SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from________to________from ____________ to ___________
Commission file number 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No___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_
45,532,900Yes __ No X
51,747,321 SHARES, $.001 PAR VALUE, AS OF APRIL 30,AUGUST 12, 2005
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
1
I N D E X
Page No.
--------
Part I - Financial Information: --------
Item 1. Financial Statements (Unaudited):
Balance Sheets
At March 31,June 30, 2005 and December 31, 2004 3
Statements of Operations
Forfor the three and six months
ended March 31,June 30, 2005 and 2004 4
Statements of Cash Flows
for the threesix months ended
March 31,June 30, 2005 and 2004 5
Notes to Unaudited Financial Statements 6 - 1113
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 1213 - 1316
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 1416
Item 4. Controls and Procedures 1416
Part II - Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 151. Legal Proceedings 17
Item 3. Defaults Upon Senior Securities 1517
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K. 1518
Signatures 16
2
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
2005 2004
------------- -------------
Current assets:
Cash and cash equivalents $ 5,379 $ 27,868
Prepaid expenses and other current assets 18,352 21,233
-----------------------------
Total current assets 23,731 49,101
Property and equipment, net 2,957 3,446
Deferred acquisition costs 36,480 43,897
Other assets 3,000 3,000
-----------------------------
$ 66,168 $ 99,444
=============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable - preferred stock $ 492,801 $ 480,880
Accounts payable 204,333 149,169
Accrued liabilities 165,096 88,883
Notes payable 547,000 475,000
Convertible debentures, related party - net of
debt discount of $0 and $5,882 - 94,118
-----------------------------
Total current liabilities 1,409,230 1,288,050
Unearned revenues 51,472 62,007
Series A mandatorily redeemable convertible
preferred stock 681,174 681,174
-----------------------------
Total Liabilities 2,141,876 2,031,231
-----------------------------
Stockholders' Deficit:
Preferred stock; authorized, 5,000,000 shares
Series B convertible redeemable preferred stock,
liquidation value 10 shares of common stock per
share; $0.01 par value; authorized, 825,000
shares; issued and outstanding, 10,000 shares 100 100
Common stock, $.001 par value; authorized, 43,066 41,031
250,000,000 shares; issued and outstanding,
43,065,336 shares at March 31, 2005 and
41,029,552 shares at December 31, 2004
Additional paid-in capital 10,641,122 10,537,408
Accumulated deficit (12,759,996) (12,510,326)
-----------------------------
Total stockholders' deficit (2,075,708) (1,931,787)
-----------------------------
$ 66,168 $ 99,444
=============================
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2005 2004
-------------------------------
Current assets:
Cash and cash equivalents $ 260 $ 27,868
Prepaid expenses and other current assets 19,923 21,233
-------------------------------
Total current assets 20,183 49,101
Property and equipment, net 2,467 3,446
Deferred acquisition costs 29,877 43,897
Other assets 3,000 3,000
-------------------------------
$ 55,527 $ 99,444
===============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable - preferred stock $ 504,722 $ 480,880
Accounts payable 213,897 149,169
Accrued liabilities 281,084 88,883
Notes payable 420,000 390,000
Notes payable, related parties 108,000 85,000
Convertible debentures, related party -
net of debt discount of $0 and $5,882 100,000 94,118
-------------------------------
Total current liabilities 1,627,703 1,288,050
Unearned revenues 42,024 62,007
Series A mandatorily redeemable convertible
preferred stock 681,174 681,174
-------------------------------
Total Liabilities 2,350,901 2,031,231
-------------------------------
Stockholders' Deficit:
Preferred stock; authorized, 5,000,000 shares
Series B convertible redeemable preferred stock,
liquidation value, 10 shares of common stock per
share; $0.01 par value; authorized, 825,000 shares;
issued and outstanding, 10,000 shares 100 100
Common stock, $.001 par value; authorized,
500,000,000 shares; issued and outstanding,
46,399,566 shares at June 30, 2005 and
41,029,552 shares at December 31, 2004 46,400 41,031
Additional paid-in capital 10,811,188 10,537,408
Accumulated deficit (13,153,062)(12,510,326)
-------------------------------
Total stockholders' deficit (2,295,374) (1,931,787)
-------------------------------
$ 55,527 $ 99,444
===============================
See accompanying notes to financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------
2005 2004
-------------- --------------
Earned revenues $ 10,535 $ 27,342
Direct costs (7,417) (19,273)
------------------------------
Gross profit 3,118 8,069
Selling, general and administrative (215,501) (149,083)
Purchase of medical royalty stream - (240,000)
------------------------------
Operating loss (212,383) (381,014)
Other income (expense):
Interest income - 159
Interest expense (25,366) (63,430)
Interest expense - Series A mandatorily
redeemable convertible preferred stock (11,921) (11,921)
------------------------------
Net loss attributable to common stockholders $ (249,670) $ (456,206)
==============================
Net loss per common share $ (.01) $ (.02)
==============================
Weighted average common shares outstanding 41,924,642 26,650,636
==============================
See accompanying notes to financial statements
4
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (249,670) $ (456,206)
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 5,749 19,200
Depreciation 489 308
Amortization of debt discount 5,882 -
Series A mandatorily redeemable convertible
preferred stock dividends 11,921 -
Deferred acquisition costs 7,417 19,273
Changes in operating asset and liabilities:
Prepaid expenses and other current assets 2,881 (12,767)
Unearned revenues (10,535) (27,342)
Accounts payable, accrued expenses, and other
current liabilities 131,377 61,309
------------------------------
Net cash used in operating activities (94,489) (396,225)
------------------------------
Cash flows from investing activities:
Acquisition of property and equipment - (1,113)
------------------------------
Net cash used in investing activities - (1,113)
------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 96,000
Net proceeds from advances on notes payable 72,000 120,000
Repayment of long-term debt - (5,964)
------------------------------
Net cash provided by financing activities 72,000 210,036
------------------------------
Net decrease in cash and cash equivalents (22,489) (187,302)
Cash and cash equivalents at beginning of period 27,868 210,947
------------------------------
Cash and cash equivalents at end of period $ 5,379 $ 23,645
==============================
Three Month Ended March 31,
------------------------------
2005 2004
-------------- --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 18,541 $ 17,299
============== ==============
Supplemental Schedule of Non-cash Financing
Activities:
Net accrual of dividends on Series A Preferred
Stock $ 11,921 $ -
============== ==============
Issuance of common stock for services rendered $ 4,875 $ -
============== ==============
Compensatory element of stock options $ 874 $ 47,629
============== ==============
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Earned revenues $ 9,448 $ 7,073 $ 19,983 $ 34,415
Direct costs (6,603) (4,871) (14,020) (24,144)
--------------------------------------------
Gross profit 2,845 2,202 5,963 10,271
Selling, general and administrative (358,760) (175,532) (574,261) (324,611)
Purchase of medical royalty stream - (240,000) - (480,000)
--------------------------------------------
Operating loss (355,915) (413,330) (568,298) (794,340)
Other income (expense):
Interest income - 4 - 159
Interest expense (25,230) (66,933) (50,596) (130,363)
Interest expense - Series A mandatorily redeemable convertible preferred
stock (11,921) (11,921) (23,842) (23,842)
--------------------------------------------
Net loss attributable to common stockholders $ (393,066) $(492,180) $(642,736) $(948,386)
============================================
Net loss per common share $ (.01) $ (.02) $ (.02) $ (.03)
============================================
Weighted average
common shares outstanding 43,647,024 29,501,515 43,726,123 28,076,075
============================================
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
2005 2004
---- ----
Cash flows from operating activities:
Net loss $(642,736) $(948,386)
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 27,149 115,708
Depreciation 979 798
Amortization of debt discount 5,882 -
Series A mandatorily redeemable preferred stock dividends 23,842 -
Deferred acquisition costs 14,020 24,144
Changes in operating asset and
liabilities:
Prepaid expenses and other current assets 1,310 10,006
Unearned revenues (19,983) (34,415)
Accounts payable, accrued expenses,
and other current liabilities 256,929 66,999
--------------------
Net cash used in operating activities (332,608) (765,146)
--------------------
Cash flows from investing activities:
Acquisition of property and equipment - (3,288)
--------------------
Net cash used in investing activities - (3,288)
--------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 152,000 428,750
Net proceeds from advances on notes payable 155,000 140,000
Net proceeds from advances on notes payable - related party 23,000 -
Repayment of notes payable (25,000) -
Repayment of long-term debt - (9,513)
--------------------
Net cash provided by financing activities 305,000 559,237
--------------------
Net decrease in cash and cash equivalents (27,608) (209,197)
Cash and cash equivalents at beginning of period 27,868 210,947
--------------------
Cash and cash equivalents at end of period $260 $1,750
====================
2005 2004
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 41,011 $ 22,254
========== =========
Supplemental Schedule of Non-cash Financing Activities:
Net accrual of dividends on Series A Preferred Stock $ 23,842 $ 23,842
========== =========
Issuance of common stock for services rendered $ 26,275 $ -
========== =========
Compensatory element of stock options $ 874 $ 96,508
========== =========
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Phase III Medical, Inc. ("Phase III" or the "Company") (formerly knownprovides capital as
Corniche Group Incorporated) provides capitalwell as consulting and guidance to companies in multiple sectors of the
healthcare and life sciences industries, in exchange for a percentage of
revenues, royalty fees, licensing fees and other product sales of the target
companies known as "royalty interests".companies. The Company charges payments for the purchase of future potential royaltythese interests
to expense as paid and will record revenues when royalty payments are received. As
of March 31,June 30, 2005, the Company has not received any such royalty payments. Previously,Through
June 30, 2002, the Company was a provider of extended warranties and service
contracts via the Internet at warrantysuperstore.com
through June 30, 2002.warrantysuperstore.com. The business of the
Company today comprises the "run off" of its sale of extended warranties and
service contracts via the Internet and the new business opportunity it is
pursuing in the medical/bio-tech sector.healthcare and life sciences industries.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, the statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position as of March
31,June 30, 2005 and
December 31, 2004, the results of operations for the three and six months
ended March 31,June 30, 2005 and 2004 and the cash flows for the threesix months ended
March 31,June 30, 2005 and 2004. The results of operations for the three and six
months ended March 31,June 30, 2005 are not necessarily indicative of the results to
be expected for the full year.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company currently has no operations
and limited financial resources to pay its current expenses and liabilities.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The December 31, 2004 balance sheet has been derived from the audited
financial statements at that date included in the Company's Annual Report on
Form 10-K. These unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K.
NOTE 3 -STOCK OPTIONS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure - an amendment of
FASB Statement No. 123 ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation and does
not permit the use of the original SFAS No. 123 prospective method of
transition in fiscal years beginning after December 15, 2003. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results, regardless of whether, when,
or how an entity adopts preferable fair value based method of accounting.
SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular
format and by requiring disclosure in the "Summary of Significant Accounting
Policies" or its equivalent and improves the timeliness of those disclosures
by requiring their inclusion in financial reports for interim periods. The
Company has adopted the disclosure requirements of SFAS No. 148. The Company
will continue to account for stock-based employee compensation under APB
Opinion No. 25 and its related interpretations.
6
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for all periods:
Three Months Ended March 31,
2005 2004
----------- -----------
Net loss as reported $ (249,670) $ (456,206)
Additional compensation (17,726) (300,795)
----------- -----------
Adjusted net loss $ (267,396) $ (757,001)
=========== ===========
Net loss per share as reported $ (.01) $ (.02)
=========== ===========
Adjusted net loss per share $ (.01) $ (.03)
=========== ===========
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- -------------------
Net loss as reported $ (393,066) $ (492,180) $ (642,736) $ (948,386)
Additional compensation (17,726) (10,985) (35,452) (157,785)
---------------- ---------------- ---------------- -------------------
Adjusted net loss $ (410,792) $ (503,165) $ (678,188) $ (1,106,171)
================ ================ ================ ===================
Net loss per share as reported $ (.01) $ (.02) $ (.02) $ (.03)
================ ================ ================ ===================
Adjusted net loss per share $ (.01) $ (.02) $ (.02) $ (.04)
================ ================ ================ ===================
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment"
("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as an expense in the
historical financial statements as services are performed. Prior to SFAS No.
123(R), only certain pro forma disclosures of fair value were required. The
provisions of this statement are effective for small business filers the
first interim reporting period that begins after December 31, 2005.
.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, FASB issued SFAS No. 154 - Accounting Changes and Error
Corrections, which replaces APB Opinion No. 20 and FASB Statement No. 3.
This statement applies to all voluntary changes in accounting principles and
to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions. When
a pronouncement includes specific transition provisions, those provisions
should be followed. This pronouncement is effective for fiscal years
beginning after December 15, 2005. The Company does not believe that this
statement will have a material effect on its financial statements.
NOTE 5 - NOTES PAYABLE
On March 17, 2003, the Company commenced a private placement offering which
raised $250,000 in 6-month promissory notes in increments of $5,000 bearing
interest at 15% per annum. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended (the "Securities Act"), arewere eligible to purchase these
promissory notes. As of March 31,June 30, 2005, $170,000 remains unpaid and the due
date of these notes has been extended.extended until August 31, 2005. All interest
payments on these notes have been made.
On August 26, 2003, the Company borrowed $25,000 from a then consultant to
the Company. In October 2004, this note was combined with a note of $50,000
previously held by an unrelated third party. This new note accrues interest
at 8% and is due on June 30,August 31, 2005 together with the accrued interest.
In February 2004, the Company commenced a sale of 30 day 20% notes in the
amount of $125,000 to three accredited investors to fund current operations.
It was anticipated that these notes would be repaid from the proceeds of the
January 2004 amended equity private placement. Two of these notes have a
default provision that if they are not paid within 30 days, there is an
additional interest payment of $250 per $25,000 of principal outstanding for
each 30 day period or part thereof the notes remain unpaid. As of March 31,June 30,
2005, $25,000all of these notes remains unpaid, the interest
rate has been reduced to 8% and the due date has been extended to April 1,
2005. All interest payments have been paid timely. On April 26, 2005 this
note together with all accrued interest washave been repaid. In
May 2004, the Company sold an additional 30 day 20% note in the amount of
$40,000 to an accredited investor to fund current operations. This note plus
interest has been repaid. In July 2004, the Company sold a five month 20%
note in the amount of $25,000 and two six month 20% notes totaling $80,000
to three accredited investors to fund current operations. As of March 31,June 30,
2005, the $25,000 note has been repaid together with accrued interest and
all interest payments have been paid timelyare current and the due date hasdates have been extended.extended until
August 31, 2005 on the other two notes. In August 2004, the Company sold
additional 30 day 20% notes in the amount of $55,000 to two accredited
investors to fund current operations. As of March 31,June 30, 2005, $25,000 of these
notes remains unpaid. All interest payments have been paid timelyare current and the due date has
been extended.extended until August 31, 2005. In December 2004, the Company sold a 60
day 8% note in the amount of $35,000 to the President and CEO, a 180 day 15%
note in the amount of $25,000 to a related party, a 180 day 20% note in the
amount of $15,000 and a 90 day 8% note in the amount of $25,000 to foura
Director, all accredited investors, totaling $100,000. As of March 31,June 30, 2005,
these notes remain unpaid. All interest payments have been
made timelyare current and the due
datedates have been extended until August 31, 2005 except for the $15,000 note
which has been extended.extended until September 15, 2005.
7
In August 2004, the Company sold a six month 20% convertible note in the
amount of $100,000 to its Chief Operating Officer ("COO"). Upon maturity,
the Company and the COO have agreed to convert the principal amount of the
new note into shares of the Company's common stockCommon Stock at 85% of the average
price as quoted on the NASD Over-the-Counter Bulletin Board for the five
days prior to the maturity date of the note. The remaining debt discount of
$5,882 was amortized in the first quarter of 2005. On February 20, 2005, the
note was converted into 1,960,784 shares of Common Stock as per the
prescribed formula. All interest payments have been paid timely.paid.
In January 2005, the Company sold a six month 20% note in the amount of
$25,000 to an accredited investor to fund current operations. In February
2005, the Company sold a six month 20% note in the amount of $10,000 to an
accredited investor to fund current operations. This note has been extended
until September 30, 2005. In March 2005, the Company sold a 30 day 8% note
(for which the due date has been extended)extended to August 31, 2005) in the amount
of $17,000 to the President and CEO and a one year 15% note in the amount of
$20,000 to two accredited investors to fund current operations. All interest
payments on these notes have been made timely.are current.
In April 2005, the Company sold a one year 15% note in the amount of
$100,000 to its Executive Vice President and General Counsel. The note
contains certain rights and obligations regarding its conversion into shares
of the Company's Common Stock. All interest payments on this note are
current.
In June 2005, the Company sold an 8% note in the amount of $6,000 to its
President and CEO, an accredited investor which is due on demand.
A summary of the above descriptionstransactions is as follows:
Repayments/
Conversions
December 31, to Common
2004 Proceeds Stock June 30, 2005
---- -------- ----- -------------
Repayments/
December 31, 2004 Proceeds Conversions March 31, 2005
----------------- -------- ----------- --------------
March 2003 Notes $ 170,000 $ - $ - $ 170,000
Consultant Note 75,000 - - 75,000
February - August 2004 Notes 230,000 - - 230,000(25,000) 205,000
2005 Notes - 72,00055,000 - 72,00055,000
2005 Notes - Related Party NoteParties - 23,000 - 23,000
Convertible Debt - Related Parties 94,118 -100,000 (94,118) -
----------------- --------100,000
--------- ---------- ----------- ------------------------
Total $ 569,118 $ 72,000178,000 $ (94,118)(119,118) $ 547,000628,000
========= ========== =========== ==========
On June 28, 2005, the Company commenced a private placement of a minimum of
$500,000 and a maximum of $2,000,000, without accounting for any
over-subscription allowances, of Senior Secured Convertible Notes and Common
Stock Warrants. The Convertible Notes bear interest at 10% per annum paid
semiannually in arrears and are convertible at any time into shares of the
Company's Common Stock at a conversion price of $.08 per share. In addition,
for each $1,000 face amount of Convertible Notes purchased, the investor
will receive a Warrant to purchase 12,500 shares of Common Stock. Each
Warrant is exercisable at a price of $.10 per share. This offering will
expire on August 31, 2005 unless extended by the Company and the placement
agent. As of August 11, 2005, the placement agent has not closed nor
remitted any funds to the Company. Sale of these securities is not being
registered under the Securities Act and the securities may not be resold
absent registration or an applicable exemption from registration.
NOTE 56 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of DesignationsDesignation 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. At March 31,June 30, 2005 and December 31, 2004, 681,174 shares of
Series A Preferred Stock were outstanding.
8
NOTE 67 - STOCKHOLDERS' EQUITY
(a) Common Stock:
On each of January and February 20, 2005, the Company issued 37,500
shares of its Common Stock, for a total of 75,000 shares, as
compensation to its public relations firm. The Company recorded $4,875
of expense as a result of this issuance.
On February 20, 2005, the Company issued 1,960,784 shares of its Common
Stock in exchange for the conversion of the relatedpromissory note held by its
COO.
On April 1, 2005, the Company issued 800,898 shares of its Common Stock
to its COO in partial payment of salary as per his employment agreement.
On April 20, 2005, the Company sold 1,666,666 shares of its Common Stock
to its Executive Vice president and General Counsel at a price of $.06
per share resulting in net proceeds to the Company of $100,000.
On May 4, 2005, the Company sold 100,000 shares of its Common Stock to
an unrelated third party note.at a price of $.06 per share resulting in net
proceeds to the Company of $6,000.
In May 2005, the Company sold a total of 350,000 shares of its Common
Stock to two directors at a price of $.06 per share resulting in net
proceeds to the Company of $21,000.
On June 8, 2005, the Company sold 416,666 shares of its Common Stock to
an unrelated third party at a price of $.06 per share resulting in net
proceeds to the Company of $25,000.
(b) Warrants:
The Company has issued Common Stock purchase warrants from time to time
to investors in private placements, certain vendors, underwriters, and
directors and officers of the Company. A total of 351,500432,500 shares of
Common Stock are reserved for issuance upon exercise of outstanding
warrants as of March 31,June 30, 2005 at prices ranging from $0.05 to $8.10 and
expiring through December 2008. In connection with the September 2003
equity private placement, the Company issued a 5 year warrant to
purchase 282,500 shares of its Common Stock at an exercise price of
$0.12 per share to its retained placement agent, Robert M. Cohen &
Company. The warrant contains piggyback registration rights. On January
20, 2005, the Company issued three year warrants to purchase a total of
25,000 shares of its Common Stock at $.05 per share to Consulting For
Strategic Growth, Ltd., the Company's investor relations and public
relations firm. This issuance brings their total warrants to 150,000.
The Company recorded expense of $874 as the fair value of these warrants
using the Black-Scholes method.
8
(c) Stock Option Plans:
In February 2003, the Company adopted the 2003 Equity Participation Plan
(the "2003 EPP") , which was approved by stockholders at the Company's
Annual Meeting on July 24, 2003. Under this plan, the Company has
reserved 15,000,000 shares of common stock for the grant of incentive
stock options and non-statutory stock options to employees and
non-employee directors, consultants and advisors.
Information with respect to options under the 2003 Equity Participation
Plan is summarized as follows:
For the ThreeSix Months Ended
March 31,June 30, 2005
--------------------------------------------- --------------
Shares Prices
--------------------------------------------- --------------
Outstanding at beginning of period 6,685,000 $0.03 to
period $0.18
Granted 200,000 $0.07350,000 $ 0.07 to $.10
Expired - -
Cancelled - -
--------------------------------------------- --------------
Outstanding at end of period 6,885,0007,035,000 $0.03 to $0.18
============================================= ==============
9
Options are usually granted at an exercise price at least equal to the
fair value of the common stockCommon Stock at the grant date. During the threesix months
ended March 31,June 30, 2005, options to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $.07 were granted to a member of
the Company's Board of Advisors pursuant to his agreement.agreement and options to
purchase 150,000 shares at an exercise price of $.10 were granted to the
Executive Vice President and General Counsel.
NOTE 78 - COMMITMENTS AND CONTINGENCIES
On March 20, 2004, the Company entered into a consulting agreement which
provides for the Company to give advice as to business development
possibilities for the services and technology of NeoStem Inc. (See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS). The agreement provides for the issuance of options to
purchase 300,000 shares of the Company's Common Stock at an exercise
price of $.10 per share. This option is immediately vested and expires
ten years from the date of issue. The agreement also provides for the
payment of $2,500 per month for each month after the Company has
received capital contributions of $1,000,000 from the date of the
agreement. If certain performance levels are met, the Company is
obligated to issue an additional option to purchase 500,000 shares of
the Company's Common Stock for an exercise price of $.10 per share.
On December 12, 2003, the Company signed a royalty agreement with
Parallel Solutions, Inc. "(PSI") to develop a new bioshielding platform
technology for the delivery of therapeutic proteins and small molecule
drugs in order to extend circulating half-life to improve
bioavailability and dosing regimen, while maintaining or improving
pharmacologic activity. The agreement provides for PSI to pay the
Company a percentage of the revenue received from the sale of certain
specified products or licensing activity. The Company is providing
capital and guidance to PSI to conduct a proof of concept study to
improve an existing therapeutic protein with the goal of validating the
bioshielding technology for further development and licensing the
technology. The Company has paid a total of $720,000 since the inception
of the agreement. The agreement also calls for the Company to pay on
behalf of PSI $280,000 of certain expenses relating to testing of the
bioshielding concept. Since inception, through March 31,June 30, 2005, the
Company paid $74,060 of such expenses.
NOTE 89 - RELATED PARTIES
On May 4, 2005, the Company's Board of Directors (the "Board") voted to
approve an amendment to Mr. Weinreb's letter agreement, subject to
approval of the stockholders which was obtained on July 20, 2005,
pursuant to which Mr. Weinreb's employment agreement will be amended to
(a) extend the expiration date thereof from February 2006 to December
2008; (b) change Mr. Weinreb's annual base salary of $217,800 (with an
increase of 10% per annum) to an annual base salary of $250,000 (with no
increase per annum); (c) grant Mr. Weinreb 3,000,000 shares of common
stock, 1,000,000 shares of which shall vest on each of the date of grant
and the first and second anniversaries of the date of grant; (d) amend
the severance provision of the existing employment agreement to provide
that in the event of termination without cause (subject to certain
exceptions), Mr. Weinreb will be entitled to receive a lump sum payment
equal to his then base salary and automobile allowance for a period of
one year; (e) commencing in August 2006, increase Mr. Weinreb's annual
bonus from $20,000 to $25,000; (f) in August 2005, pay Mr. Weinreb
$15,000 to cover costs incurred by him on behalf of the Company; and (g)
in 2006, provide for the reimbursement of all premiums in an annual
aggregate amount of up to $18,000 payable by Mr. Weinreb for life and
long term care insurance covering each year during the remainder of the
term of his employment.
On September 13, 2004, ("Commencement Date") the Company entered into a
letter agreement (the "Letter Agreement") with Mr. Robert Aholt Jr.
pursuant to which the Company appointed Mr. Aholt as its Chief Operating
Officer. Subject to the terms and conditions of the Letter Agreement,
the term of Mr. Aholt's employment in such capacity will be for a period
of three (3) years from the Commencement Date (the "Term").
In consideration for Mr. Aholt's services under the Letter Agreement,
Mr. Aholt will be entitled to receive a monthly salary of $4,000 during
the first year of the Term, $5,000 during the second year of the Term,
and $6,000 during the third year of the Term. In further consideration
for Mr. Aholt's services under the Letter Agreement, on January 1, 2005
and on the first day of each calendar quarter thereafter during the
Term, Mr. Aholt will be entitled to receive shares of Common Stock with
a "Dollar Value" of $26,750, $27,625 and $28,888, respectively, during
the first, second and third years of the Term. The per share price (the
"Price") of each share granted to determine the Dollar Value will be the
average closing price of one share of Common Stock on the Bulletin Board
(or other similar exchange or association on which the Common Stock is
then listed or quoted) for the five (5) consecutive trading days
immediately preceding the date of grant of such shares; provided,
however, that if the Common Stock is not then listed or quoted on an
exchange or association, the Price will be the fair market value of one
share of Common Stock as of the date of grant as determined in good
faith by the Board of Directors of the Company. The number of shares of
Common Stock for each quarterly grant will be equal to the quotient of
the Dollar Value divided by the Price. The shares granted will be
subject to a one year lockup as of the date of each grant. Mr. Aholt
received 477,679 shares of the Company's Common Stock based on the January 1, 2005
date. Mr. Aholt will receiveand 800,898 shares on April 1, 2005.
910
In the event Mr. Aholt's employment is terminated prior to the end of
the Term for any reason, earned but unpaid cash compensation and
unreimbursed expenses due as of the date of such termination will be
payable in full. In addition, in the event Mr. Aholt's employment is
terminated prior to the end of the Term for any reason other than by the
Company with cause, Mr. Aholt or his executor of his last will or the
duly authorized administrator of his estate, as applicable, will be
entitled (i) to receive severance payments equal to one year's salary,
paid at the same level and timing of salary as Mr. Aholt is then
receiving and (ii) to receive, during the one (1) year period following
the date of such termination, the stock grants that Mr. Aholt would have
been entitled to receive had his employment not been terminated prior to
the end of the Term; provided, however, that in the event such
termination is by the Company without cause or is upon Mr. Aholt's
resignation for good reason, such severance payment and grant shall be
subject to Mr. Aholt's execution and delivery to the Company of a
release of all claims against the Company.
On May 4, 2005, the Board voted to approve an amendment to Mr. Aholt's
letter agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, to (a) replace the provision of Mr. Aholt's
existing employment agreement pursuant to which he is compensated in
shares of common stock with a provision pursuant to which he will be
compensated solely in cash, effective as of September 30, 2005; (b)
replace the provision of Mr. Aholt's existing employment agreement
pursuant to which his compensation accrues on a monthly and/or quarterly
basis with a provision pursuant to which his compensation will be paid
in accordance with the Company's normal payroll practices, effective as
of September 30, 2005; and (c) provide for a minimum annual bonus of
$12,000, payable in January of each year during the term of his
employment, commencing in January 2006.
On August 12, 2004 ("Commencement Date") the Company and Dr. Wayne A.
Marasco, a Company Director, entered into a Letter Agreement appointing
Dr. Marasco as the Company's Senior Scientific Advisor. Dr. Marasco will
be responsible for assisting the Company in reviewing and evaluating
business, scientific and medical opportunities, and for other
discussions and meetings that may arise during the normal course of the
Company conducting business. For his services, during a three year
period ("Term"), Dr. Marasco shall be entitled to annual cash
compensation with increases each year of the Term and an additional cash
compensation based on a percentage of collected revenues derived from
the Company's royalty or revenue sharing agreements. Although the annual
cash compensation and additional cash compensation stated above shall
begin to accrue as of the Commencement Date, Dr. Marasco will not be
entitled to receive any such amounts until the Company raises $1,500,000
in additional equity financing after the Commencement Date. In addition,
Dr. Marasco was granted an option, fully vested, to purchase 675,000
shares of the Company's common stock at an exercise price of $.10 cents
per share. The shares will be subject to a one year lockup as of the
date of grant. The exercise period will be ten years, and the grant will
otherwise be in accordance with the Company's 2003 Equity Participation
Plan and Non-Qualified Stock Option Grant Agreement. As of March 31,June 30,
2005, Mr. Marasco has accrued $52,500$96,500 in salary under this agreement.
On May 4, 2005, the Board voted to approve an amendment to Dr. Marasco's
letter agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, pursuant to which Dr. Marasco's letter
agreement with the Company will be amended to (a) extend the term of the
letter agreement from August 2007 to August 2008; (b) provide for an
annual salary of $110,000, $125,000 and $150,000 for the years ended
August 2006, 2007 and 2008, payable in each such year during the term;
(c) provide for a minimum annual bonus of $12,000, payable in January of
each year during the term, commencing in January 2006; (d) eliminate Dr.
Marasco's right under his existing letter agreement to receive 5% of all
collected revenues derived from the Company's royalty or other revenue
sharing agreements (which right is subject to the limitation that the
amount of such additional cash compensation and Dr. Marasco's annual
salary do not exceed, in the aggregate, $200,000 per year); and (e)
permit Dr. Marasco to begin receiving all accrued but unpaid cash
compensation under his letter agreement upon the Company's consummation
of any financing, whether equity or otherwise, pursuant to which the
Company raises $1,500,000.
On April 20, 2005 (the "Commencement Date"), the Company entered into a
letter agreement (the "Letter Agreement") with Catherine M. Vaczy
pursuant to which Ms. Vaczy will serve as the Company's Executive Vice
President and General Counsel. Subject to the terms and conditions of
the letter agreement, the term of Ms. Vaczy's employment in such
capacity will be for a period of three (3) years from the commencement
date (the "Term").
11
In consideration for Ms. Vaczy's services under the letter agreement,
Ms. Vaczy is entitled to receive an annual salary of $155,000 during the
first year of the term, a minimum annual salary of $170,500 during the
second year of the term, and a minimum annual salary of $187,550 during
the third year of the term. Ms. Vaczy and the Company have agreed that
from the commencement date until the 90th day thereafter (the "Initial
90 Day Period"), Ms. Vaczy's salary will be paid to her at a rate of 50%
of the annual rate and accrue as to the remainder. At the end of the
initial 90 day period, and at the end of each additional 90 day period
thereafter, whether to continue to accrue salary at this rate and
provision for payment of accrued amounts will be discussed in good
faith. Payment of accrued salary may be made in cash, or, upon mutual
agreement, shares of Common Stock. Any shares of Common Stock issued in
payment of accrued salary shall have a per share price equal to the
average closing price of one share of common stock on the Bulletin Board
(or other similar exchange or association on which the Common Stock is
then listed or quoted) for the five (5) consecutive trading days
immediately preceding the date of issue of such shares; provided,
however, that if the common stock is not then quoted on the Bulletin
Board or otherwise listed or quoted on an exchange or association, the
price shall be the fair market value of one share of common stock as of
the date of issue as determined in good faith by the Board. The number
of shares of common stock for any issuance in payment of accrued salary
shall be equal to the quotient of the amount of the accrued salary
divided by the price. The shares issued will be subject to a one-year
lock up as of the date of each grant and shall be registered with the
Securities and Exchange Commission on a Registration Statement on Form
S-8.
In the event Ms. Vaczy's employment is terminated prior to the end of
the term for any reason, earned but unpaid cash compensation and
unreimbursed expenses due as of the date of such termination will be
payable in full. In addition, in the event Ms. Vaczy's employment is
terminated prior to the end of the term for any reason other than by the
Company with "cause" or Ms. Vaczy without "good reason", Ms. Vaczy or
her executor of her last will or the duly authorized administrator of
her estate, as applicable, will be entitled in the event the employment
termination date is after April 20, 2006, to receive severance payments
equal to Ms. Vaczy's then one year's salary, paid in accordance with the
Company's standard payroll practices for executives of the Company and
(ii) in the event the employment termination date is before April 20,
2006 but after October 20, 2005, to receive severance payments equal to
one-sixth of Ms. Vaczy's then one year's salary, paid in accordance with
the Company's standard payroll practices for executives of the Company.
In addition, in the event Ms. Vaczy's employment is terminated prior to
the end of the term by the Company without "cause" or by Ms. Vaczy for
"good reason", the option (as defined below) shall vest and become
immediately exercisable in its entirety and remain exercisable in
accordance with its terms. No other payments shall be made, nor benefits
provided, by the Company in connection with the termination of
employment prior to the end of the term, except as otherwise required by
law.
NOTE 910 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION
The Company's operations are currently in one segment, namely the "run
off" of its sale of extended warranties and service contracts via the
Internet. Additionally, the Company is currently endeavoring to
establish new business operations by providing capital as well as
consulting and guidance to companies in multiple sectors of the
healthcare and life sciences industries, in exchange for a percentage of
revenues, royalty fees, licensing fees and other product sales of the
target companies. The Company didTo date, the company has not realizerealized any revenue from
its purchase of the royalty interest.those interests. The Company's operations are conducted
entirely in the United States.
NOTE 1011 - SUBSEQUENT EVENTS
On AprilJuly 1, 2005, 800,898668,750 shares of the Company's Common Stock were
issued to Robert Aholt based on the formula in his employment agreement
in partial payment of salary.
On April 15,July 1, 2005, 16,666 shares of the Company's Common Stock were issued
to Consulting for Strategic Growth Ltd., the Company's investor
relations and public relations firm; as compensation for work to be
performed in July 2005.
On July 18, 2005, the Company entered into an engagement agreement with an
investment bankersold 1,250,000 shares of its Common Stock
to be the sole placement agent in a proposed private
placement of convertible notes and warrants. The notes, warrants and
underlying securities have not been registered under the Securities Act and
my not be offered or sold in the United States without registration or an
applicable exemption. The agreement calls for an upfront payment of $25,000
which has been paid and an additional $25,000 at closing of the first
placement. All other fees are based on the amount raised.
On April 20, 2005, the Company entered into the following agreements with
Catherine M. Vaczy, a previously unrelated third party.
10
o Employment agreement to become the Company'sits Executive Vice President and General Counsel
o Stock Purchase Agreement to purchase 1,666,666 shares of the Company's
Common Stock at .$06 per share totaling $100,000
o Promissory Note in the principal amount of $100,000 bearing annual interest
at 15% and payable April 20, 2006, subject to certain rights and
obligations contained therein relating to the conversion of the Promissory
Note into shares of Common Stock
o Stock Option Agreement to purchase 150,000 shares of the Company's Common
Stock at an exercise price of $.10 per share.
In April 2005, the Company repaid $25,000 to a note holder from the February -
August 2004 notes. (See Note 4) In addition, the Company sold 100,000 shares of
its Common Stock to an accredited investor at a price of $.06
per share resulting in grossnet proceeds to the Company of $6,000.$75,000.
In July 2005, the President and CEO advanced the Company $19,000 which
bears interest at 8% per annum and is due on demand.
On July 20, 2005, at the Company's Annual Meeting of Stockholders, the
Company's stockholders approved the issuance of 3,000,000 shares of the
Company's Common Stock to Mark Weinreb, President and CEO under the 2003
Equity Participation Plan, of which 1,000,000 shares vest immediately
and 1,000,000 shares vest on each of the next two anniversary dates. In
addition, the shareholders approved the following:
12
1. An increase in the number of authorized shares of Common Stock
from 250,000,000 to 500,000,000
2. An amendment to the 2003 Equity Participation Plan to increase
the shares of Common Stock covered by the plan from 15 million to
50 million shares
3. Granting of 8,000,000 options to purchase the Company's Common
Stock to Officers, Directors and employees at an exercise price
of $.06 per share which was greater than the fair market value of
one share of Common Stock on the date of grant.
4. Amendments to the employment agreements of the CEO, COO and Chief
Scientific Officer
5. The appointment of Holtz Rubenstein Reminick LLP as the Company's
independent certified public accountant for fiscal year 2005
There was not present at the meeting a quorum of the holders of the Series A
Preferred Stock and the meeting was adjourned with respect to the proposal to
approve an amendment to the certificate of designations for the Series A
Preferred Stock. There were no shares of Series A Preferred Stock present,
accordingly, this action was ratified by the shares of Common Stock present.
Pursuant to the proposal, stockholders were asked to approve an amendment to the
certificate of designations to permit the Company to issue in conversion of the
outstanding shares of Series A Preferred Stock and its obligation to pay accrued
dividends thereon a total of 5,449,368 shares of common stock (eight (8) shares
per Series A Preferred Stock outstanding).
On August 11, 2005, at a meeting of the Board, the Board approved (i)
the adoption of the Company's Amended and Restated By-laws; (ii) the issuance to
Mark Weinreb, the Company's President and CEO, of a promissory note in the
aggregate amount of $25,000 bearing annual interest of 8% and payable on demand,
which relates to cash advances totaling $25,000 made by Mr. Weinreb to the
Company during July and August 2005; (iii) the approval of the sale to Wayne
Marasco, the Company's Chief Scientific Officer, of 833,333 shares of Common
Stock at a per share purchase price of $.06, for an aggregate purchase price of
$50,000; and (iv) the approval of an agreement with Catherine Vaczy, the
Company's Executive Vice President and General Counsel, pursuant to which (A) on
August 12, 2005 Ms. Vaczy was issued 412,339 shares of Common Stock in payment
of $24,740 in salary accrued during the period April 20, 2005 through August 12
2005, based on a per share purchase price of $.06, the closing price of the
Common Stock on August 12, 2005; (B) Ms. Vaczy will continue to accrue her
salary as to 50% through September 30, 2005 at which time she will be issued
shares of Common Stock in payment therefor based on the closing price of the
Common Stock on September 30, 2005; and (C) commencing on October 1, 2005, Ms.
Vaczy will be paid her salary solely in cash in accordance with the Company's
standard payroll practice.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Disclosure Regarding Forward Looking Statements
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 December 12, 2003, the Company signed a royalty agreement with Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. The agreement provides for PSI
to pay the Company a percentage of the revenue received from the sale of certain
specified products or licensing activity. The Company is providing capital and
guidance to PSI to conduct a proof of concept study to improve an existing
therapeutic protein with the goal of validating the bioshielding technology for
further development and licensing the technology. The Company has paid a total
of $720,000 since the inception of the agreement. The agreement also calls for
the Company to pay on behalf of PSI $280,000 of certain expenses relating to
testing of the bioshielding concept. Since inception, through March 31,June 30, 2005, the
Company paid $74,060 of such expenses.
On June 28, 2005, the Company commenced a private placement of a minimum of
$500,000 and a maximum of $2,000,000, without accounting for any
over-subscription allowances, of Senior Secured Convertible Notes and Common
Stock Warrants. The Convertible Notes bear interest at 10% per annum paid
semiannually in arrears and are convertible at any time into shares of the
Company's Common Stock at a conversion price of $.08 per share. In addition, for
each $1,000 face amount of Convertible Note purchased, the investor will receive
a Warrant to purchase 12,500 shares of Common Stock. Each Warrant is exercisable
at a price of $.10 per share. This offering will expire on August 31, 2005
unless extended by the Company and the placement agent. As of August 11, 2005,
the placement agent has not closed nor remitted any funds to the Company.
RESULTS OF OPERATIONS
The Company recognizes revenue from its warranty service contracts business over
the life of contracts executed. Additionally, the Company purchased insurance to
fully cover any losses under the service contracts from a domestic carrier. The
insurance premium expense and other costs related to the sale are amortized
ratably over the life of the contracts.
Three Months Ended March 31,June 30, 2005 Compared To Three Months Ended March 31,June 30, 2004.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $10,535$9,448 for the three months ended March 31,June 30, 2005 as
compared to $27,342$7,073 for the three months ended March 31,June 30, 2004. The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. Similarly, direct costs incurred were
$7,417$6,603 and $19,273$4,871 for the three months ended March 31,June 30, 2005 and 2004,
respectively. In addition, the Company paid $0 and $240,000 respectively for the
three months ended March 31,June 30, 2005 and 2004 towards the purchase of royalty
interests as per its agreement with PSI. Due to the uncertainty of the future
revenues, the amounts paid have been charged to current operations.
General and administration expenses increased approximately $66,000$183,000 to $215,501$358,760
for the three months ended March 31,June 30, 2005 as compared to $149,083$175,532 for the three
months ended March 31,June 30, 2004. The increase in general and administrative expenses
is primarily due to increases in payroll and related expenses of $73,000$90,000 and
investor relations expenses of $15,000,$11,000, legal expenses of $75,000, professional
fees of $40,000 partially offset by reductions in professional feesD&O insurance of $22,000.$18,000 and
investment banking commissions of $15,000.
14
Interest expense decreased by approximately $38,000$42,000 for the three months ended
March 31,June 30, 2005 from the three months ended March 31,June 30, 2004. Such decrease was
primarily as a result of reduced interest rates on certain debt, no shares being
issued as additional interest and the elimination of default options on debt
that has been repaid.
For the reasons cited above, including primarily that no payments were made
towards royalty interests in the three months ended June 30, 2005, the net loss
for the three months ended March 31,June 30, 2005 decreased to $249,670$393,066 from $456,206$492,180 for
the three months ended March 31,June 30, 2004.
Six Months Ended June 30, 2005 Compared To Six Months Ended June 30, 2004.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $19,983 for the six months ended June 30, 2005 as
compared to $34,415 for the six months ended June 30, 2004. The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. Similarly, direct costs incurred were
$14,020 and $24,144 for the six months ended June 30, 2005 and 2004,
respectively. In addition, the Company paid $0 and $480,000 respectively for the
six months ended June 30, 2005 and 2004 towards the purchase of royalty
interests as per its agreement with PSI. Due to the uncertainty of the future
revenues, the amounts paid have been charged to current operations.
General and administration expenses increased approximately $250,000 to $574,261
for the six months ended June 30, 2005 as compared to $324,611 for the six
months ended June 30, 2004. The increase in general and administrative expenses
is primarily due to increases in payroll and related expenses of $169,000 and
investor relations expenses of $14,000, legal expenses of $69,000, professional
fees of $21,000, travel of $7,000, rent and other expenses of $3,000 partially
offset by reductions in D&O insurance of $18,000 and investment banking
commissions of $15,000.
Interest expense decreased by approximately $80,000 for the six months ended
June 30, 2005 from the six months ended June 30, 2004. Such decrease was
primarily as a result of reduced interest rates on certain debt, no shares being
issued as additional interest and the elimination of default options on debt
that has been repaid.
For the reasons cited above, including primarily that no payments were made
towards royalty interests in the six months ended June 30, 2005, the net loss
for the six months ended June 30, 2005 decreased to $642,736 from $948,386 for
the six months ended June 30, 2004.
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:
12
Three Months Ended
------------------
March 31, March 31,
2005 2004
Cash used in
Operating Activities $ (94,489) $ (396,225)
Cash (used) provided by
Investing Activities $ - $ (1,113)
Cash provided by
Financing Activities $ 72,000 $ 210,036
Six Months Ended
----------------
June 30, 2005 June 30, 2004
Cash used in
Operating Activities $ (332,608) $ (765,146)
Cash used in
Investing Activities $ - $ (3,288)
Cash provided by
Financing Activities $ 305,000 $ 559,237
The Company incurred a net loss of $249,670$642,736 for the threesix months ended March 31,June 30,
2005. Such loss adjusted for non-cash items such as deferred revenues (net of
deferred acquisition costs) ($3,118)5,963) and other non cashnon-cash credits totaling $24,021$34,010
resulted in cash used in operations totaling $94,489$332,608 for the threesix months ended
March 31,June 30, 2005 including working capital movements of $134,258.$258,239 which is comprised
of accounts payable, accrued expenses and other liabilities of $256,929 and
prepaid expenses of $1,310.
To meet its cash requirement for the threesix months ended March 31,June 30, 2005, the Company
relied on the net proceeds from the issuance of Promissory Notes and Common
Stock in the amount of $72,000.$305,000. In order to address the cash requirements for
the Company through the end of the year, the Company, on June 28, 2005,
commenced a private placement of a minimum of $500,000 and a maximum of
$2,000,000, without accounting for any over-subscription allowances, of Senior
Secured Convertible Notes and Common Stock Warrants. The Convertible Notes bear
interest at 10% per annum paid semiannually in arrears and are convertible at
any time into shares of the Company's Common Stock at a conversion price of $.08
per share. In addition, for each $1,000 face amount of Convertible Note
purchased, the investor will receive a Warrant to purchase 12,500 shares of
Common Stock. Each Warrant is exercisable at a price of $.10 per share. This
offering will expire on August 31, 2005 unless extended by the Company and the
placement agent. As of August 11, 2005, the placement agent has not closed nor
remitted any funds to the Company.
15
The Company has a contractual commitment to pay PSI up to an additional $194,676$205,940
through the end of its agreement. As of March 31,June 30, 2005, the Company had virtually
no cash balances totaling approximately $5,379.balances. The Company will rely on its current cash, the private
placement of convertible notes and warrants and proceeds from the sale of
promissory notes and common stock to fund its new business operations until they
become cash generative.generative, if at all. All interest payments have been paid timely. The Company plans to meet its current and future
obligations through the sales of common stock and loans from accredited
investors.are current. There can
be no assurance that sufficient proceeds will be raised to meet current
obligations when due.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company currently has no operations and limited
financial resources to pay its current expenses and liabilities. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the threesix months ended March 31,June 30, 2005, a situation which is
expected to continue for the foreseeable future.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Our principal executive officer has concluded, based on his
evaluation of, the effectiveness of our "disclosure controls and
procedures" as of the end of the period covered by this quarterly
report on Form 10-Q (as defined under Rule 13a-15(e) and Rule 15d-15(e)
of the Securities Exchange Act of 1934) were effective as of such date
to ensure that information we are required to disclose in the reports
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and include controls and procedures designed to ensure
that information we are required to disclose in such reports is
accumulated and communicated to management, including our principal
executive, as appropriate, to allow timely decisions regarding required
disclosure.
(b) During our last fiscal quarter and subsequent to our evaluation,
there were no significant changes in internal controls or other factors
that have materially affected, or reasonably likely to materially
affect our internal controls over financial reporting.
1416
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1. LEGAL PROCEEDINGS
The following securities were sold duringCompany is not aware of any material pending legal proceedings or claims
against the first quarter of 2005 in private
transactions exempt from registration pursuant to Section 4(2) of the Securities
Act and/or Regulation D there under: (i) on each of January and February 20,
2005, the Company issued 37,500 shares of its Common Stock, for a total of
75,000 shares, as compensation to its public relations firm; and (ii) on
February 20, 2005, the Company issued 1,960,784 shares of its Common Stock in
exchange for the conversion of a related party note.Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Cumulative dividends payable on Series A Convertible Redeemable Preferred Stock
totaled $492,801$504,722 at March 31,June 30, 2005, of which $11,921$23,842 represents dividends for the
threesix months then ended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders was held on July 20, 2005.
(b) The Directors elected at the annual meeting were Mark Weinreb, Wayne A.
Marasco and Joseph D. Zuckerman. Such persons are all of the Directors of
the Company whose term of office continued after the annual meeting.
(c) The matters voted upon at the annual meeting and the results of the voting,
including broker non-votes where applicable, are set forth below:
(i) Election of Directors
Name In Favor Witheld
--------- -------- -------
Mark Weinreb 34,340,869 19,258
Wayne A. Marasco 34,340,876 19,251
Joseph D. Zuckerman 34,340,865 19,262
(ii) The stockholders approved an amendment to the certificate of
incorporation to increase the number of shares of the Company's
authorized Common Stock from 250,000,000 to 500,000,000. The
stockholders voted 34,185,651 shares in favor and 144,245 shares
against. 30,230 shares abstained from voting.
(iii) There was not present at the meeting a quorum of the holders of the
Series A Preferred Stock and the meeting was adjourned with respect to
the proposal to approve an amendment to the certificate of designations
for the Series A Preferred Stock. This action was ratified by the
shares of Common Stock present. There were no shares of Series A
Preferred Stock present. The Common Stock holders voted 22,519,124
shares in favor and 142,119 shares against. 11,126 shares abstained
from voting.
(iv) The stockholders approved (A) an amendment to the Company's 2003 EPP
and the grants of options to the Company's executive officers,
controller and directors under the 2003 EPP; (B) amendments to the
employment agreements of certain of the Company's executive officers;
and (C) a grant of a restricted stock award under the 2003 EPP to the
President and CEO. The stockholders voted 24,526,134 shares in favor
and 159,038 shares against. 3,863 shares abstained from voting. There
were 9,671,092 broker nonvotes.
(v) The stockholders ratified the appointment by the Board of Holtz
Rubenstein Reminick LLP as the Company's independent certified public
accountants for the fiscal year ending December 31, 2005. The
stockholders voted 34,342,434 shares in favor and 2,103 shares against.
15,590 shares abstained from voting.
17
ITEM 6. EXHIBITS
AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated By-laws
3.2 Amendment dated July 20, 2005 to Certificate of Incorporation
10.1 Amendment dated July 18, 2005 to Stock Purchase Agreement with
Catherine M. Vaczy dated April 20, 2005
10.2 Amendment dated July 20, 2005 to Employment Agreement with Mark
Weinreb dated February 6, 2003
10.3 Amendment dated July 20, 2005 to Employment Agreement with Wayne
A. Marasco dated August 12, 2004
10.4 Amendment dated July 20, 2005 to Employment Agreement with Robert
Aholt dated September 13, 2004
10.5 Form of Option Agreement dated July 20, 2005
10.6 Form of Promissory Note Extension
10.7 Letter Agreement dated August 12, 2005 with Catherine M. Vaczy
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
152002
99.1 2003 Equity Participation Plan, as amended
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE III MEDICAL, INC.
(Registrant)
By: /s/ Mark Weinreb
---------------------------------
Mark Weinreb, President and Chief
Executive Officer
Date: May 16,August 15, 2005
1619