SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
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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.)
420 LEXINGTON AVE, SUITE 450, NEW YORK, NEW YORK 10170
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 212-584-4184
(FORMERLY: 33O SOUTH SERVICE ROAD, SUITE 120 MELVILLE, NEW YORK, 11949)
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 large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [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 [ ]
151,449,821 SHARES, $.001 PAR VALUE, AS OF AUGUST 8, 2006
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
I N D E X Page No.
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Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets At June 30, 2006 and
December 31, 2005 3
Consolidated Statements of Operations For the three
months and six months ended June 30, 2006 and 2005 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 and 2005 5
Notes to Unaudited Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4. Controls and Procedures 18
Part II - Other Information:
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19-21
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Securityholders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
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PHASE III MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2006 2005
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Current assets:
Cash and cash equivalents $912,250 $488,872
Prepaid expenses and other current assets 119,233 18,447
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Total current assets 1,031,483 507,319
Property and equipment, net 68,591 1,488
Deferred acquisition costs 10,187 19,121
Goodwill 580,866 -
Other assets 3,000 114,753
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$1,694,127 $642,681
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable - preferred stock $ - $528,564
Accounts payable 401,164 256,976
Accrued liabilities 117,657 617,196
Other current liabilities 1,379,519 -
Due to related party - current portion 125,000 -
Notes payable 189,542 135,000
Notes payable - related parties - 48,000
Convertible promissory notes - net of debt discount
of $75,804 and $83,333 424,196 166,667
Capitalized lease obligations - current portion 25,455 -
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Total current liabilities 2,662,533 1,752,403
Unearned revenues 14,221 26,745
Due to related party - long-term portion 81,731 -
Capitalized lease obligations 54,513 -
Series A mandatorily redeemable convertible preferred stock - 681,171
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Total Liabilities 2,812,998 2,460,329
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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,
500,000,000 shares; issued and outstanding,
144,066,189 shares at June 30, 2006 and
70,543,862 shares at December 31, 2005 144,067 70,545
Additional paid-in capital 15,376,853 12,367,082
Accumulated deficit (16,639,891) (14,255,365)
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Total stockholders' deficit (1,118,871) (1,817,638)
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$1,694,127 $642,681
============= ==============
See accompanying notes to consolidated financial statements
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PHASE III MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Earned revenues $ 6,262 $ 9,448 $ 12,524 $ 19,983
Direct costs (4,467) (6,603) (8,934) (14,020)
------------ ------------ ------------ ------------
Gross profit 1,795 2,845 3,590 5,963
Selling, general and administrative 1,039,409 358,760 1,978,234 574,261
------------ ------------ ------------ ------------
Operating loss (1,037,614) (355,915) (1,974,644) (568,298)
Other income (expense):
Interest income 2,005 - 2,544 -
Interest expense (209,473) (25,230) (402,492) (50,596)
Interest expense - Series A
mandatorily redeemable convertible
preferred stock - (11,921) (9,934) (23,842)
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders $ (1,245,082) $ (393,066) $ (2,384,526) $ (642,736)
============ ============ ============ ============
Net loss per common share ($0.01) ($0.01) ($0.03) ($0.02)
============ ============ ============ ============
Weighted average
common shares outstanding 101,142,933 43,647,024 90,403,659 43,726,123
============ ============ ============ ============
See accompanying notes to consolidated financial statements
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PHASE III MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
-----------------------------------
2006 2005
--------------- ----------------
Cash flows from operating activities:
Net loss $ (2,384,526) $ (642,736)
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 675,473 27,149
Depreciation 12,041 979
Amortization of debt discount 136,696 5,882
Series A mandatorily redeemable convertible preferred
stock dividends 9,934 23,842
Deferred acquisition costs 8,934 14,020
Changes in operating asset and liabilities:
Prepaid expenses and other current assets (103,591) 1,310
Unearned revenues (12,524) (19,983)
Accounts payable, accrued expenses, and other current
liabilities (126,063) 256,929
--------------- ----------------
Net cash used in operating activities (1,783,626) (332,608)
--------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,928,100 152,000
Proceeds from advances on notes payable 180,396 155,000
Payments of capitalized lease obligations (9,631) -
Net Proceeds from advances on notes payable -- related
party - 23,000
Proceeds from sale of convertible debentures 250,000 -
Repayments of notes payable (141,861) (25,000)
--------------- ----------------
Net cash provided by financing activities 2,207,004 305,000
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Net increase/(decrease) in cash and cash equivalents 423,378 (27,608)
Cash and cash equivalents at beginning of period 488,872 27,868
--------------- ----------------
Cash and cash equivalents at end of period $ 912,250 $ 260
=============== ================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 38,698 $ 41,011
Supplemental Schedule of Non-cash Financing Activities:
Issuance of shares for purchase of NeoStem $ 200,000 $ -
Net accrual of dividends on Series A Preferred Stock $ 9,934 $ 23,842
Issuance of common stock for services rendered $ 301,483 $ 26,278
Compensatory element of stock options $ 298,516 $ 874
See accompanying notes to consolidated financial statements.
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PHASE III MEDICAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Phase III Medical, Inc., a Delaware corporation ("Phase III" or the
"Company") is engaged in the business of operating a commercial autologous
(donor and recipient are the same) adult stem cell bank and is pioneering
the pre-disease collection, processing and storage of adult stem cells that
donors can access for their own present and future medical treatment. The
Company's previous business was to provide capital and business guidance to
companies in the healthcare and life science industries. On January 19,
2006 the Company consummated the acquisition of the assets of NeoStem,
Inc., a California corporation ("NeoStem") relating to NeoStem's business
of collecting and storing adult stem cells. NeoStem had been a company to
which Phase III had been providing business guidance. Effective with the
acquisition, the business of NeoStem became the principal business of the
Company. The Company now provides adult stem cell processing, collection
and banking services with the goal of making stem cell collection and
storage widely available, so that the general population will have the
opportunity to store their own stem cells for future healthcare needs. The
Company also plans to become the leading provider of adult stem cells for
therapeutic use in the burgeoning field of regenerative medicine for
potentially addressing heart disease, certain types of cancer and other
critical health problems. The Company is utilizing the combined Phase III
and NeoStem management teams to develop and expand this business.
Prior to the NeoStem acquisition, the business of the Company was to
provide capital and business guidance to companies in 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.
Additionally, through June 30, 2002, the Company was a provider of extended
warranties and service contracts via the Internet at
warrantysuperstore.com. The Company is still engaged in the "run off" of
such extended warranties and service contracts.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, the
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position as of June 30,
2006 and December 31, 2005, the results of operations for the three months
and six months ended June 30, 2006 and 2005 and the cash flows for the six
months ended June 30, 2006 and 2005. The results of operations for the
three months and six months ended June 30, 2006 are not necessarily
indicative of the results to be expected for the full year.
The Company's consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company currently has no
cash generating revenues 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 consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The December 31, 2005 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 -RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments- An
Amendment of FASB No. 133 and 140. The purpose of SFAS statement No. 155 is
to simplify the accounting for certain hybrid financial instruments by
permitting fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 also eliminates the restriction on passive
derivative instruments that a qualifying special-purpose entity may hold.
-6-
SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of any entity's first fiscal year beginning after
September 15, 2006. We believe that the adoption of this standard on
January 1, 2007 will not have a material effect on our consolidated
financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an Amendment of SFAS No. 140. SFAS No. 156 requires
separate recognition of a servicing asset and a servicing liability each
time an entity undertakes and obligation to service a financial asset by
entering into a servicing contract. This statement also requires that
servicing assets and liabilities be initially recorded at fair value and
subsequently adjusted to the fair value at the end of each reporting
period. This statement is effective in fiscal years beginning after
September 15, 2006. We believe that the adoption of this standard on
January 1, 2007 will not have a material effect on our consolidated
financial statements.
NOTE 4 -STOCK OPTIONS
The Company's Equity Participation Plan (the "Plan") permits the grant of
share options and shares to its employees, Directors, consultants and
advisors for up to 50,000,000 shares of common stock as stock compensation.
All stock options under the Equity Participation Plan are generally granted
at the fair market value of the common stock at the grant date. Employee
stock options vest ratably over a period determined at time of grant and
generally expire 10 years from the grant date.
Effective January 1, 2006, the Company's Plan is accounted for in
accordance with the recognition and measurement provisions of Statement of
Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)"), which replaces FAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and
related interpretations. FAS 123 (R) requires compensation costs related to
share-based payment transactions, including employee stock options, to be
recognized in the financial statements. In addition, the Company adheres to
the guidance set forth within Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views
regarding the interaction between SFAS No. 123(R) and certain SEC rules and
regulations and provides interpretations with respect to the valuation of
share-based payments for public companies.
Prior to January 1, 2006, the Company accounted for similar transactions in
accordance with APB No. 25 which employed the intrinsic value method of
measuring compensation cost. Accordingly, compensation expense was not
recognized for fixed stock options if the exercise price of the option
equaled or exceeded the fair value of the underlying stock at the grant
date.
While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting period,
companies were permitted to continue to apply the intrinsic value-based
method of accounting prescribed by APB No. 25 and disclose certain
pro-forma amounts as if the fair value approach of SFAS No. 123 had been
applied. In December 2002, FAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS No. 123, was
issued, which, in addition to providing alternative methods of transition
for a voluntary change to the fair value method of accounting for
stock-based employee compensation, required more prominent pro-forma
disclosures in both the annual and interim financial statements. The
Company complied with these disclosure requirements for all applicable
periods prior to January 1, 2006.
In adopting FAS 123(R), the Company applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of FAS 123 (R) are to be applied to new awards and to awards
modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the
required effective date shall be recognized as the requisite service is
rendered on or after the required effective date. The compensation cost for
that portion of awards shall be based on the grant-date fair value of those
awards as calculated for either recognition or pro-forma disclosures under
FAS 123.
As a result of the adoption of FAS 123 (R), the Company's results for the
three month and six month period ended June 30, 2006 include share-based
compensation expense totaling approximately $245,619 and $298,516
respectively. Such amounts have been included in the consolidated
statements of income within general and administrative expenses. Stock
compensation expense recorded under APB No. 25 in the consolidated
statements of operations for the three months and six months ended June 30,
2005 totaled $0.
Stock option compensation expense in 2006 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite
service period for entire portion of the award.
The weighted average estimated fair value of stock options granted in the
three months and six months ended June 30, 2006 was $.06 and $.06,
respectively. The weighted average estimated fair value of stock options
-7-
granted in the three months and six months ended June 30, 2005 was $.025
and $.0283, respectively. The fair value of options at the date of grant
was estimated using the Black-Scholes option pricing model. During 2006,
the Company took into consideration the guidance under SFAS 123(R) and SAB
No. 107 when reviewing and updating assumptions. The expected volatility is
based upon historical volatility of our stock and other contributing
factors. The expected term is based upon observation of actual time elapsed
between date of grant and exercise of options for all employees. Previously
such assumptions were determined based on historical data.
The assumptions made in calculating the fair values of options are as
follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
2006 2005 2006 2005
---------------- ---------------- --------------- ----------------
Expected term (in years) 10 10 10 10
Expected volatility 199% 200% 197% 200%
Expected dividend yield 0% 0% 0% 0%
Risk-free interest rate 2.80% 2.80% 2.80% 2.80%
The following table addresses the additional disclosure requirements of FAS
123(R) in the period of adoption. The table illustrates the effect on net
income and earnings per share as if the fair value recognition provisions
of FAS No. 123 had been applied to all outstanding and unvested awards in
the prior year comparable period.
Three Months Six Months
Ended June Ended June
30, 2005 30, 2005
-------------- --------------
Net loss, as reported $(393,066) $(642,736)
Add: Stock based compensation included in
reported net income - -
Deduct: Total stock based compensation
expense determined under the fair value
based method for all awards (no tax effect) (17,726) (35,452)
-------------- --------------
Pro forma net loss $(410,792) $(678,188)
============== ==============
Net loss per share:
Basic, as reported ($0.01) ($0.02)
Basic, proforma ($0.01) ($0.02)
The Company granted 11,140,000 and 11,365,000 options under the Plan during
the three months and six months ended June 30, 2006, respectively, at
exercise prices ranging from $.044 per share to $.25 per share.
-8-
The following table represents our stock options granted, exercised, and
forfeited during the six months ended June 30, 2006.
Weighted Average Weighted Average Aggregate
Number of Exercise Price Remaining Intrinsic
Shares Per Share Contractual Term Value
------------- ------------------ ------------------- ------------
Stock Options
Outstanding at December 31, 2005 17,885,000 $0.0684
Granted 11,365,000 $0.0876
Exercised
Forfeited/expired (500,000) $0.0600
-------------
Outstanding at June 30, 2006 28,750,000 $0.0759 8.82 $83,000
=============
Vested and Exercisable at June 30, 2006 15,275,000 $0.0730 7.11 $50,000
=============
As of June 30, 2006, there was $ 556,360 of total unrecognized compensation
costs related to unvested stock option awards which are expected to vest
over a weighted average life of 1.09 years.
Weighted
Average Grant
Options Date Fair Value
----------------- ---------------
Nonvested at December 31, 2005 5,800,000 $0.0337
Granted 11,365,000 $0.0600
Vested (3,190,000) $0.0557
Forfeited (500,000) $0.0437
-----------------
Nonvested at June 30, 2006 13,475,000 $0.0492
=================
The total fair value of shares vested during the six month period ended
June 30, 2006 was $298,516.
NOTE 5 - NOTES PAYABLE
On March 17, 2003, the Company commenced a private placement offering to
raise up to $250,000 in 6-month promissory notes in increments of $5,000
bearing interest at 15% per annum. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act
of 1933, as amended, 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 June 30, 2006, $90,000 has been converted into 1,530,000
shares of the Company's Common Stock and $95,000 has been repaid and the
remaining balance of $65,000 bears interest at 20% and the due date has
been extended to September 30, 2006. All interest payments have been made
timely.
-9-
In August 2004, the Company sold 30 day 20% notes in the amount of $55,000
to two accredited investors to fund current operations. As of June 30,
2006, $30,000 of these notes has been paid and $25,000 converted into
425,000 shares of the Company's Common Stock. 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 June 30, 2006, $15,000 has been repaid and $85,000
converted into 1,445,000 shares of the Company's Common Stock, and as of
June 30, 2006 there are no amounts due. All interest payments have been
made timely.
In March 2005, the Company sold a 30 day 8% note in the amount of $17,000,
in August 2005, an 8% note in the amount of $10,000 and in September 2005,
two 8% notes in the amounts of $6,000 and $15,000 to its President and then
CEO, totaling $48,000 and were all due on demand. In January 2006, all
notes were repaid. The interest on these notes was made timely.
On December 30, 2005, the Company sold $250,000 of convertible nine month
Promissory Notes which bear 9% simple interest with net proceeds to the
Company of $220,000. These convertible notes were sold in connection with a
subscription agreement between the Company and Westpark Capital, Inc.
("Westpark"). (The convertible notes and warrants sold in December, 2005
and January, 2006 in the transaction in which Westpark Capital, Inc. acted
as the placement agent is sometimes referred to here in as the "Westpark
Private Placement") As part of the Westpark Private Placement, these
Promissory Notes have 416,666 detachable warrants for each $25,000 of debt,
which entitle the holder to purchase one share of the Company's Common
Stock at a price of $.12 per share. The warrants are exercisable for a
period of three years from the date of the Promissory Note. The Promissory
Notes convert to the Company's Common Stock at $.06 per share. The
Promissory Notes are convertible at anytime into shares of Common Stock at
the option of the Company subsequent to the shares underlying the
Promissory Notes and the shares underlying the warrants registration if the
closing price of the Common Stock has been at least $.18 for a period of at
least 10 consecutive days prior to the date on which notice of conversion
is sent by the Company to the holders of the Promissory Notes. Pursuant to
the terms of the WestPark Private Placement, the Company agreed to file
with the SEC and have effective by July 31, 2006, a registration statement
registering the resale by the investors in the WestPark Private Placement
of the shares of Common Stock underlying the convertible notes and the
warrants sold in the WestPark Private Placement. This registration
statement was made effective by July 31, 2006 and certain additional rights
have accrued to the Convertible Promissory Noteholders (see Note 12 for a
detailed description of these additional rights). In connection with this
event the Company is approaching Convertible Promissory Noteholders with
proposals to extend the term or convert their debt positions into Common
Stock under terms that are more favorable than the subscription agreement
calls for (see Note 12 for a detailed description of these proposals and
the amount of debt that has been extended or converted into Common
Stock).The Company recorded a debt discount associated with the conversion
feature in the amount of $83,333. For the three months and six months ended
June 30, 2006, the Company charged $27,776 and $55,758 of the debt discount
to interest expense, respectively. The debt discount recorded of $83,333
does not change the amount of cash required to payoff the principal value
of these Promissory Notes, at any time during the term, which is $250,000.
In 2005, the Company recorded an expense of $2,573 associated with the
warrants as their fair value using the Black Scholes method.
In January 2006, the Company sold an additional $250,000 of convertible
nine month Promissory Notes which bear 9% simple interest with net proceeds
to the Company of $223,880 as part of the Westpark Private Placement. These
Promissory Notes also have 416,666 detachable warrants for each $25,000 of
debt, which entitle the holder to purchase one share of the Company's
Common Stock at a price of $.12 per share. The warrants are exercisable for
a period of three years from the date of the Promissory Note. The
Promissory Notes convert to the Company's Common Stock at $.06 per share.
The Promissory Notes are convertible at anytime into shares of Common Stock
at the option of the Company subsequent to the shares underlying the
Promissory Notes and the shares underlying the warrants registration if the
closing price of the Common Stock has been at least $.18 for a period of at
least 10 consecutive days prior to the date on which notice of conversion
is sent by the Company to the holders of the Promissory Notes. Pursuant to
the terms of the WestPark Private Placement, the Company agreed to file
with the SEC and have effective by July 31, 2006, a registration statement
registering the resale by the investors in the WestPark Private Placement
of the shares of Common Stock underlying the convertible notes and the
warrants sold in the WestPark Private Placement. This registration
statement was not filed on July 31, 2006 and certain additional rights have
accrued to the Convertible Promissory Noteholders (see Note 12 for a
detailed description of these additional rights). In connection with this
event the Company is approaching Convertible Promissory Noteholders with
proposals to extend the term or convert their debt positions into Common
Stock under terms that are more favorable than the subscription agreement
calls for (see Note 12 for a detailed description of these proposals and
the amount of debt that has been extended or converted into Common Stock).
The Company recorded a debt discount associated with the conversion feature
in the amount of $129,167. For the three months and six months ended June
30, 2006, the Company charged $$43,056 and $80,938 of the debt discount to
interest expense, respectively. For the three months and six months ended
June 30, 2006, the Company recorded as interest expense $127,995 and
$255,990, respectively, associated with the warrants as their fair value
using the Black Scholes method. The debt discount recorded of $129,167 does
not change the amount of cash required to payoff the principal value of
these Promissory Notes, at any time during the term, which is $250,000
-10-
In connection with the NeoStem acquisition, the Company assumed a 6% note
due to Tom Hirose, a former employee of NeoStem in the amount of $15,812.
As of June 30, 2006, $1,312 remains unpaid. Payments are made in the amount
of $1,500 per month and will continue until all amounts due including
interest are paid.
On May 17, 2006, the Company sold an 8% promissory note in the amount of
$20,000 due on demand to Robin Smith, the Company's then Chairman of the
Advisory Board. This promissory note was paid off on June 2, 2006.
The Company has financed certain insurance polices and has notes payable
balance due at June 30, 2006 of $123,230 related to these policies. These
notes require monthly payments and mature in less than one year.
NOTE 6 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of Designations for the Company's Series A $.07 Convertible
Preferred Stock ("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
March 17, 2006, the stockholders of the Company voted to approve an
amendment to the Certificate of Incorporation which permits the Company to
issue in exchange for all 681,171 shares of Series A Preferred Stock
outstanding and its obligation to pay $538,498 (or $.79 per share) in
accrued dividends thereon, a total of 5,449,368 shares of Common Stock
(eight (8) shares of Common Stock per share of Series A Preferred Stock).
Pursuant thereto, at June 30, 2006, all outstanding shares of Series A
Preferred Stock were cancelled and converted into Common Stock. Therefore
at June 30, 2006 and December 31, 2005, there were 0 and 681,171 shares of
Series A Preferred Stock outstanding.
NOTE 7 - STOCKHOLDERS' EQUITY
(a) Common Stock:
In January 2006, the Company issued 765,000 shares of its Common Stock
in exchange for $45,000 of notes payable. In addition, the Company
issued 250,000 shares of its Common Stock to Westpark as additional
compensation for its role as placement agent in the Westpark Private
Placement. The fair value of these shares was $22,750 which was
charged to expense. In connection with the acquisition of certain
assets of NeoStem, the Company issued 2,000,000 shares of its Common
Stock to NeoStem. An additional 2,000,000 shares of the Company's
Common Stock are being held in escrow pending any potential claims
that may be made in connection with the NeoStem transaction to be
released one year from the closing less any shares reclaimed due to
amounts paid in cash in lieu of stock. The Company issued 1,000,000
additional shares of its Common Stock in escrow pending the approval
of the license for the laboratory used for the collection of stem
cells. The agreement calls for 16,666 shares to be forfeited each day
the license is not obtained past February 15, 2006, with a maximum of
1,000,000 shares of Common Stock subject to forfeiture. The license
was obtained in May, 2006 and therefore the Company has notified
NeoStem of the requirement that the 1,000,000 shares be forfeited to
the Company. Subsequent to the closing of the NeoStem transaction, the
Company issued 2,012,225 shares of its Common Stock in payment of
obligations assumed by the Company. In certain cases, the Company
issued shares with a fair market value on the date of issuance of
$98,600 which was greater than the debt being paid and therefore
recorded additional expense of $28,344.
In March 2006, the Company sold 602,270 shares of its Common Stock to
five accredited investors at a per share price of $.044 resulting in
net proceeds to the Company of $26,500.
In April and May 2006 the Company sold 3,513,185 of its Common Stock
to eleven accredited investors at a per share price of $.044 resulting
in net proceeds to the Company of $154,600
In May 2006, the Company entered into an advisory agreement with
Duncan Capital Group LLC ("Duncan"). Pursuant to the advisory
agreement, Duncan is providing to the Company on a non-exclusive "best
efforts" basis, services as a financial consultant in connection with
any equity or debt financing, merger, acquisition as well as with
other financial matters. In return for these services, the Company is
paying to Duncan a monthly retainer fee of $7,500, 50% of which may be
paid by the Company in shares of its Common Stock valued at fair
market value and reimbursing it for its reasonable out-of-pocket
expenses in an amount not to exceed $12,000. Pursuant to the advisory
agreement, Duncan also agrees, subject to certain conditions, that it
or one of its affiliated entities would act as lead investor in a
proposed private placement (the "Duncan Private Placement") of shares
of Common Stock and warrants to purchase shares of Common Stock in an
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amount that is not less than $2,000,000 or greater than $3,000,000. In
consideration for such role, Duncan will receive a fee of $200,000 in
cash and 2,400,000 shares of restricted Common Stock. On June 2, 2006
, pursuant to the Duncan Private Placement, the Company sold
47,249,992 shares of its Common Stock to seventeen accredited
investors at a per share price of $.044 resulting in gross proceeds of
$ 2,079,000, In connection with this transaction the Company issued
23,624,991 common stock purchase warrants to these seventeen
investors. These Common Stock purchase warrants have a term of 5 years
and exercise price of $.08 per share. From the proceeds of sale of
Common Stock a fee of $200,000 was paid to Duncan and 2,400,000 Common
Stock shares were issued to Duncan. In addition Dr. Robin Smith was
paid a fee of $100,000 and 1,000,000 Common Stock shares were issued
to her in connection with an Advisory Agreement dated September 14,
2005 as amended by the Supplement to Advisory Agreement dated January
18, 2006 and Dr. Smith's employment agreement with the Company dated
June 2, 2006.
On June 2, 2006 certain employees and members of senior management
agreed to take common stock as the net pay on $278,653 of unpaid
salary that dated back to 2005. This resulted in the issuances of
3,799,821 shares of common stock, valued at $167,192, or $.044 per
share, the balance of the unpaid salary was used to pay the
withholding taxes which are associated with those earnings.
On June 2, 2006 Dr. Robin Smith was appointed Chairman and CEO of the
Company. In connection with Dr. Smith's appointment 2,000,000 shares
of common stock were issued to Dr. Smith valued at $88,000 which was
reflected as compensation expense in the three months ended June 30,
2006. In addition, Dr. Smith was granted common stock options to
purchase 5,400,000 shares of the Company's common stock, which
3,000,000 option shares vested immediately, 1,200,000 option shares
vest on the first anniversary of the effective date and 1,200,000
option shares vest on the second anniversary of the effective date.
The exercise price of the options are (i) $.053 as to the first
1,000,000 option shares, (ii) $.08 as to the second 1,000,000 option
shares, (iii) $.10 as to the third 1,000,000 option shares, (iv) $.16
as to the next 1,200,000 option shares, and (v) $.25 as to the
balance.
In May and June, 2006 the Company issued 480,466 shares of its Common Stock,
valued at $21,140 in payment of certain account payable obligations of the
Company.
(b) Warrants:
The Company has issued Common Stock purchase warrants from time to
time to investors in private placements, certain vendors,
underwriters, and directors and officers of the Company. A total of
33,544,143 shares of Common Stock are reserved for issuance upon
exercise of outstanding warrants as of June 30, 2006 at prices ranging
from $0.05 to $.12 and expiring through June 2011. 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. From August 2004 through January 20, 2005, the Company issued
three year warrants to purchase a total of 150,000 shares of its
Common Stock at $.05 per share to Consulting For Strategic Growth,
Ltd., the Company's investor relations firm. On September 14, 2005,
the Company issued 240,000 Common Stock purchase warrants to its then
Chairman of its Advisory Board, Dr. Robin Smith. These warrants were
scheduled to vest at the rate of 20,000 per month beginning with
September 14, 2005. The vesting of these warrants was accelerated so
that they became immediately vested on June 2, 2006 pursuant to Dr.
Smith's employment agreement. 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. In December,
2005 and January, 2006, the Company issued an aggregate of 4,583,326
Common Stock purchase warrants, in each period, to the investors and
placement agent. Each warrant entitles the holder to purchase one
share of Common Stock at a price of $.12 per share for a period of
three years. In March 2006, the Company issued 120,000 Common Stock
purchase warrants to Healthways Communications, Inc., the Company's
marketing consultants. These warrants vest 20,000 per month beginning
March 2006 and entitle the holder to purchase one share of Common
Stock at a price of $.10 per share for a period of three years. In
June, 2006 the Healthways Communications, Inc. agreement was
terminated and 40,000 Common Stock purchase warrants issued to
Healthways Communications, Inc. were cancelled. On June 2, 2006,
pursuant to the Duncan Private Placement, the Company sold 47,249,992
shares of its Common Stock to seventeen accredited investors at a per
share price of $044 resulting in gross proceeds of $2,079,000, In
connection with this transaction the company issued 23,624,991 common
stock purchase warrants to these seventeen investors. These common
stock purchase warrants have a term of 5 years and exercise price of
$.08 per share. The Company's warrants provide for certain
registration rights and certain penalties if such registration is not
achieved within 180 days of the initial closing of the Duncan Private
Placement. Accordingly, the value of the warrants, $1,379,519, has
been classified as a current liability until such time as the
registration of the securities becomes effective.
(c) Stock Option Plans:
In February 2003, the Company adopted the 2003 Equity Participation
Plan, which was approved by stockholders at the Company's Annual
Meeting on July 24, 2003 and amended by approval of stockholders at
the Company's Annual Meeting on July 20, 2005. Under this plan, the
Company has reserved 50,000,000 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.
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Information with respect to options under the 2003 Equity Participation
Plan is summarized as follows:
For the Three Months Ended For the Six Months Ended
June 30, 2006 June 30, 2006
----------------------------------- -------------------------------------
Shares Prices Shares Prices
--------------- ---------------- ----------------- ----------------
Outstanding at beginning of period 17,610,000 $0.03 to $0.18 17,885,000 $0.03 to $0.18
Granted 11,140,000 $0.044 to $0.25 11,365,000 $0.044 to $0.25
Expired - - - -
Cancelled - (500,000) $0.06
--------------- ----------------
Outstanding at end of period 28,750,000 $0.03 to $0.25 28,750,000 $0.03 to $0.25
=============== ================
Options are usually granted at an exercise price at least equal to the fair
value of the common stock at the grant date and may be granted to
employees, Directors, consultants and advisors of the Company. Options to
purchase 11,140,000 and 11,365,000 shares of the Company's Common Stock at
exercise prices ranging from of $.044 and $.25 were granted during the
three and six months ended June 30, 2006, respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
On January 20, 2006, Mr. Robert Aholt, Jr. tendered his resignation as
Chief Operating Officer of the Company. In connection therewith, on March
31, 2006, the Company and Mr. Aholt entered into a Settlement Agreement and
General Release (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, the Company agreed to pay to Mr. Aholt the aggregate sum of
$250,000 (less applicable Federal and California state and local
withholdings and payroll deductions), payable over a period of two years in
biweekly installments of $4,807.69 commencing on April 7, 2006, except that
the first payment was in the amount of $9,615,38. In the event the Company
breaches its payment obligations under the Settlement Agreement and such
breach remains uncured, the full balance owed shall become due. The Company
and Mr. Aholt each provided certain general releases. Mr. Aholt also agreed
to continue to be bound by his obligations not to compete with the Company
and to maintain the confidentiality of Company proprietary information. At
June 30, 2006 $206,731 was due Mr. Aholt pursuant to the terms of the
Settlement Agreement.
In connection with the Company's acquisition of the assets of NeoStem on
January 19, 2006, the Company entered into an employment agreement with
Larry A. May. Mr. May is the former Chief Executive Officer of NeoStem.
Pursuant to Mr. May's employment agreement, he is to serve as an officer of
the Company reporting to the CEO for a term of three years, subject to
earlier termination as provided in the agreement. In return, Mr. May will
be paid an annual salary of $165,000, payable in accordance with the
Company's standard payroll practices, will be entitled to participate in
the Company's benefit plans generally available to other executives,
including a car allowance equal to $750 per month and was granted on his
commencement date an employee stock option under the Company's 2003 Equity
Participation Plan to purchase 150,000 shares of the Company's Common Stock
at a per share purchase price equal to $.05, the closing price of the
Common Stock on the commencement date, which vests as to 50,000 shares of
Common Stock on the first, second and third anniversaries of the
commencement date. Under certain circumstances, Mr. May is also entitled to
a severance payment equal to one year's salary in the event of the early
termination of his employment.
In connection with the Company's acquisition of the assets of NeoStem on
January 19, 2006, the Company entered into an employment agreement with
Denis O. Rodgerson. Dr. Rodgerson is one of the founders of NeoStem. Dr.
Rodgerson's employment agreement is identical to Mr. May's employment
agreement, except that (i) its term is one year; (ii) he was granted an
option to purchase 50,000 shares of Common Stock under the Equity
Participation Plan vesting in its entirety after one year; and (iii) his
agreement does not contain a provision for severance.
Certain employees and members of senior management of the Company, as a
condition of the initial closing under the Securities Purchase Agreement in
the Duncan Private Placement, entered into letter agreements with the
Company pursuant to which they converted an aggregate of $278,653 of
accrued salary into shares of Common Stock at a per share price of $0.044.
-13-
After adjustments for applicable payroll and withholding taxes which were
paid by the Company, the Company issued to such individuals an aggregate of
3,799,821 shares of Common Stock. The Company also adopted a Compensation
Plan, effective as of the date of closing of the Securities Purchase
Agreement and pursuant to the letter agreements each officer agreed to be
bound by the Compensation Plan. In addition to the conversion of accrued
salary, the letter agreements provide for a reduction by 25% in base salary
for each officer until the Company achieves certain milestones, the
granting of options to purchase shares of Common Stock under the Company's
2003 Equity Participation Plan (the "2003 EPP") which become exercisable
upon the Company achieving certain revenue milestones and the acceleration
of the vesting of certain options and restricted shares held by the
officers.
On May 26, 2006, the Company entered into an employment agreement with Dr.
Robin L. Smith (the "Employment Agreement"), pursuant to which Dr. Smith
will serve as the Chief Executive Officer of the Company for a period of
two years, which term shall be renewed for successive one-year terms unless
otherwise terminated by Dr. Smith or the Company. The effective date of the
Employment Agreement was June 2, 2006, the date of the initial closing
under the Duncan Private Placement. Dr. Smith shall receive a base salary
of $180,000 per year, which shall be increased to $236,000 after the first
year anniversary of the effective date of the Employment Agreement. If the
Company raises an aggregate of $5,000,000 through equity or debt financing
(with the exception of the financing under the Duncan Private Placement),
Dr. Smith's base salary shall be raised to $275,000. Dr. Smith shall also
be eligible for an annual bonus determined by the Board, a car allowance of
$1,000 per month and variable life insurance with payments not to exceed
$1,200 per month. Pursuant to the Employment Agreement, Dr. Smith's
advisory agreement with the Company, as supplemented, was terminated,
except that (i) the vesting of the warrant to purchase 240,000 shares of
Common Stock granted there under was accelerated so that the warrant became
fully vested as of the effective date of the employment agreement, (ii) Dr.
Smith received $100,000 in cash and 1,000,000 shares upon the initial
closing of the Duncan Private Placement, (iii) if an aggregate of at least
$3,000,000 is raised and/or other debt or equity financings prior to August
15, 2006, Dr. Smith shall receive an additional payment of $50,000, (iv) a
final payment of $3,000 relating to services rendered in connection with
Dr. Smith's advisory agreement, paid at the closing of the Duncan Private
Placement and (v) all registration rights provided in the advisory
agreement shall continue in effect. Upon the effective date of the
Employment Agreement, Dr. Smith was awarded under the Company's 2003 Equity
Participation Plan 2,000,000 shares of Common Stock of the Company, and
options to purchase 5,400,000 shares of Common Stock, which options expire
ten years from the date of grant.
NOTE 9 - ACQUISITION OF NEOSTEM
On January 19, 2006 the Company consummated the acquisition of the assets
of NeoStem Inc., relating to NeoStem's business of collecting and storing
adult stem cells, issuing 4,000,000 shares of the Company's Common Stock
with a value of $200,000. In addition, the Company assumed certain
liabilities of NeoStem's which totaled $489,989. The underlying physical
assets acquired from NeoStem were valued at $109,123 resulting in the
recognition of goodwill in the amount of $580,866. Upon completion of the
acquisition the operations of NeoStem were assumed by Phase III and have
been reflected in the Statement of Operations since January 19, 2006.
Effective with the acquisition, the business of NeoStem became the
principal business of the Company. The Company provides adult stem cell
processing, collection and banking services with the goal of making stem
cell collection and storage widely available, so that the general
population will have the opportunity to store their own stem cells for
future healthcare needs. Presented below is the proforma information for
the three and six months ended June 30, 2006 and 2005 as if the acquisition
had occurred on January 1, 2005. The net loss per share for the three and
six months ended June 30, 2006 gives effect to the shares issued in
connection with the acquisition.
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ----------------------------------
2006 2005 2006 2005
--------------- ---------------- ---------------- ---------------
Revenue $6,262 $9,448 $12,524 $20,433
Net loss ($1,245,082) ($671,615) ($2,384,526) ($1,653,722)
Net loss per share ($0.01) ($0.02) ($0.03) ($0.04)
NOTE 10 - RELATED PARTIES
In connection with the acquisition of NeoStem, an officer and an employee
of the Company, who were then officers of NeoStem, received Common Stock in
payment of liabilities assumed by the Company. Larry May, Chief Financial
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Officer and Denis Rodgerson, Director of Stem Cell Science, received shares
of Common Stock in excess of the value of the liability assumed by the
Company. In the case of Mr. May, he received 96,148 shares of Common Stock
valued at $4,807 in settlement of a liability assumed by the Company of
$2,884. The Company recorded an additional expense of $1,923. In the case
of Dr. Rodgerson, he received 675,227 shares of Common Stock valued at
$33,761 in settlement of a liability assumed by the Company of $20,257. The
Company recorded an additional expense of $13,504.
NOTE 11 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION
On January 19, 2006, the Company acquired substantially all the assets and
operations of NeoStem, an adult stem cell collection and banking Company. The
Company, with this acquisition, will have operations in two segments when
NeoStem commences operations. One segment will be the collection and banking of
adult stem cells and the other segment remains the "run off" of its sale of
extended warranties and service contracts via the Internet, this "run-off" of
warranty and service contracts will continue for approximately seven months. As
of June 30, 2006, the Company has not realized any revenues from the collecting
or banking of adult stem cells. The Company's operations are conducted entirely
in the United States. The Company has a "run off" of extended warranties and
service contracts which generated a profit for the three months and six months
ended June 30, 2006 of $1,795 and $3,590, respectively.
NOTE 12 - SUBSEQUENT EVENTS
Pursuant to the terms of the WestPark Private Placement, the Company agreed to
file with the SEC and have effective by July 31, 2006, a registration statement
registering the resale by the investors in the WestPark Private Placement of the
shares of Common Stock underlying the convertible promissory notes and the
warrants sold in the WestPark Private Placement. In the event the Company does
not do so, (i) the conversion price of the convertible promissory notes is
reduced by 5% each month, subject to a floor of $.04; (ii) the exercise price of
the warrants is reduced by 5% each month, subject to a floor of $.10; and (iii)
the warrants may be exercised pursuant to a cashless exercise provision. The
Company did not have the registration statement effective by July 31, 2006 and
has requested that the investors in the WestPark Private Placement extend the
date by which the registration statement is required to be effective until
February 28, 2007. The Company has also offered to the investors the option of
(A) extending the term of the convertible note for an additional four months
from the maturity date in consideration for which (i) the Company shall issue to
the investor for each $25,000 in principal amount of the convertible note 56,818
shares of unregistered Common Stock; and (ii) the exercise price per warrant
shall be reduced from $.12 to $.08, or (B) converting the convertible note into
shares of the Company's Common Stock in consideration for which (i) the
conversion price per conversion share shall be reduced to $.044; (ii) the
Company shall issue to the investor for each $25,000 in principal amount of the
Note, 113,636 shares of Common Stock; (iii) the exercise price per warrant shall
be reduced from $.12 to $.08; and (iv) a new warrant shall be issued
substantially on the same terms as the original Warrant to purchase an
additional 416,666 shares of Common Stock for each $25,000 in principal amount
of the convertible note at an exercise price of $.08 per share. Pursuant to
this, the investor is also being asked to waive any and all penalties and
liquidated damages accumulated as of the date of the agreement. As of August 14,
2006, investors holding $212,500 of the $500,000 of convertible promissory notes
had agreed to convert them into shares of Common Stock and $50,000 had agreed to
extend the term of the convertible promissory notes on the terms set forth
above.
In July and August 2006, the Company sold an aggregate of 6,818,180 shares of
Common Stock to four accredited investors at a per share price of $.044
resulting in gross proceeds to the Company of $300,000. In connection with this
transaction, the Company issued 3,409,088 Common Stock purchase warrants with a
term of five years and per share exercise price of $.08.
In July 2006, the Company issued an aggregate of 565,454 shares of Common Stock
in conversion of an aggregate of $26,140 in accounts payable owed certain
vendors. The per share conversion price ranged from $.044 to $.05.
In August 2006, the Company issued an aggregate of 536,977 shares of Common
Stock in conversion of an aggregate of $23,537 in accounts payable owed certain
vendors. The per share conversion price was $.044.
On August 1, 2006, the Board approved the issuance of an option to an employee
to purchase 50,000 shares of Common Stock at a per share purchase price of $.05
vesting as to one-third of the shares on each of the first, second and third
anniversaries of the date of grant and otherwise being subject to all of the
terms and conditions of the EPP. On August 1, 2006, the Board approved the
issuance of an option to a consultant to purchase 60,000 shares of Common Stock
at a per share purchase price of $.05. The option was fully vested on the date
of grant and is otherwise subject to all of the terms and conditions of the EPP.
On July 17, 2006, the Board approved the Company's holding its Annual Meeting of
Stockholders on August 29, 2006 to (i) elect a board of four directors, (ii)
approve adoption of the Company's Amended and Restated Certificate of
Incorporation, to effect a reverse stock split at a ratio of ten to one, and
change the name of the Company to "NeoStem, Inc."; (iii) approve certain
amendments to the Company's 2003 Equity Purchase Plan; and (iv) ratify the
appointment of Holtz Rubenstein Reminick LLP as the Company's independent
certified public accountant.
-15-
Effective as of July 1, 2006, the Company entered into an agreement for the use
of space at 420 Lexington Avenue, New York, New York. Pursuant to the terms of
the Agreement, the Company will pay $7,500 monthly for the space, including the
use of various office services and utilities. The agreement is on a month to
month basis, subject to a thirty day prior written notice requirement to
terminate. The space serves as the Company's principal executive offices.
Effective October 1, 2006 the Company terminated the lease for its Melville, New
York facility.
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
On January 19, 2006 the Company consummated the acquisition of the assets of
NeoStem Inc., a California corporation ("NeoStem") relating to NeoStem's
business of collecting and storing adult stem cells. NeoStem had been a company
to which Phase III had been providing business guidance. Effective with the
acquisition, the business of NeoStem became the principal business of the
Company. The Company now provides adult stem cell processing, collection and
banking services with the goal of making stem cell collection and storage widely
available, so that the general population will have the opportunity to store
their own stem cells for future healthcare needs. The Company also hopes to
become the leading provider of adult stem cells for therapeutic use in the
burgeoning field of regenerative medicine for potentially addressing heart
disease, certain types of cancer and other critical health problems. The Company
is utilizing the combined Phase III and NeoStem management teams to develop and
expand this business. A marketing and operational plan is being developed to
integrate both companies, and a corporate awareness campaign is being prepared.
Until the NeoStem acquisition, the business of the Company was providing capital
and business guidance to companies in 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. Additionally, through June 30,
2002, the Company was a provider of extended warranties and service contracts
via the Internet at warrantysuperstore.com. The Company is still engaged in the
"run off" of such extended warranties and service contracts.
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 and Six Months Ended June 30, 2006 Compared To Three and Six Months Ended
June 30, 2005
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $6,262 and $12,524for the three months and six
months ended June 30, 2006, respectively, as compared to $9,448 and $19,983 for
the three months and six months ended June 30, 2005, respectively. The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. Warranty revenue will continue to
decline as policy periods expire since the Company is no longer selling extended
warranty contracts. It is expected that the recognition of Warranty revenue will
end in approximately seven months. As of June 30, 2006, the Company has not
realized any revenues from the NeoStem acquisition. It is anticipated that
revenues will begin in 2006. Similarly, direct costs incurred, in connection
with the extended warranty contracts, were $4,467 and $8,934 for the three and
six months ended June 30, 2006 respectively as compared to $6,603 and $14,020
for the three months and six months ended June 30, 2005, respectively.
-16-
Selling, general and administration expenses increased approximately $680,600
and $1,404,000 for the three and six months ended June 30, 2006 as compared to
the three and six months ended June 30, 2005. The increase in selling, general
and administrative expenses for the three months ended June 30, 2006 is
primarily due to increases in payroll and related expenses of $143,800, for
increase in staff as the result of acquiring NeoStem, legal expense of $53,200,
the compensatory element of stock options issued to staff members and common
stock issued as a signing bonus paid to Dr. Robin Smith upon being appointed
Chairman of the Board and Chief Executive Officer in the amount of $333,600,
accounting fees of $21,600, rent of $14,900, marketing expenses of $17,800,
investment banking consulting expense of $31,200, travel and entertainment of
$15,600 and insurance primarily related to NeoStem of $24,000. The increase in
selling, general and administrative expenses for the six months ended June 30,
2006 compared to the six months ended June 30, 2005, is primarily due to
increases in payroll and related expenses of $215,800, for increase in staff as
the result of acquiring NeoStem, legal expense of $100,700, and the compensatory
element of stock options issued to staff members and common stock issued as a
signing bonus paid to Dr. Robin Smith upon being appointed Chairman of the Board
and Chief Executive Officer in the amount of $386,500 the settlement with Robert
Aholt of $250,000, investment banking consulting of $145,500 insurance primarily
related to NeoStem of $90,000, marketing relating to NeoStem of $41,700,
laboratory related expenses of $37,000, printing of $16,000, stock transfer fees
of $11,000, and travel and entertainment of $28,000.
Interest expenses increased approximately $172,300 and $338,000 for the three
and six months ended June 30, 2006 as compared to the three and six months ended
June 30, 2005.. Such increase was primarily as a result of sale of convertible
notes in December 2005 and January, 2006 including increases resulting from
amortization of debt discount associated with the convertible notes of $70,800
and $136,700 for the three and six months ended June 30, 2006, respectively, and
the increases as a result of the value of warrants associated with these
convertible notes of $127,995 and $255,990 for the three and six months ended
June 30, 2006, respectively, charged to interest expense. These increases in
interest expense were offset by reductions in interest expense related to the
repayment of other debt; and the conversion of Series A Preferred Shares to
Common Stock.
For the reasons cited above the net loss for the three and six months ended June
30, 2006 of $1,245,802 and $2,384,526 increased over the net loss of $393,066
and $642,736 for the three and six months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
Six Months Ended
----------------
June 30, 2006 June 30, 2005
Cash used in
Operating Activities $ (1,783,626) $ (332,608)
Cash (used) provided by
Investing Activities $ - $ -
Cash provided by
Financing Activities $ 2,207,004 $ 305,000
The Company incurred a net loss of $2,384,526 for the six months ended June 30,
2006. Such loss adjusted for non-cash items including common stock, options and
warrants issued for services and interest of $675,473, amortization and
depreciation of $148,737 and interest related to the Series A Preferred of
$9,934 resulted in cash used in operations totaling $1,783,626 for the six
months ended June 30, 2006. This use of cash included additions to prepaid
expenses and other current assets of $103,591 and decreases in accounts payable
and accrued expenses of $126,063.
To meet its cash requirement for the six months ended June 30, 2006, the Company
relied on proceeds from the sale of $250,000 of convertible notes and the sale
of shares of Common Stock resulting in net proceeds of $1,928,100.
Subsequent to June 30, 2006, the Company has sold 6,818,178 shares of its Common
Stock resulting in proceeds to the Company of $300,000 and issued 1,102,431
shares of its Common Stock as partial or complete payment of certain accounts
payable.
In May 2006, the Company entered into an advisory agreement with Duncan Capital
Group LLC ("Duncan"). Pursuant to the advisory agreement, Duncan is providing to
the Company on a non-exclusive "best efforts" basis, services as a financial
consultant in connection with any equity or debt financing, merger, acquisition
as well as with other financial matters. In return for these services, the
Company is paying to Duncan a monthly retainer fee of $7,500, 50% of which may
be paid by the Company in shares of its Common Stock valued at fair market value
and reimbursing it for its reasonable out-of-pocket expenses in an amount not to
-17-
exceed $12,000. Pursuant to the advisory agreement, Duncan also agrees, subject
to certain conditions, that it or one of its affiliated entities would act as
lead investor in a proposed private placement (the "Duncan Private Placement")
of shares of Common Stock and warrants to purchase shares of Common Stock in an
amount that is not less than $2,000,000 or greater than $3,000,000. In
consideration for such role, Duncan will receive a fee of $200,000 in cash and
2,400,000 shares of restricted Common Stock. On June 2, 2006 , pursuant to the
Duncan Private Placement, the Company sold 47,249,992 shares of its Common Stock
to seventeen accredited investors at a per share price of $.044 resulting in
gross proceeds of $ 2,079,000. In connection with this transaction the Company
issued 23,624,991 common stock purchase warrants to these seventeen investors.
These common stock purchase warrants have a term of 5 years and exercise price
of $.08 per share. From the proceeds of sale of Common Stock a fee of $200,000
was paid to Duncan and 2,400,000 Common Stock shares were issued to Duncan.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company currently has no operations and limited
financial resources to pay its current expenses and liabilities. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the six months ended June 30, 2006, a situation which is
expected to continue for the foreseeable future.
-18-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) During the six month period ended June 30, 2006, our management, including
the principal executive officer and principal financial officer, evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with the
SEC. These disclosure controls and procedures have been designed to ensure that
material information relating to us, including our subsidiaries, is made known
to our management, including these officers, by other of our employees, and that
this information is recorded, processed, summarized, evaluated and recorded as
applicable, within the time periods specified in the SEC rules and forms. Due to
the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by the management
override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
(b) Based on their evaluation as of June 30, 2006, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective to reasonably ensure
that the information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and recorded within the time periods specified in the SEC rules and
forms
-19-
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
Sales of substantial amounts of our Common Stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
Common Stock.
We had 151,449,821 shares of Common Stock outstanding as of August 8, 2006. The
following securities that may be exercised for, or are convertible into, shares
of our Common Stock were issued and outstanding as of August 8, 2006:
o Options. Stock options to purchase 28,750,000 shares of our Common
Stock at a weighted average exercise price of approximately $.076 per
share.
o Warrants. Warrants to purchase 33,544,513 shares of our Common Stock
at a weighted average exercise price of approximately $.091 per share.
o Convertible Promissory Notes. Notes which will convert into 8,333,320
shares of our Common Stock.
All the shares of our Common Stock that may be issued under the options are
currently registered with the SEC.
We have liquidity problems and our ability to continue as a going concern is
uncertain, which may affect our ability to raise capital.
At June 30, 2006, we had a cash balance of $912,250 and a working capital
deficit of $1,631,050. Our auditors, Holtz Rubenstein Reminick LLP, have
expressed substantial doubt about our ability to continue as a going concern
based on our lack of liquidity combined with our history of losses, and it will
be more difficult for us to raise capital on favorable terms as a result. Our
financial statements do not reflect any adjustments relating to the doubt of our
ability to continue as a going concern. We have from time to time raised capital
for our activities through the sale of our equity securities and promissory
notes. Such capital raising activities are enabling us to pursue our business
plan and grow our adult stem cell collection and storage business, including
expanding marketing and sales activities as well as pay certain of our
outstanding liabilities. Our financial condition still raises substantial doubt
about our ability to operate as a going concern. Substantial additional
financing is needed.
We may be forced to undertake lengthy and costly efforts to build market
acceptance of our stem cell storage services, the success of which is critical
to our profitability. There can be no assurance that these services will gain
market acceptance.
We anticipate that service fees from the processing and storage of stem cells
will comprise a substantial majority of our revenue in the future and,
therefore, our future success depends on the successful and continued market
acceptance of this service. Broad use and acceptance of our service requires
marketing expenditures and education and awareness of consumers and medical
practitioners who, under present law, must order stem cell collection on behalf
of a potential customer. The time and expense required to educate and build
awareness of our services and its potential benefits could significantly delay
market acceptance and our ultimate profitability. The successful
commercialization of our services will also require that we satisfactorily
address the concerns of medical practitioners in order to avoid potential
resistance to recommendations for our services and ultimately reach our
potential consumers. No assurances can be given that our business plan and
marketing efforts will be successful, that we will be able to commercialize our
services, or that there will be market acceptance of our services or clinical
acceptance of our services by physicians sufficient to generate any material
revenues for us.
-20-
Ethical and other concerns surrounding the use of stem cell therapy may increase
the regulation of or negatively impact the public perception of our stem cell
banking services, thereby reducing demand for our services.
The use of embryonic stem cells for research and stem cell therapy has been the
subject of debate regarding related ethical, legal and social issues. Although
our business only utilizes adult stem cells and does not involve the more
controversial use of embryonic stem cells, the use of other types of human stem
cells for therapy could give rise to similar ethical, legal and social issues as
those associated with embryonic stem cells. Additionally, it is possible that
our business could be negatively impacted by any stigma associated with the use
of embryonic stem cells if the public fails to appreciate the distinction
between the use of adult versus embryonic stem cells. The commercial success of
our business will depend in part on public acceptance of the use of stem cell
therapy, in general, for the prevention or treatment of human diseases. Public
attitudes may be influenced by claims that stem cell therapy is unsafe or
unnecessary, and stem cell therapy may not gain the acceptance of the public or
the medical community. Public pressure or adverse events in the field of stem
cell therapy that may occur in the future also may result in greater
governmental regulation of our business creating increased expenses and
potential regulatory delays relating to the approval or licensing of any or all
of the processes and facilities involved in our stem cell banking services. In
the event that the use of stem cell therapy becomes the subject of adverse
commentary or publicity, our business could be adversely affected and the market
price for our common stock could be significantly harmed.
We operate in a highly regulated environment, and our failure to comply with
applicable regulations, registrations and approvals would materially and
adversely affect our business.
Historically, the FDA has not regulated banks that collect and store stem cells.
Recent changes, however, require establishments engaged in the recovery,
processing, storage, labeling, packaging or distribution of any Human Cells,
Tissues, and Cellular and Tissue-Based Products (HCT/Ps) or the screening or
testing of a cell tissue donor to register with the FDA under the Public Health
Service Act as of January 2004. The FDA also adopted rules in May 2005 that
regulate current Good Tissues Practices (cGTP). We may be or become subject to
such registration requirements and regulations, and there can be no assurance
that we will be able, or will have the resources, to comply. Future FDA
regulations could also adversely impact or limit our ability to market or
perform our services. In order to collect and store blood stem cells we must
conduct (or arrange for the conduct of) a variety of laboratory tests which are
regulated under the federal Clinical Laboratory Improvements Amendments (CLIA).
Any facility conducting regulated tests must obtain a CLIA certificate of
compliance and submit to regular inspection. Some states require additional
regulation and oversight of clinical laboratories operating within their borders
and some impose obligations on out-of-state laboratories providing services to
their residents. The states in which we initially plan to engage in processing
and storage activities all currently have licensing requirements with which we
believe we will need to comply. Additionally, there may be state regulations
impacting the storage and use of blood products that would impact our business.
We obtained our biologics license from the State of California in May 2006 but
there can be no assurance that we will be able to obtain the necessary licensing
required to conduct our business in other states, or maintain licenses that we
do obtain in such states, including California. If we identify other states with
licensing requirements or if other states adopt such other requirements, or if
we plan to conduct business in a new state with such licensing requirements, we
would also have to obtain such licenses and/or comply with such other
requirements. We may also be subject to state and federal privacy laws related
to the protection of our customers' personal health information to which we
would have access through the provision of our services. We may be required to
spend substantial amounts of time and money to comply with any regulations and
licensing requirements, as well as any future legislative and regulatory
initiatives. Failure to comply with applicable regulatory requirements or delay
in compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution which would have a
material adverse effect on the marketing and sales of our services and impair
our ability to operate profitably or preclude our ability to operate at all in
the future.
Our success will depend in part on establishing and maintaining effective
strategic partnerships and collaborations.
A key aspect of our business strategy is to establish strategic relationships in
order to gain access to critical supplies, to expand or complement our
development or commercialization capabilities, or to reduce the cost of
developing or commercializing services on our own. We currently have strategic
relationships with two parties. While we are in discussions with others to
establish additional relationships and collaborations, there can be no assurance
that we will enter into such relationships or that the arrangements will be on
favorable terms. Relationships with licensed professionals such as physicians
may be subject to state and federal fraud and abuse regulations restricting the
referral of business, prohibiting certain payments to physicians, or otherwise
limiting our options for structuring a relationship. If our services become
reimbursable by government or private insurers in the future, we could be
subject to additional regulation and perhaps additional limitations on our
ability to structure relationships with physicians. Failure to comply with
applicable fraud and abuse regulations could result in civil fines and/or
criminal prosecution. Even if we do enter into these arrangements, we may not be
able to maintain these relationships or establish new ones in the future on
acceptable terms. Furthermore, these arrangements may require us to grant
certain rights to third parties, including exclusive rights or may have other
terms that are burdensome to us. If any of our partners terminate their
relationship with us or fail to perform their obligations in a timely manner,
the development or commercialization of our services may be substantially
delayed. If we fail to structure our relationships with physicians in accordance
with applicable fraud and abuse laws it could have a material adverse effect on
our business.
-21-
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following securities were sold during the second quarter of 2006 in
private transactions that, unless otherwise stated, were exempt from
registration pursuant to Section 4(2) of the Securities Act and/or
Regulation D thereunder: (i) on June 2, 2006 the Company sold
47,249,992 shares of its Common Stock to seventeen accredited investors
at a per share price of $044 and warrants to purchase 23,624,991 shares
of Common Stock; (ii) pursuant to its advisory agreement 2,400,000
shares of Common Stock were issued to Duncan; (iii). Dr. Robin Smith
received 1,000,000 shares of Common Stock issued in connection with an
Advisory Agreement dated September 14, 2005 as amended by the
Supplement to Advisory Agreement dated January 18, 2006 and Dr. Smith's
employment agreement with the Company dated June 2, 2006; (iv) On May
17, 2006, the Company sold a 8% promissory note in the amount of
$20,000 due on demand to Dr. Robin Smith, the Chairman of the Advisory
Board, this promissory note was paid off in cash on June 2, 2006. (v)
On June 2, 2006 3,799,821 shares of common stock, valued at $.044 per
share, were issued in the aggregate to Mark Weinreb, Catherine M.Vaczy,
Larry A. May, Dr. Wayne Marasco and Denis Rodgerson, all employees of
the Company, to liquidate a portion of unpaid salary that dated back to
2005; (vi) an aggregate of 480,466 shares of Common Stock were issued
in conversion of accounts payable and certain employees reimbursable
expenses; and (vii) 3,513,185 other shares of Common Stock were sold at
$.044 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On May 26, 2006 the Company was issued a biologics license from the State of
California relating to the operation of its California facility for process and
storage of adult stem cells.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial 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.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
-22-
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/ Robin Smith M.D.
--------------------
Robin Smith, M.D.
-----------------
Date: August 14, 2006
Exhibit 31.1
CERTIFICATION
I, Robin Smith, M.D. 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 report;
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: August 14, 2006
/s/ Robin Smith, M.D.
- -------------------------
Name: Robin Smith, M.D.
Title: Chief Executive Officer of Phase III Medical, Inc.
A signed original of this written statement required by Section 302 has been
provided to Phase III Medical, Inc. and will be retained by Phase III Medical,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 31.2
CERTIFICATION
I, Larry A. May, 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 report;
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: August 14, 2006
/s/ Larry A. May
- --------------------
Name: Larry A. May
Title: Chief Financial 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
reqest.
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 June 30, 2006 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I Robin
Smith, M.D., Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition of the Company as of the
dates presented and the result of operations of the Company for the
periods presented.
Dated: August 14, 2006
/s/ Robin Smith, M.D.
---------------------
Robin Smith, M.D.
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.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Phase III Medical, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2006 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Larry
A. May, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition of the Company as of the
dates presented and the result of operations of the Company for the
periods presented.
Dated: August 14, 2006
/s/ Larry A. May
----------------
Larry A. May
Chief Financial 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.