain stated
minimums based on the stage of the agreement. Healthwave has the right to
terminate the agreement by paying to Phase III a buy-out fee. The agreement
is contingent on Phase III receiving certain minimum financing and
satisfactorily completing its due diligence.
10
On September 9, 2005, the Company signed a revenue sharing agreement with
NeoStem, Inc. ("NeoStem"). The Company has agreed to fund NeoStem up to
$20,000 initially to pay certain expenses which the Company has the right
to approve or not to approve prior to funding. The Company has agreed to
fund NeoStem based on a formula relating to the Company's ability to raise
capital. Once funded, NeoStem will pay the Company monthly based on the
revenue generated in the previous month with a minimum payment due each
month. No assurances can be given that the Company will raise the capital
needed to fund its obligations to NeoStem, that NeoStem's collection,
processing and storage technology will be successfully implemented, that
NeoStem will be able to commercialize its adult stem cell banking
enterprise, or that there will be market acceptance of any such enterprise
sufficient to generate any material revenues for NeoStem or any material
royalty revenues for the Company, or that any stem cell therapeutic
strategies will be successfully developed or commercialized
NOTE 8 - RELATED PARTIES
On May 4, 2005, the Company's Board of Directors (the "Board") voted to
approve an amendment to Mr. Weinreb's letter agreement, subject to approval
of the stockholders which was obtained on July 20, 2005, pursuant to which
Mr. Weinreb's employment agreement was amended to (a) extend the expiration
date thereof from February 2006 to December 2008; (b) change Mr. Weinreb's
annual base salary of $217,800 (with an increase of 10% per annum) to an
annual base salary of $250,000 (with no increase per annum); (c) grant Mr.
Weinreb 3,000,000 shares of common stock, 1,000,000 shares of which shall
vest on each of the date of grant and the first and second anniversaries of
the date of grant; (d) amend the severance provision of the existing
employment agreement to provide that in the event of termination without
cause (subject to certain exceptions), Mr. Weinreb will be entitled to
receive a lump sum payment equal to his then base salary and automobile
allowance for a period of one year; (e) commencing in August 2006, increase
Mr. Weinreb's annual bonus from $20,000 to $25,000; (f) in August 2005, pay
Mr. Weinreb $15,000 to cover costs incurred by him on behalf of the
Company; and (g) in 2006, provide for the reimbursement of all premiums in
an annual aggregate amount of up to $18,000 payable by Mr. Weinreb for life
and long term care insurance covering each year during the remainder of the
term of his employment.
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. Mr.
Aholt received 477,679 shares of the Company's Common Stock on January 1,
2005, 800,898 shares on April 1, 2005 and 668,750 shares on July 1, 2005.
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.
11
On May 4, 2005, the Board voted to approve an amendment to Mr. Aholt's
Letter Agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, to (a) replace the provision of Mr. Aholt's
existing employment agreement pursuant to which he is compensated in shares
of Common Stock with a provision pursuant to which he will be compensated
solely in cash, effective as of September 30, 2005; (b) replace the
provision of Mr. Aholt's existing employment agreement pursuant to which
his compensation accrues on a monthly and/or quarterly basis with a
provision pursuant to which his compensation will be paid in accordance
with the Company's normal payroll practices, effective as of September 30,
2005; and (c) provide for a minimum annual bonus of $12,000, payable in
January of each year during the term of his employment, commencing in
January 2006.
On August 12, 2004 ("Commencement Date") the Company and Dr. Wayne A.
Marasco, a Company Director, entered into a Letter Agreement appointing Dr.
Marasco as the Company's Senior Scientific Advisor. Dr. Marasco will be
responsible for assisting the Company in reviewing and evaluating business,
scientific and medical opportunities, and for other discussions and
meetings that may arise during the normal course of the Company conducting
business. For his services, during a three year period ("Term"), Dr.
Marasco shall be entitled to annual cash compensation with increases each
year of the Term and an additional cash compensation based on a percentage
of collected revenues derived from the Company's royalty or revenue sharing
agreements. Although the annual cash compensation and additional cash
compensation stated above shall begin to accrue as of the Commencement
Date, Dr. Marasco will not be entitled to receive any such amounts until
the Company raises $1,500,000 in additional equity financing after the
Commencement Date. In addition, Dr. Marasco was granted an option, fully
vested, to purchase 675,000 shares of the Company's common stock at an
exercise price of $.10 cents per share. The shares will be subject to a one
year lockup as of the date of grant. The exercise period will be ten years,
and the grant will otherwise be in accordance with the Company's 2003
Equity Participation Plan and Non-Qualified Stock Option Grant Agreement.
As of September 30, 2005, Dr. Marasco has accrued $96,692 in salary under
this agreement.
On May 4, 2005, the Board voted to approve an amendment to Dr. Marasco's
Letter Agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, pursuant to which Dr. Marasco's Letter Agreement
with the Company was be amended to (a) extend the term of the Letter
Agreement from August 2007 to August 2008; (b) provide for an annual salary
of $110,000, $125,000 and $150,000 for the years ended August 2006, 2007
and 2008, payable in each such year during the term; (c) provide for a
minimum annual bonus of $12,000, payable in January of each year during the
term, commencing in January 2006; (d) eliminate Dr. Marasco's right under
his existing Letter Agreement to receive 5% of all collected revenues
derived from the Company's royalty or other revenue sharing agreements
(which right is subject to the limitation that the amount of such
additional cash compensation and Dr. Marasco's annual salary do not exceed,
in the aggregate, $200,000 per year); and (e) permit Dr. Marasco to begin
receiving all accrued but unpaid cash compensation under his Letter
Agreement upon the Company's consummation of any financing, whether equity
or otherwise, pursuant to which the Company raises $1,500,000.
On April 20, 2005 (the "Commencement Date"), the Company entered into a
letter agreement (the "Letter Agreement") with Catherine M. Vaczy pursuant
to which Ms. Vaczy serves as the Company's Executive Vice President and
General Counsel. Subject to the terms and conditions of the Letter
Agreement, the term of Ms. Vaczy's employment in such capacity will be for
a period of three (3) years from the commencement date (the "Term").
In consideration for Ms. Vaczy's services under the Letter Agreement, Ms.
Vaczy is entitled to receive an annual salary of $155,000 during the first
year of the term, a minimum annual salary of $170,500 during the second
year of the term, and a minimum annual salary of $187,550 during the third
year of the term. Ms. Vaczy and the Company have agreed that from the
commencement date until the 90th day thereafter (the "Initial 90 Day
Period"), Ms. Vaczy's salary will be paid to her at a rate of 50% of the
annual rate and accrue as to the remainder. At the end of the initial 90
day period, and at the end of each additional 90 day period thereafter,
whether to continue to accrue salary at this rate and provision for payment
of accrued amounts will be discussed in good faith. Payment of accrued
salary may be made in cash, or, upon mutual agreement, shares of Common
Stock. Any shares of Common Stock issued in payment of accrued salary shall
have a per share price equal to 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 issue
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 issue as determined in good faith by the
Board. The number of shares of common stock for any issuance in payment of
accrued salary shall be equal to the quotient of the amount of the accrued
salary divided by the price. The shares issued will be subject to a
one-year lock up as of the date of each grant and shall be registered with
the Securities and Exchange Commission on a Registration Statement on Form
S-8.
12
In the event Ms. Vaczy'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 Ms. Vaczy's employment is terminated prior to the
end of the term for any reason other than by the Company with "cause" or
Ms. Vaczy without "good reason", Ms. Vaczy or her executor of her last will
or the duly authorized administrator of her estate, as applicable, will be
entitled in the event the employment termination date is after April 20,
2006, to receive severance payments equal to Ms. Vaczy's then one year's
salary, paid in accordance with the Company's standard payroll practices
for executives of the Company and (ii) in the event the employment
termination date is before April 20, 2006 but after October 20, 2005, to
receive severance payments equal to one-sixth of Ms. Vaczy's then one
year's salary, paid in accordance with the Company's standard payroll
practices for executives of the Company. In addition, in the event Ms.
Vaczy's employment is terminated prior to the end of the term by the
Company without "cause" or by Ms. Vaczy for "good reason", the option (as
defined below) shall vest and become immediately exercisable in its
entirety and remain exercisable in accordance with its terms. 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.
In August 2005, Ms. Vaczy's Letter Agreement was amended to provide that
(i) as of October 1, 2005 she will cease to accrue salary and will as of
that date begin to receive payment of salary solely in cash in accordance
with the Company's standard payroll practices, and (ii) will be issued in
payment of salary accruing during the period that commenced on April 20,
2005 and ended on September 30, 2005, shares of Common Stock. With respect
to the portion of salary that accrued from April 20, 2005 through August
12, 2005, the price per share will be $.06, the closing price of the Common
Stock on August 12, 2005. For the portion of salary that accrued from
August 13, 2005 through September 30, 2005, the price per share will be the
closing price of the Common Stock on September 30, 2005. Pursuant to the
foregoing, on August 12, 2005, Ms. Vaczy was issued 412,339 shares of
Common Stock in payment of $24,740 in accrued salary and on October 3,
2005, Ms. Vaczy was issued 260,817 shares in payment of $10,433 in accrued
salary.
NOTE 9 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION
The Company's operations are currently in one segment, namely the "run off"
of its sale of extended warranties and service contracts via the Internet.
Additionally, the Company is currently endeavoring to establish new
business operations in the medical/bio-tech sector. The Company did not
realize any revenue from its purchase of the royalty interest. The
Company's operations are conducted entirely in the United States.
NOTE 10 - SUBSEQUENT EVENTS
On each of October 1, 2005 and November 1, 2005, 16,666 shares of the
Company's Common Stock were issued to Consulting for Strategic Growth Ltd.,
the Company's investor relations and public relations firm; as compensation
for work to be performed in October and November 2005.
On October 3, 2005, the Company issued 260,817 shares of its Common Stock
to its Executive Vice President and General Counsel as payment of deferred
compensation as per her employment agreement.
On October 3, 2005, the Company issued 461,206 shares of its Common Stock
to its COO in partial payment of salary as per his employment agreement.
On October 6, 2005, the Company sold 250,000 shares of its Common Stock to
an accredited investor at a price of $.04 per share resulting in gross
proceeds to the Company of $10,000.
On October 6, 2005, the Company sold 500,000 shares of its Common Stock to
a member of its Advisory Board, an accredited investor, at a price of $.05
per share resulting in gross proceeds to the Company of $25,000.
In October 2005, the Company signed a non-binding letter of intent to
purchase all the assets, properties and rights of NeoStem that relate to
its adult stem cell collection and storage business and assume certain of
its liabilities. The letter of intent provides that the Company will pay
the entire purchase price in shares of the Company's Common Stock, $.001
par value. The letter of intent expires on December 31, 2005 unless
extended by the parties.
On November 10, 2005, the Company sold a total of 833,332 shares of its
Common Stock to two accredited investors at a price of $.06 per share
resulting in gross proceeds to the Company of $50,000.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Quarterly Report, statements that are not statements of current or historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "plan", "intend," "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
The Company provides capital and guidance to companies within the medical
sector, in exchange for revenues, royalties and other contractual rights known
as "royalty interests" that entitle it to receive a portion of revenue from the
sale of pharmaceuticals, medical devices and biotechnology products.
On December 12, 2003, the Company signed a royalty agreement with Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. Through September 30, 2005, the
Company has paid PSI a total of $720,000 under the agreement. 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. Through September 30, 2005, the
Company paid $74,060 of such expenses. In August 2005, the Company received from
PSI a letter stating that the proof of concept study under the royalty agreement
has been completed and that despite interesting preliminary in vitro results,
the study did not meet the success standards set forth in the royalty agreement
and that PSI has no definitive plans to move forward with the program. Phase III
has requested pursuant to the royalty agreement that additional in vitro studies
be performed with other molecules. PSI is under no obligation to perform any
additional studies. If no additional studies are performed under the royalty
agreement the likelihood of PSI generating revenues in which the Company would
share is substantially reduced.
On March 31, 2004, the Company signed a Joint Venture Agreement with NeoStem to
introduce NeoStem to potential clients for its services and/or technology. In
exchange for such introductions, Phase III will receive 10% of any revenues or
fees and 2% of any research grants received from or as a result of the
introduced client. As of September 30, 2005, no payments have been received
under this agreement.
On June 16, 2005, the Company signed a revenue sharing agreement with
Healthwave, a medical billing company that utilizes advanced, proprietary
technology and connectivity to improve the efficiency of paper-and
labor-intensive routines of healthcare transaction processing. Under the
agreement, Phase III initially will fund Healthwave $125,000 (with a potential
for an additional $125,000) and will provide guidance to them principally
relating to developing and marketing Healthwave's healthcare transaction
processing services. In return, Healthwave will pay Phase III on a monthly basis
a portion of its gross revenues, with certain stated minimums based on the stage
of the agreement. Healthwave has the right to terminate the agreement by paying
to Phase III a buy-out fee. The agreement is contingent on Phase III receiving
certain minimum financing and satisfactorily completing its due diligence.
On September 9, 2005, the Company signed a revenue sharing agreement with
NeoStem. The Company has agreed to fund NeoStem up to $20,000 initially to pay
certain expenses which the Company has the right to approve or not to approve
prior to funding. The Company has agreed to provide additional funding to
NeoStem based on a formula relating to the Company's ability to raise capital.
On October 19, 2005, the Company signed a non-binding letter of intent to
purchase all the assets, properties and rights of NeoStem that relate to its
adult stem cell collection and storage business and assume certain of its
liabilities. The letter of intent provides that the Company will pay the entire
purchase price in shares of the Company's Common Stock. The letter of intent
expires on December 31, 2005 unless extended by the parties.
14
RESULTS OF OPERATIONS
The Company recognizes revenue from its warranty service contracts business over
the life of contracts executed. Additionally, the Company purchased insurance to
fully cover any losses under the service contracts from a domestic carrier. The
insurance premium expense and other costs related to the sale are amortized
ratably over the life of the contracts.
Three Months Ended September 30, 2005 Compared To Three Months Ended September
30, 2004.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $8,218 for the three months ended September 30,
2005 as compared to $2,968 for the three months ended September 30, 2004. The
revenues generated in the quarter were derived entirely from revenues deferred
over the life of contracts sold in prior periods. Similarly, direct costs
incurred were $5,750 and $1,964 for the three months ended September 30, 2005
and 2004, respectively. In addition, the Company paid $6,540 of expenses
relating to its revenue sharing agreement with NeoStem for the three months
ended September 30, 2005 as compared to $234,060 paid for the three months ended
September 30, 2004 to PSI. Due to the uncertainty of the future revenues, these
amounts paid have been charged to current operations.
General and administration expenses increased approximately $354,000 to $538,070
for the three months ended September 30, 2005 as compared to $184,342 for the
three months ended September 30, 2004. The increase in general and
administrative expenses is primarily due to increases in payroll and related
expenses of $219,000, professional fees of $70,000, investment banking expenses
of $25,000, printing costs relating to a private placement that has yet to close
of $27,000 and expenses relating to the amending of certain employment
agreements of $13,000.
Interest expense decreased by approximately $50,000 for the three months ended
September 30, 2005 from the three months ended September 30, 2004. Such decrease
was primarily as a result of reduced interest rates on certain debt, no shares
being issued as additional interest and the elimination of default options on
debt that has been repaid.
For the reasons cited above, the net loss for the three months ended September
30, 2005 increased to $575,351 from $500,495 for the three months ended
September 30, 2004.
Nine Months Ended September 30, 2005 Compared To Nine Months Ended September 30,
2004.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $28,201 for the nine months ended September 30,
2005 as compared to $37,383 for the nine months ended September 30, 2004. The
revenues generated in the nine months were derived entirely from revenues
deferred over the life of contracts sold in prior periods. Similarly, direct
costs incurred were $19,770 and $26,108 for the nine months ended September 30,
2005 and 2004, respectively. In addition, the Company paid $6,540 of expenses
relating to its revenue sharing agreement with NeoStem for the nine months ended
September 30, 2005 as compared to $714,060 paid for the nine months ended
September 30, 2004 to PSI. Due to the uncertainty of the future revenues, these
amounts paid have been charged to current operations.
General and administration expenses increased approximately $603,000 to
$1,112,331 for the nine months ended September 30, 2005 as compared to $508,953
for the nine months ended September 30, 2004. The increase in general and
administrative expenses is primarily due to increases in payroll and related
expenses of $379,000, increases in professional fees of $156,000, increases in
investment banking fees and investor relations of $30,000, increases in printing
costs related to a private placement yet to close of $27,000 and increases in
stock transfer fees of $8,000.
Interest expense decreased by approximately $130,000 for the nine months ended
September 30, 2005 from the nine months ended September 30, 2004. Such decrease
was primarily as a result of reduced interest rates on certain debt, no shares
being issued as additional interest and the elimination of default options on
debt that has been repaid
For the reasons cited above, the net loss for the nine months ended September
30, 2005 decreased to $1,218,087 from $1,448,881 for the nine months ended
September 30, 2004.
15
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
Nine Months Ended
-----------------
September 30, 2005 September 30, 2004
------------------ ------------------
Cash used in
Operating Activities $ (477,491) $ (1,120,064)
Cash used by
Investing Activities - $ (3,934)
Cash provided by
Financing Activities $ 460,000 $ 1,374,487
The Company incurred a net loss of $1,218,087 for the nine months ended
September 30, 2005. Such loss adjusted for non-cash items such as deferred
revenues (net of deferred acquisition costs) ($8,431) and other non-cash credits
totaling $282,431 resulted in cash used in operations totaling $477,491 for the
nine months ended September 30, 2005 including working capital movements of
$466,596 which is comprised of accounts payable, accrued expenses and other
liabilities of $469,581 and prepaid expenses of $(2,985).
To meet its cash requirements for the nine months ended September 30, 2005, the
Company relied on the net proceeds from the issuance of Promissory Notes and
Common Stock in the amount of $490,000. In order to address the cash
requirements for the Company through the end of the year, the Company, on June
28, 2005, commenced a private placement of a minimum of $500,000 and a maximum
of $2,000,000, without accounting for any over-subscription allowances, of
Senior Secured Convertible Notes and Common Stock Warrants. The Convertible
Notes bear interest at 10% per annum paid semiannually in arrears and are
convertible at any time into shares of the Company's Common Stock at a
conversion price of $.08 per share. In addition, for each $1,000 face amount of
Convertible Note purchased, the investor will receive a Warrant to purchase
12,500 shares of Common Stock. Each Warrant is exercisable at a price of $.10
per share. This offering expired on August 31, 2005. The placement agent has not
closed nor remitted any funds to the Company.
The Company has a contractual commitment to pay PSI up to an additional $205,940
through the end of its agreement. In addition, the Company has the obligation to
pay NeoStem up to any additional $13,460 of approved expenses. As of September
30, 2005, the Company had cash balances totaling approximately $10,000. The
Company will rely on its current cash and proceeds from additional financing
through the issuance of promissory notes and sales of common stock to fund its
new business operations until they become cash generative, if at all. All
interest payments are current. There can be no assurance that sufficient
proceeds will be raised to meet current obligations when due.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company currently has no operations and limited
financial resources to pay its current expenses and liabilities. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In order to provide the funding to Healthwave and NeoStem pursuant to the
revenue sharing agreements between each of them and the Company, the Company
will need to raise sufficient funds. Each of these agreements provides that the
Company's funding obligations are subject to the Company raising $1,500,000 in
equity financing. The Company will also need to raise sufficient funds to pay
its debts and other obligations.
In the event the Company consummates the acquisition of all of NeoStem's assets
relating to its adult stem cell collection and storage business, the business of
NeoStem will become the Company's primary business and it will utilize the
combined management team and advisors to grow and expand the Company. NeoStem
operates the first autologous adult stem cell bank in the world and is
pioneering the pre-disease collection, processing and storage of adult stem
cells for future medical treatments. In order to grow the business as planned,
the Company will need to raise substantial funds and is currently seeking to do
so.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the nine months ended September 30, 2005, a situation which is
expected to continue for the foreseeable future.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Our principal executive officer has concluded, based on his evaluation
of, the effectiveness of our "disclosure controls and procedures" as of the
end of the period covered by this quarterly report on Form 10-Q (as defined
under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of
1934) were effective as of such date to ensure that information we are
required to disclose in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and include controls and procedures
designed to ensure that information we are required to disclose in such
reports is accumulated and communicated to management, including our
principal executive, as appropriate, to allow timely decisions regarding
required disclosure.
(b) During our last fiscal quarter and subsequent to our evaluation, there
were no significant changes in internal controls or other factors that have
materially affected, or reasonably likely to materially affect our internal
controls over financial reporting.
17
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Notes issued from March through August 2003, in the amount of $170,000, of which
$15,000 is from a related party, are in default and bear interest at 20% per
annum. Notes issued in August through December 2004, for $280,000, of which
$275,000 is still outstanding, are in default and bear interest at rates from 8%
to 20% per annum. Notes issued in January through September 2005, for $52,000,
are in default and bear interest at rates from 8% to 20% per annum.
Cumulative dividends payable on Series A Convertible Redeemable Preferred Stock
totaled $516,643 at September 30, 2005, of which $35,763 represents dividends
for the nine months then ended.
ITEM 6. EXHIBITS
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
10.8 Restricted Stock Agreement with Mark Weinreb
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE III MEDICAL, INC. (Registrant)
By: /s/ Mark Weinreb
----------------
Mark Weinreb, President and Chief Executive Officer
Date: November 14, 2005
19
Exhibit 31.1
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Phase III Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly;
4. The registrant's other certifying officer(s) (if any) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this quarterly report based on such evaluation; and
c) presented in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. I have disclosed, based on our most recent evaluation of internal control
over financial reporting to the registrant's auditors and the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 14, 2005
/s/ Mark Weinreb
- ----------------
Name: Mark Weinreb
Title: Chief Executive Officer of Phase III Medical, Inc.
A signed original of this written statement required by Section 302 has been
provided to Phase III Medical, Inc. and will be retained by Phase III Medical,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
20
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Phase III Medical, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2004 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Mark
Weinreb, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition of the Company as of the
dates presented and the result of operations of the Company for the
periods presented.
Dated: November 14, 2005
/s/ Mark Weinreb
----------------
Mark Weinreb
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code) and is not being filed as part of the Form
10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to Phase III Medical, Inc. and will be retained by Phase III Medical,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
21
Exhibit 10.8
PHASE III MEDICAL, INC.
RESTRICTED STOCK GRANT AGREEMENT
This Restricted Stock Grant Agreement (the "Agreement"), dated as
of the "Award Date" set forth in the attached Exhibit A, is entered into between
Phase III Medical, Inc., a Delaware corporation (the "Company"), and the
individual identified in Exhibit A (the "Awardee").
WHEREAS, the Company desires to provide the Awardee an incentive
to participate in the success and growth of the Company through the holding of a
proprietatry interest in the Company; and
WHEREAS, to give effect to the foregoing intentions, the Company
desires to grant the Awardee a restricted stock award of shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") pursuant to the
Phase III Medical, Inc. 2003 Equity Participation Plan, as amended (the "Plan");
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. Grant. The Company hereby grants the Awardee a restricted
stock award (the "Award") with respect to the number of shares of Common Stock
set forth in Exhibit A (such shares being referred to herein as the "Restricted
Shares"). The Award and the Restricted Shares shall be subject to the terms and
conditions set forth in this Agreement and the provisions of the Plan, the terms
of which are incorporated herein by reference. Capitalized terms used but not
otherwise defined herein shall have the meanings as set forth in the Plan.
2. Lapsing Forfeiture Provisions. Subject to the terms of this
Agreement, the Awardee shall forfeit the Restricted Shares to the extent set
forth in Exhibit A immediately upon Awardee's termination of employment,
directorship and/or consultancy with the Company prior to the date(s) set forth
in Exhibit A. Restricted Shares, to the extent forfeited, shall be immediately
returned to the Company.
3. Transfer Restrictions. Prior to the satisfaction of the
conditions set forth in Exhibit A, the Awardee shall not sell, assign, pledge or
otherwise transfer (voluntarily or involuntarily) any of the Restricted Shares.
Upon satisfaction of the conditions set forth in Exhibit A with respect to
Restricted Shares, the transfer restrictions set forth in this Section shall
lapse with respect to the Restricted Shares for which such conditions are
satisfied. As a condition of the grant of this award, Awardee shall be required
to execute a stock power in blank in the form of Exhibit B hereto with respect
to any shares issued pursuant to this Agreement.
4. Adjustment of Shares. Notwithstanding anything contained
herein to the contrary, in the event of any change in the Company's Common Stock
resulting from a corporate transaction including, but not limited to, a
subdivision or consolidation, reorganization, recapitalization, merger, share
split, reverse share split, share distribution, combination of shares or the
payment of a share dividend, the Restricted Shares shall be treated in the same
manner in any such transaction as other Common Stock. Any Common Stock or other
securities received by the Awardee as a result of such transaction with respect
to the Restricted Shares shall be subject to the restrictions and conditions set
forth herein and in the attached Exhibit A.
5. Rights as Stockholder. Except as provided by Section 3 hereof,
the Awardee shall be entitled to all of the rights of a stockholder with respect
to the Restricted Shares as of the Award Date, including, but not limited to,
the right to vote such shares and receive dividends and other distributions
payable with respect to same.
22
6. Escrow of Share Certificates. As soon as reasonably
practicable after the Award Date, the Company shall issue stock certificates in
the Awardee's name that correspond to the Restricted Shares (the
"Certificates"), and shall hold such Certificates in escrow for the Awardee's
benefit, properly endorsed for transfer, until such time as the Restricted
Shares are forfeited to the Company or all restrictions thereon lapse. The
Company shall not be liable for any act it may do or fail to do with respect to
the holding of the Certificates in escrow hereunder, provided it acts or fails
to act in good faith and in the exercise of its sound judgment.
7. Legend. The Certificates shall bear the following legend:
THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS
AND CONDITIONS (INCLUDING FORFEITURE CONDITIONS AND TRANSFER
RESTRICTIONS) CONTAINED IN A RESTRICTED STOCK AWARD AGREEMENT
BETWEEN PHASE III MEDICAL, INC. AND THE HOLDER AND THE TERMS OF
THE PHASE III MEDICAL, INC. 2003 EQUITY PARTICIPATION PLAN, AS
EACH MAY BE AMENDED FROM TIME TO TIME. A COPY OF SUCH AGREEMENT
IS ON FILE IN THE OFFICE OF THE GENERAL COUNSEL OF PHASE III
MEDICAL, INC.
8. Section 83(b) Election. The Awardee hereby acknowledges that
the Awardee has been informed that, with respect to the Restricted Shares, the
Awardee may file an election with the Internal Revenue Service, within 30 days
of the execution of this Agreement, electing pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, (the "Code") to be taxed currently on
any difference between the purchase price of the Restricted Shares and their
fair market value on the date of purchase. Absent such an election, taxable
income will be measured and recognized by the Awardee at the time or times at
which the forfeiture restrictions on the Restricted Shares lapse. The Awardee is
strongly encouraged to seek the advice of his own tax consultants in connection
with the issuance of the Restricted Shares and the advisability of filing an
election under Section 83(b) of the Code. Upon filing an election under Section
83(b) of the Code, Awardee shall promptly provide a copy of such election to the
Company. A form of Election under Section 83(b) is attached hereto as Exhibit C
for reference.
THE AWARDEE ACKNOWLEDGES THAT IT IS NOT THE COMPANY'S, BUT RATHER
THE AWARDEE'S SOLE RESPONSIBILITY TO FILE THE ELECTION UNDER SECTION 83(b)
TIMELY.
Circular 230 Disclaimer: To ensure compliance with requirements
imposed by the IRS, any U.S. federal tax advice contained in this Agreement
(including any attachments) is not intended or written to be used, and cannot be
used, for the purpose of (i) avoiding tax-related penalties under the Internal
Revenue Code or (ii) promoting, marketing or recommending to another party any
transaction or tax-related matter(s) addressed herein.
9. Government Regulations. Notwithstanding anything contained
herein to the contrary, the Company's obligation to issue or deliver
certificates evidencing the Restricted Shares shall be subject to the terms of
all applicable laws, rules and regulations and to such approvals by any
governmental agencies or national securities exchanges as may be required.
10. Withholding Taxes. The Company shall have the right to
require the Awardee to remit to the Company, or to withhold from amounts payable
to the Awardee, as compensation or otherwise, an amount sufficient to satisfy
all federal, state and local withholding tax requirements (including, without
limitation, any tax resulting from (i) the expiration of restrictions set forth
hereunder that are applicable to any particular Restricted Shares or (ii) an
election made by the Awardee under Section 83(b) of the Code).
11. Investment Purpose. The Awardee agrees not to sell, transfer
or otherwise dispose of such shares unless they are either (1) registered under
the Securities Act of 1933 and all applicable state securities laws, or (2)
exempt from such registration in the opinion of Company counsel, and consents to
the Company's placing of the legend set forth in Section 7 above on the
certificates summarizing such securities law restrictions.
23
12. Awardee Representations. The Awardee has reviewed with his
own tax advisors the federal, state, local and foreign tax consequences of the
transactions contemplated by this Agreement. The Awardee is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents, if any, made to the Awardee. The Awardee understands that the
Awardee (and not the Company) shall be responsible for the Awardee's own tax
liability arising as a result of the transactions contemplated by this
Agreement.
13. Employment. Neither this Agreement nor any action taken
hereunder shall be construed as giving the Awardee any right of continuing
employment by the Company.
14. Notices. Notices or communications to be made hereunder shall
be in writing and shall be delivered in person, by registered mail, by confirmed
facsimile or by a reputable overnight courier service to the Company at its
principal office or to the Awardee at his address contained in the records of
the Company.
15. Governing Law. This Agreement shall be construed under the
laws of the State of New Jersey, without regard to conflict of laws principles.
16. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements and understandings relating to the subject
matter of this Agreement.
17. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and the Awardee and their respective
permitted successors, assigns, heirs, beneficiaries and representatives. This
Agreement is personal to the Awardee and may not be assigned by the Awardee
without the prior consent of the Company. Any attempted assignment in violation
of this Section shall be null and void.
18. Amendment. This Agreement may be amended or modified only by
a written instrument executed by both the Company and the Awardee.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement or caused their duly authorized officer to execute this Agreement as
of the date first written above.
PHASE III MEDICAL, INC.
By: /S/ Catherine Vaczy
-------------------
Name: Catherine Vaczy
Title: EVP
AWARDEE
/S/ Mark Weinreb
----------------
Mark Weinreb
24
EXHIBIT A
1. (a). Awardee's Name: Mark Weinreb
-----------------------------------
(b). Awardee's Social Security Number:
-----------------
(c). Award Date: July 20, 2005
---------------------------------------
(d). Number of Restricted Shares Granted: 3,000,000
--------------
(e). Vesting Requirements: The Restricted Shares shall become vested,
and the restrictions applicable to Restricted Shares shall lapse
over a period of two years, as follows:
-----------------------------------------------------------------
Restrictions applicable to the Shall lapse on the following
following Number of Restricted date; provided that the
Shares: Awardee is in the employ of,
is a director of, or is a
consultant to, the Company
on such date:
-----------------------------------------------------------------
1,000,000 July 20, 2005
-----------------------------------------------------------------
1,000,000 July 20, 2006
-----------------------------------------------------------------
1,000,000 July 20, 2007
-----------------------------------------------------------------
Notwithstanding the foregoing, in the event of a complete
liquidation or a merger or consolidation (as set forth in Section
19 of the Plan) while the Awardee is in the employ of, a director
of, or is a consultant to, the Company, the Board of Directors of
the Company may provide written notice to the Awardee that all
non-vested options and Restricted Shares granted under the Plan
shall thereupon be vested and the restrictions applicable to all
Restricted Shares shall thereupon lapse.
25
EXHIBIT B
STOCK POWER
FOR VALUE RECEIVED, Mark Weinreb hereby sells, assigns, and
transfers unto Phase III Medical, Inc. 2,000,000 shares of common stock of Phase
III Medical, Inc. issued pursuant to, and subject to the terms of, that certain
Restricted Stock Grant Agreement by and between the Company and Mark Weinreb,
dated July 20, 2005, standing in his/her name on the books of said corporation
represented by Certificate No. ___ herewith, and does hereby irrevocably
constitute and appoint _____________________ as his attorney to transfer the
said stock on the books of said corporation with full power of substitution in
the premises.
Dated:
--------------------
----------------------------------
Mark Weinreb
In the presence of:
- ------------------------------
26
EXHIBIT C
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby makes an election pursuant to Section 83(b)
of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations
thereunder (the "Regulations"), and in connection with this election supplies
the following information:
1. The name, address and taxpayer identification number of the undersigned
are:
Name:
-----------------------------------
Address:
---------------------------------------------------------
Social Security Number: - -
--- -- ----
2. The election is being made with respect to ________ shares of common stock
(the "Stock") of Phase III Medical, Inc., a Delaware corporation (the
"Company").
3. The date on which the Stock was transferred to the undersigned was
____________, 200__. The taxable year for which this election is being made is
calendar year 200__.
4. The property is subject to the following restrictions:
The above-mentioned shares may not be transferred and are subject to
forfeiture under the terms of an agreement between the taxpayer and the
Company. These restrictions lapse upon the satisfaction of certain
conditions contained in such agreement.
Disposition of the Stock is also subject to restrictions imposed under
applicable federal and state securities laws regulating the transfer of
unregistered securities.
5. The fair market value of the Stock at the time of transfer (determined
without regard to any lapse restriction, as defined in ss.1.83-3(i) of the
Regulations) was $___________.
6. The undersigned did not pay any amount for the Stock. Therefore, $______
(the full fair market value of the Stock stated above) is includible in the
undersigned's gross income as compensation for services.
7. A copy of this election has been furnished to the Company as required by
ss.1.83-2(d) of the Regulations.
Dated: ----------------------------
------------------------- Taxpayer signature
INSTRUCTIONS FOR FILING SECTION 83(B) ELECTION
Attached is a form of election under section 83(b) of the Internal Revenue
Code. If you wish to make such an election, you should complete, sign and date
the election and then proceed as follows:
1. Execute three counterparts of your completed election (plus one extra
counterpart for each person other than you, if any who receives property that is
the subject of your election), retaining at least one photocopy for your
records.
2. Send one counterpart to the Internal Revenue Service Center with which you
will file your Federal income tax return for the current year (e.g., Holtsville,
New York for New Jersey residents) via certified mail, return receipt requested.
THE ELECTION SHOULD BE SENT IMMEDIATELY, AS YOU ONLY HAVE 30 DAYS FROM THE
ISSUANCE/PURCHASE/GRANT DATE WITHIN WHICH TO MAKE THE ELECTION - NO WAIVERS,
LATE FILINGS OR EXTENSIONS ARE PERMITTED.
3. Deliver one counterpart of the completed election to the Company for its
files.
4. If anyone other than you (e.g., one of your family members) will receive
property that is the subject of your election, deliver one counterpart of the
completed election to each such person.
5. Attach one counterpart of the completed election to your Federal income tax
return for this year when you file that return next.
28