SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005MARCH 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
---------------- ----------------______to______
Commission file number 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No --- ---___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer (as
definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act of 1934). Yes NoAct.
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_X_ No --- ---
55,645,530__
86,738,633 SHARES, $.001 PAR VALUE, AS OF NOVEMBER 10, 2005May 19, 2006
(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. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets
At September 30, 2005March 31, 2006 and December 31, 20042005 3
Consolidated Statements of Operations
For the three and nine months
ended September 30,March 31, 2006 and 2005 and 2004 4
Consolidated Statements of Cash Flows
for the ninethree months ended
September 30,March 31, 2006 and 2005 and 2004 5
Notes to Unaudited Consolidated Financial
Statements 6 - 136-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 14 - 16
Operations 14-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 1716
Item 4. Controls and Procedures 1716
Part II - Other Information:
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 17
Item 3. Defaults Upon Senior Securities 1817
Item 4. Submission of Matters to a Vote of
Securityholders 17
Item 5. Other Information 17
Item 6. Exhibits 1817
Signatures 19
2
PHASE III MEDICAL, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2005 2004
--------------- --------------
Current assets:
Cash and equivalents $ 10,377 $ 27,868
Prepaid expenses and other current assets 24,218 21,233
------------------------------
Total current assets 34,595 49,101
Property and equipment, net 1,978 3,446
Deferred acquisition costs 24,127 43,897
Other assets 3,000 3,000
------------------------------
$ 63,700 $ 99,444
==============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable -
preferred stock $ 516,643 $ 480,880
Accounts payable and accrued expenses 380,372 235,053
Accounts payable and accrued expenses
related parties 327,261 2,999
Notes payable 400,000 390,000
Notes payable - related parties 148,000 85,000
Convertible debentures, related party -
net of debt discount of $0 and $5,882 100,000 94,118
------------------------------
Total current liabilities 1,872,276 1,288,050
Unearned revenues 33,806 62,007
Series A mandatorily redeemable convertible
preferred stock 681,174 681,174
------------------------------
Total Liabilities 2,587,256 2,031,231
------------------------------
Stockholders' Deficit:
Preferred stock; authorized, 5,000,000
shares Series B convertible redeemable
preferred stock, liquidation value, 10
shares of common stock per share; $0.01
par value; authorized, 825,000 shares;
issued and outstanding, 10,000 shares 100 100
Common stock, $.001 par value; authorized,
250,000,000 shares; issued and outstanding,
53,256,843 shares at September 30, 2005 and
41,029,552 shares at December 31, 2004 53,257 41,031
Additional paid-in capital 11,151,500 10,537,408
Accumulated deficit (13,728,413) (12,510,326)
------------------------------
Total stockholders' deficit (2,523,556) (1,931,787)
------------------------------
$ 63,700 $ 99,444
==============================
ASSETS
March 31, December 31,
2006 2005
-------------- --------------
Current assets:
Cash and cash equivalents $ 29,067 $ 488,872
Prepaid expenses and other current assets 191,385 18,447
-------------------------------
Total current assets 220,452 507,319
Property and equipment, net 75,005 1,488
Deferred acquisition costs 14,654 19,121
Goodwill 580,866 -
Other assets 3,000 114,753
-------------------------------
$ 893,977 $ 642,681
===============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable - preferred
stock $ - $ 528,564
Accounts payable 455,428 256,976
Accrued liabilities 467,664 617,196
Due to related party - current portion 125,000 -
Notes payable 251,209 135,000
Notes payable - related parties - 48,000
Convertible debentures - net of debt discount
Of $146,638 and $83,333 353,362 166,667
Capitalized lease obligations - current
portion 37,598 -
-------------------------------
Total current liabilities 1,690,261 1,752,403
Unearned revenues 20,483 26,745
Due to related party - long-term portion 125,000 -
Capitalized lease obligations 76,001 -
Series A mandatorily redeemable convertible
preferred stock - 681,171
-------------------------------
Total Liabilities 1,911,745 2,460,329
-------------------------------
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,
83,622,725 shares at March 31, 2006 and
70,543,862 shares at December 31, 2005 83,624 70,545
Additional paid-in capital 14,293,317 12,367,082
Accumulated deficit (15,394,809) (14,255,365)
-------------------------------
Total stockholders' deficit (1,017,768) (1,817,638)
-------------------------------
$ 893,977 $ 642,681
===============================
See accompanying notes to consolidated financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------------------------- -------------------------------
Earned revenues $ 8,218 $ 2,968 $ 28,201 $ 37,383
Direct costs (5,750) (1,964) (19,770) (26,108)
-----------------------------------------------------------------
Gross profit 2,468 1,004 8,431 11,275
Selling, general and administrative (538,070) (184,342) (1,112,331) (508,953)
Purchase of medical royalty stream (6,540) (234,060) (6,540) (714,060)
-----------------------------------------------------------------
Operating loss (542,142) (417,398) (1,110,440) (1,211,738)
Other income (expense):
Interest income - - - 159
Interest expense (21,288) (71,176) (71,884) (201,539)
Interest expense - Series A
mandatorily redeemable convertible (35,763) (35,763)
preferred stock (11,921) (11,921)
-----------------------------------------------------------------
Net loss attributable to common
stockholders $ (575,351) $ (500,495) $(1,218,087) $(1,448,881)
=================================================================
Net loss per common share $ (.01) $ (.01) $ (.03) $ (.05)
=================================================================
Weighted average common shares
outstanding 51,237,184 33,464,208 46,257,323 29,885,230
=================================================================
PHASE III MEDICAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-----------------------------
2006 2005
------------- -------------
Earned revenues $ 6,262 $ 10,535
Direct costs (4,467) (7,417)
-----------------------------
Gross profit 1,795 3,118
Selling, general and administrative (939,234) (215,501)
-----------------------------
Operating loss (937,439) (212,383)
Other income (expense):
Interest income 539 -
Interest expense (192,610) (25,366)
Interest expense - Series A mandatorily
redeemable convertible preferred stock (9,934) (11,921)
-----------------------------
Net loss attributable to common stockholders $ (1,139,444) $ (249,670)
=============================
Net loss per common share $ (.02) $ (.01)
=============================
Weighted average common shares outstanding 75,581,529 41,924,642
=============================
See accompanying notes to consolidated financial statements.statements
4
PHASE III MEDICAL, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
2005 2004
------------- --------------
Cash flows from operating activities:
Net loss $(1,218,087) $(1,448,881)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common shares issued and stock options granted for
services rendered and interest expense 239,318 152,337
Depreciation 1,468 1,933
Deferred acquisition costs 19,770 26,108
Amortization of debt discount 5,882 2,941
Series A mandatorily redeemable preferred stock dividends 35,763
Changes in operating assets and liabilities
Prepaid expenses and other current assets (2,985) 18,024
Unearned revenues (28,201) (37,383)
Accounts payable, accrued expenses and other current liabilities 469,581 164,857
----------------------------
Net cash used in operating activities (477,491) (1,120,064)
----------------------------
Cash flows from investing activities:
Acquisition of property and equipment - (3,934)
----------------------------
Net cash used in investing activities - (3,934)
----------------------------
Cash flows from financing activities:
Net Proceeds from issuance of common stock 287,000 1,109,000
Proceeds from advances on notes payable 55,000 410,000
Proceeds from advances on notes payable - related parties 48,000
Proceeds from convertible debenture, related party 100,000 100,000
Repayments of notes payable (30,000) (235,000)
Repayment of long-term debt - (9,513)
----------------------------
Net cash provided by financing activities 460,000 1,374,487
----------------------------
Net (decrease) increase in cash and cash equivalents (17,491) 250,489
Cash and cash equivalents at beginning of period 27,868 210,947
----------------------------
Cash and cash equivalents at end of period $ 10,377 $ 461,436
============================
2005 2004
------------- --------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 64,166 $ 61,825
============= ==============
Supplemental Schedule of Non-cash Financing Activities:
Net accrual of dividends on Series A Preferred Stock $ 35,763 $ -
============= ==============
Issuance of common stock for services rendered $ 236,122 $ 6,000
============= ==============
Compensatory element of stock options $ 3,196 $ 127,137
============= ==============
For the Three
Months Ended
March 31,
---------
2006 2005
------------- -----------
Cash flows from operating activities:
Net loss $ (1,139,444) $ (249,670)
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 220,766 5,749
Depreciation 5,627 489
Amortization of debt discount 65,862 5,882
Series A mandatorily redeemable convertible preferred
stock dividends 9,934 11,921
Deferred acquisition costs 4,467 7,417
Changes in operating asset and liabilities:
Prepaid expenses and other current assets (144,852) 2,881
Unearned revenues (6,262) (10,535)
Accounts payable, accrued expenses, and other current
liabilities 156,180 131,377
--------------------------
Net cash used in operating activities (827,722) (94,489)
--------------------------
--------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 26,500 -
Proceeds from advances on notes payable 180,397 -
Payments of capitalized lease obligations (5,980) -
Proceeds from sale of convertible debentures 250,000 72,000
Repayments of notes payable (83,000) -
--------------------------
Net cash provided by financing activities 367,917 72,000
--------------------------
Net decrease in cash and cash equivalents (459,805) (22,489)
Cash and cash equivalents at beginning of period 488,872 27,868
--------------------------
Cash and cash equivalents at end of period $ 29,067 $ 5,379
==========================
Three Months Ended
------------------
March 31,
---------
2006 2005
------------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,679 $ 18,541
============= ===========
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 $ 11,921
============= ===========
Issuance of common stock for services rendered $ 25,150 $ 4,875
============= ===========
Compensatory element of stock options $ 195,616 $ 874
============= ===========
See accompanying notes to consolidated financial statements.
5
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") providesis currently 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 as
well as consulting and
business guidance to companies in multiple sectors of the healthcare and life sciencesscience
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 intends to provide 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 will
attempt to utilize 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.
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 exchangereturn for a percentage of revenues, royalty
fees, licensing fees and other product sales of the target companies.
The Company charges payments for the purchase of these
interests to expense as paid and will record revenues when payments are
received. As of September 30, 2005, the Company has not received any such
payments. ThroughAdditionally, through June 30, 2002, the Company was a provider of extended
warranties and service contracts via the Internet at
warrantysuperstore.com. The business of the Company today comprisesis still engaged in the "run off" of
its sale ofsuch extended warranties and service contracts via the
Internet and the new business opportunity it is pursuing in the healthcare
and life sciences industries.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 September 30, 2005March
31, 2006 and December 31, 2004,2005, the results of operations for the three
and nine months ended September 30,March 31, 2006 and 2005 and 2004 and the cash flows for the ninethree
months ended September 30, 2005March 31, 2006 and 2004.2005. The results of operations for the
three and nine months ended September 30, 2005March 31, 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
operationscash 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, 20042005 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.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/A.10-K.
NOTE 3 - STOCK OPTIONS-RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002,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.
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 July
1, 2007 will not have a material effect on our consolidated financial
statements.
6
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 July
1, 2007 will not have a material effect on our consolidated financial
statements.
NOTE 4 -STOCK OPTIONS
The Company's Equity Participation Plan permits the grant of share options
and shares to its employees 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 ("SFAS"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, "AccountingAccounting for Stock-Based
Compensation-Transition and Disclosure, - an amendment of FASB Statement No. 123 ("SFAS 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),was
issued, which, in addition to provideproviding alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation, and does
not permit the use of the original SFAS No. 123 prospective method of
transition in fiscal years beginning after December 15, 2003. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS 123 to requirerequired more prominent pro-forma
disclosures in both the annual and interim financial statements aboutstatements. The
Company complied with these disclosure requirements for all applicable
periods prior to January 1, 2006.
In adopting FAS 123(R), the methodCompany applied the modified prospective
approach to transition. Under the modified prospective approach, the
provisions of accountingFAS 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 stock-based employee compensation and the effectportion of awards for which the
requisite service has not been rendered that are outstanding as of the
method usedrequired effective date shall be recognized as the requisite service is
rendered on reported results, regardlessor after the required effective date. The compensation cost for
that portion of whether, when,
or how an entity adopts preferableawards shall be based on the grant-date fair value based method of accounting.
SFAS No. 148 improves the prominence and claritythose
awards as calculated for either recognition or pro-forma disclosures under
FAS 123.
As a result of the pro forma
disclosures required by SFAS No.adoption of FAS 123 by prescribing a specific tabular
format and by requiring disclosure(R), the Company's results for the
three month period ended March 31, 2006 include share-based compensation
expense totaling approximately $219. Such amounts have been included in the
"Summaryconsolidated statements of Significant
Accounting Policies" or its equivalentincome within general and improvesadministrative
expenses. Stock compensation expense recorded under APB No. 25 in the
timelinessconsolidated statements of those
disclosures by requiring their inclusionoperations for the three months ended March 31,
2005 totaled $0.
7
Stock option compensation expense in financial reports2006 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite
service period for interim
periods.entire portion of the award.
The weighted average estimated fair value of stock options granted in the
three months ended March 31, 2006 and 2005 was $.05 and $0, respectively.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. During 2006, the Company has adoptedtook 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
- ------------------------------------------------------------------
March 31, March 31,
2006 2005
- ------------------------------------------------------------------
Expected term (in years) 10 10
- ------------------------------------------------------------------
Expected volatility 264% 200%
- ------------------------------------------------------------------
Expected dividend yield 0% 0%
- ------------------------------------------------------------------
Risk-free interest rate 2.8% 2.8%
- ------------------------------------------------------------------
The following table addresses the additional disclosure requirements of SFAS No.
148.FAS
123(R) in the period of adoption. 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 lossincome
and net lossearnings per share as if the Company had applied the fair value recognition provisions of SFASFAS No.
123 "Accounting for Stock-Based Compensation,"had been applied to stock-based
employeeall outstanding and unvested awards in the prior year
comparable period.
Three
Months
Ended
March 31,
2005
-----------
Net loss, as reported $ (249,670)
Add: Stock-based compensation
included in reported net income -
Deduct: Total stock based
compensation expense
determined under the fair value
based method for all periods:
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Net loss as reported $ (575,351) $ (500,495) $ (1,218,087) $ (1,448,881)
Additional compensation (49,553) (7,488) (85,005) (165,273)
---------------- ---------------- ---------------- ----------------
Adjusted net loss $ (624,904) $ (507,983) $ (1,303,092) $ (1,614,154)
================ ================ ================= ================
Net loss per share as reported $ (.01) $ (.01) $ (.03) $ (.05)
================ ================ ================= ================
Adjusted net loss per share $ (.01) $ (.02) $ (.03) $ (.05)
================ ================ =================awards (no tax effect) (17,726)
-----------
Pro forma net loss $ (267,396)
===========
Net loss per share:
Basic - as reported $ (.01)
===========
Basic - pro forma $ (.01)
===========
The Company granted 225,000 options under the Plan during the three months ended
March 31, 2006 at exercise prices ranging from $.05 per share to $.08 per share.
8
The following table represents our stock options granted, exercised, and
forfeited during the first quarter of 2006.
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number Price Contractual Intrinsic
Stock Options of Shares per Share Term Value
- ---------------------------------------------------------------------
Outstanding at
January 1, 2006 17,885,000 $.07
- ---------------------------------------------------------------------
Granted 225,000
Exercised -
Forfeited/expired (500,000) ($.06)
- ---------------------------------------------------------------------
Outstanding at
March 31, 2006 17,610,000 $.07 8.63 $ 366,500
=====================================================================
Vested and
Exercisable at
March 31, 2006 12,210,000 $.07 8.33 $ 260,500
=====================================================================
As of March 31, 2006, there was $131,385 of total unrecognized compensation
costs related to unvested stock option awards. The $131,385 is expected to vest
over the weighted average of less than one year.
Weighted Average
Grant Date
Options Fair Value
------------ ----------------
Nonvested at December 31, 2005 5,800,000 $ .024
------------ ----------------
Granted 200,000 $ .025
Vested (100,000) $ .030
Forfeited (500,000) $ .024
------------ ----------------
Nonvested at March 31, 2006 5,400,000 $ .024
============ ================
.The total fair value of shares vested during the three month period ended March
31, 2006 was $2,995.
NOTE 45 - NOTES PAYABLE
On March 17, 2003, the Company commenced a private placement offering which
raisedto
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, (the "Securities Act"), 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 March 31, 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, 2005, $170,000, of which $15,000 is
to a related party, is outstanding from the original $250,000 and is in
default and remains unpaid. All interest payments on these notes have been
made.
On August 26, 2003, the Company borrowed $25,000 from a then consultant to
the Company. In October 2004, this note was combined with a note of $50,000
previously held by an unrelated third party. This new note accrues interest
at 8% and was due on August 31, 2005 together with the accrued interest. As
of September 30, 2005, this note remains unpaid and is in default.2006. All interest payments have been
accrued.
In February 2004, the Company commenced a sale of 30 day 20% notes in the
amount of $125,000 to three accredited investors to fund current
operations. It was anticipated that these notes would be repaid from the
proceeds of the January 2004 amended equity private placement. Two of these
notes have a default provision that if they are not paid within 30 days,
there is an additional interest payment of $250 per $25,000 of principal
outstanding for each 30 day period or part thereof the notes remain unpaid.
As of September 30, 2005, all of these notes together with accrued interest
have been repaid. In May 2004, the Company sold an additional 30 day 20%
note in the amount of $40,000 to an accredited investor to fund current
operations. This note plus interest has been repaid. In July 2004, the
Company sold a five month 20% note in the amount of $25,000 and two six
month 20% notes totaling $80,000 to three accredited investors to fund
current operations. As of September 30, 2005, the $25,000 note has been
repaid together with accrued interest. As of September 30, 2005 the
remaining $80,000 is in default. All interest has been paid.made timely.
9
In August 2004, the Company sold additional 30 day 20% notes in the amount of $55,000
to two accredited investors to fund current operations. As of September 30,
2005, $25,000March 31,
2006, $30,000 of these notes remains unpaidhas been paid and is in default.$25,000 converted into
425,000 shares of the Company's Common Stock. All interest payments have
been made.paid timely. In December 2004, the Company sold a 60 dayfour notes to four
accredited investors totaling $100,000 with interest rates that range from
8% note in the amountto 20%. As 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 ofMarch 31, 2006, $15,000 of which $5,000 has been repaid and a 90 day 8% note in$85,000
converted into 1,445,000 shares of the amount of $25,000 to a Director, all accredited investors, totaling
$100,000. As of September 30, 2005, these notes remain unpaid and are in
default.Company's Common Stock. All interest
payments have been made.
In August 2004, the Company sold a six month 20% convertible note in the
amount of $100,000 to its Chief Operating Officer ("COO"). Upon maturity,
the Company and the COO have agreed to convert the principal amount of the
new note into shares of the Company's Common Stock at 85% of the average
price as quoted on the NASD Over-the-Counter Bulletin Board for the five
days prior to the maturity date of the note. The remaining debt discount of
$5,882 was amortized in the first quarter of 2005. On February 20, 2005,
the note was converted into 1,960,784 shares of Common Stock as per the
prescribed formula. All interest payments have been paid.
In January 2005, the Company sold a six month 20% note in the amount of
$25,000 to an accredited investor to fund current operations. This note is
in default and remains unpaid. All interest payments have been made. In
February 2005, the Company sold a six month 20% note in the amount of
$10,000 to an accredited investor to fund current operations. This note is
in default and remains unpaid. All interest payments have been made.made timely.
In March 2005, the Company sold a 30 day 8% note in the amount of $17,000,
to
the President and CEO and a one year 15% note in the amount of $20,000 to
two accredited investors to fund current operations. All interest payments
on these notes are current. The note in the amount of $17,000 remains
unpaid and is in default as of September 30, 2005.
7
In April 2005, the Company sold a one year 15% note in the amount of
$100,000 to its Executive Vice President and General Counsel. The note
contains certain rights and obligations regarding its conversion into
shares of the Company's Common Stock. All interest payments on this note
have been made.
In August 2005, the Company sold an 8% note in the amount of $10,000 to its
President and CEO, an accredited investor which is due on demand.
Inin September 2005, Company sold
two 8% notes in the amounts of $6,000 and $15,000 to its President and CEO,
an accredited investor which aretotaling $48,000 and were all due on demand. A summaryIn 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. In addition, these Promissory Notes have 416,666
detachable warrants for each $25,000 of debt, which entitle the holder to
purchase one share of the above descriptionsCompany'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. The Company recorded a debt discount associated with the
conversion feature in the amount of $83,333. The Company recorded an
expense of $2,573 associated with the warrants as follows:
Repayments/
Conversions
December 31, to Common September 30,
2004 Proceeds Stock 2005
------------ ------------ ------------ ------------
March 2003 Notes $ 155,000 $ - $ - $ 155,000
Consultant Note 75,000 - - 75,000
February - December 2004 Notes 145,000 - (30,000) 115,000
2005 Notes - 55,000 - 55,000
Notes - Related Parties 100,000 48,000 - 148,000
Convertible Debt - Related Parties 94,118 100,000 (94,118) 100,000
------------ ------------ ------------ ------------
Total $ 569,118 $ 203,000 $(124,118) $ 648,000
============ ============ ============ ============
their fair value using
the Black Scholes method. For the three months ended March 31, 2006, the
Company charged $27,980 of the debt discount to interest expense.
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. In addition, 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. The Company recorded a debt
discount associated with the conversion feature in the amount of $129,167.
The Company recorded an expense of $82,337 associated with the warrants as
their fair value using the Black Scholes method. For the three months ended
March 31, 2006, the Company charged $37,882 of the debt discount to
interest expense.
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 March 31, 2006, $5,812 remains unpaid. Payments are made in the
amount of $1,500 per month and will continue until all amounts due
including interest are paid.
The Company has financed certain insurance polices and has notes payable at
March 31, 2006 in the amount of $136,542 related to these policies. These
notes require monthly payments and mature in less than one year.
NOTE 56 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of DesignationDesignations for the Company's Series A $.07 Convertible
Preferred Stock ("Series A Preferred Stock") provides that at any time
after December 31,1, 1999 any holder of Series A Preferred Stock may require
the Company to redeem his shares of Series A Preferred Stock (if there are
funds with which the Company may legally do so) at a price of $1.00 per
share. Notwithstanding the foregoing redemption provisions, if any
dividends on the Series A Preferred Stock are past due, no shares of Series
A Preferred Stock may be redeemed by the Company unless all outstanding
shares of Series A Preferred Stock are simultaneously redeemed. The holders
of Series A Preferred Stock may convert their Series A Preferred Stock into
shares of Common Stock of the Company at a price of $5.20 per share. At September 30, 2005On
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 Decemberits 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 March 31, 2004, 681,1742006, all outstanding shares of Series A
Preferred Stock were cancelled and converted into Common Stock. Therefore
at March 31, 2006 and December 31, 2005, there were 0 and 681,171 shares of
Series A Preferred Stock outstanding.
10
NOTE 67 - STOCKHOLDERS' EQUITY
(a) Common Stock:
In each of January and February 2005,2006, 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 1,960,784765,000 shares of its Common Stock in
exchange for the conversion$45,000 of the promissory note held by its
COO.
On April 1, 2005,notes payable. In addition, the Company issued
800,898250,000 shares of its Common Stock to Westpark Capital, Inc. as additional
compensation for its COOrole as placement agent in partial paymentthe sale of salary as per his employment agreement.
On April 20, 2005,the convertible
debentures. 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 sold 1,666,666issued 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 Executive Vice PresidentCommon 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. As of April 16,
2006, the license had not been obtained and General Counseltherefore 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 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 $.06 per
share$.044 resulting in net
proceeds to the Company of $100,000.
On May 4, 2005, the Company sold 100,000 shares of its Common Stock to an
unrelated third party at a price of $.06 per share resulting in net
proceeds to the Company of $6,000.
8
In May 2005, the Company sold a total of 350,000 shares of its Common Stock
to two directors at a price of $.06 per share resulting in net proceeds to
the Company of $21,000.
On June 8, 2005, the Company sold 416,666 shares of its Common Stock to an
unrelated third party at a price of $.06 per share resulting in net
proceeds to the Company of $25,000.
On July 1, 2005, the Company issued 668,750 shares of its Common Stock to
its COO in partial payment of salary as per his employment agreement. The
Company recorded an expense of $21,400 as a result of this issuance.
On each of July 1, August 1, and September 1, 2005, the Company issued
16,666 shares of its Common Stock for a total of 49,998 shares as
compensation to its public relations firm. The Company recorded an expense
of $2,833 as a result of this issuance.
On July 18, 2005, the Company sold 1,250,000 shares of its Common Stock to
its Executive Vice President and General Counsel at a price of $.06 per
share resulting in net proceeds to the Company of $75,000.
On July 20, 2005, the Company issued 3,000,000 restricted shares of its
Common Stock to its President and CEO as additional compensation as per his
employment agreement approved by the shareholders of the Company at its
annual meeting. The Company recorded an expense of $120,000 as a result of
this issuance.
On August 12, 2005, the Company issued 412,339 shares of its Common Stock
to its Executive Vice President and General Counsel as payment of deferred
compensation as per her employment agreement. The Company recorded an
expense of $24,740 as a result of this issuance.
On August 16, 2005, the Company sold 833,333 shares of its Common Stock to
a director at a price of $.06 per share resulting in net proceeds to the
Company of $50,000.
On September 14, 2005, the Company issued 500,000 shares of its Common
Stock to an Advisory Board member as compensation pursuant to her advisory
agreement. The Company recorded an expense of $40,000 as a result of this
issuance.
On September 29, 2005, the Company sold 142,857 shares of its Common Stock
to an unrelated third party at a price of $.07 per share resulting in net
proceeds to the Company of $10,000.$26,500.
(b) Warrants:
The Company has issued Common Stock purchase warrants from time to time to
investors in private placements, certain vendors, underwriters, and
directors officers and advisory board membersofficers of the Company. A total of 672,5009,959,152 shares of
Common Stock are reserved for issuance upon exercise of outstanding
warrants as of September 30, 2005March 31, 2006 at prices ranging from $0.05 to $8.10$.12 and
expiring through December 2008.March 2009. 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. OnFrom August 2004 through January 20, 2005,
the Company issued three year warrants to purchase a total of 25,000150,000
shares of its Common Stock at $.05 per share to Consulting For Strategic
Growth, Ltd., the Company's investor relations and public relations firm.
This issuance brings their total warrants to 150,000. The Company recorded
expense of $874 as the fair value of these warrants using the Black-Scholes
method. On September 14, 2005,
the Company issued 240,000 Common Stock purchase warrants to a memberthe Chairman
of its Advisory Board. These warrants vest at the rate of 20,000 per month
beginning with September 14, 2005. Each warrant entitles the holder to
purchase one share of the Company's Common Stock at a price of $.08 per
share. The warrant expires three years from issuance. On December 30, 2005,
the Company issued 4,583,326 Common Stock purchase warrants 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 January 2006, the Company issued 4,583,326 Common Stock
purchase warrants to the investors who purchased convertible debentures.
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.
(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, 2003.2003 and amended by approval of stockholders at the Company's Annual
Meeting on July 20, 2005. Under this plan, the Company has reserved
15,000,00050,000,000 shares of common stock for the grant of incentive stock options
and non-statutory stock options to employees and non-employee directors,
consultants and advisors.
In July 2005 the plan was increased to a total of
50,000,000 shares.
911
Information with respect to options under the 2003 Equity Participation Plan is
summarized as follows:
For the NineThree Months Ended
September 30, 2005
-----------------------------March 31, 2006
------------------------------
Shares Prices
-----------------------------------------------------------
Outstanding at beginning of period 6,685,00017,885,000 $0.03 to $0.18
Granted 10,850,000 $0.07225,000 $0.05 to $.10$0.08
Expired - -
Cancelled - -
-----------------------------(500,000) $.06
------------------------------
Outstanding at end of period 17,535,00017,610,000 $0.03 to $0.18
===========================================================
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 ninethree months ended
September 30, 2005,March 31, 2006, options to purchase 200,000225,000 shares of the Company's Common
Stock at an exercise priceprices of $.07$.05 and $.08 were granted to a memberconsultant,
employee and an officer of the Company's Board of Advisors pursuant to his agreement and options to
purchase 150,000 shares at an exercise price of $.10 and 750,000 shares at
an exercise price of $.06 were granted to the Executive Vice President and
General Counsel. Options to purchase shares at an exercise price of $.06
were granted to two members of the Board of Directors totaling 4,050,000
shares. Options to purchase 4,000,000 shares at an exercise price of $.06
were granted to the President and CEO. The COO and another employee were
granted options to purchase a total of 1,700,000 shares at an exercise
price of $.06.Company.
NOTE 78 - 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
20, 2004,31, 2006, the Company and Mr. Aholt entered into a Settlement Agreement and
General Release (the "Settlement Agreement"). Pursuant to the Settlement
Agreement, the Company agrees 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 will be 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 agrees to continue to be bound by his obligations not to compete with
the Company and to maintain the confidentiality of Company proprietary
information.
In connection with the Company's acquisition of the assets of NeoStem on
January 19, 2006, the Company entered into a consulting agreement which
provides for the Company to give advice as to business development
possibilities for the services and technology of NeoStem, Inc. ("NeoStem")
(See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS). The agreement provides for the issuance of options
to purchase 300,000 shares of the Company's Common Stock at an exercise
price of $.10 per share. This option is immediately vested and expires ten
years from the date of issue. The agreement also provides for the payment
of $2,500 per month for each month after the Company has received capital
contributions of $1,000,000 from the date of the agreement. If certain
performance levels are met, the Company is obligated to issue an additional
option to purchase 500,000 shares of the Company's Common Stock for an
exercise price of $.10 per share. This agreement expired on September 20,
2005.
On December 12, 2003, the Company signed a royaltyemployment agreement with
Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology
forLarry A. May. Mr. May is the deliveryformer Chief Executive Officer of therapeutic proteins and small molecule drugs in order
to extend circulating half-life to improve bioavailability and dosing
regimen, while maintaining or improving pharmacologic activity. The
agreement provides for PSI to pay the Company a percentage of the revenue
received from the sale of certain specified products or licensing activity.
The Company is providing capital and guidance to PSI to conduct a proof of
concept study to improve an existing therapeutic protein with the goal of
validating the bioshielding technology for further development and
licensing the technology. The Company has paid a total of $720,000 since
the inception of the agreement. The agreement also calls for the Company to
pay on behalf of PSI $280,000 of certain expenses relating to testing of
the bioshielding concept. Since inception, through September 30, 2005, the
Company paid $74,060 of such expenses. In August 2005, the Company received
from PSI a letter stating that the proof of concept study under the royalty
agreement has been completed and that despite interesting preliminary in
vitro results, the study did not meet the success standards set forth in
the royalty agreement and that PSI has no definitive plans to move forward
with the program. Phase III has requested pursuant to the royalty agreement
that additional in vitro studies be performed with other molecules. PSI is
under no obligation to perform any additional studies. If no additional
studies are performed under the royalty agreement the likelihood of PSI
generating revenues in which the Company would share is substantially
reduced.
On June 16, 2005, the Company signed a revenue sharing agreement with
Healthwave, a medical billing company that utilizes advanced, proprietary
technology and connectivity to improve the efficiency of paper-and
labor-intensive routines of healthcare transaction processing. Under the
agreement, Phase III initially will fund Healthwave $125,000 (with a
potential for an additional $125,000) and will provide guidance to them
principally relating to developing and marketing Healthwave's healthcare
transaction processing services. In return, Healthwave will pay Phase III
on a monthly basis a portion of its gross revenues, with certain stated
minimums based on the stage of the agreement. Healthwave has the right to
terminate the agreement by paying to Phase III a buy-out fee. The agreement
is contingent on Phase III receiving certain minimum financing and
satisfactorily completing its due diligence.
10
On September 9, 2005, the Company signed a revenue sharing agreement with
NeoStem, Inc. ("NeoStem"). The Company has agreed to fund NeoStem up to
$20,000 initially to pay certain expenses which the Company has the right
to approve or not to approve prior to funding. The Company has agreed to
fund NeoStem based on a formula relating to the Company's ability to raise
capital. Once funded, NeoStem will pay the Company monthly based on the
revenue generated in the previous month with a minimum payment due each
month. No assurances can be given that the Company will raise the capital
needed to fund its obligations to NeoStem, that NeoStem's collection,
processing and storage technology will be successfully implemented, that
NeoStem will be able to commercialize its adult stem cell banking
enterprise, or that there will be market acceptance of any such enterprise
sufficient to generate any material revenues for NeoStem or any material
royalty revenues for the Company, or that any stem cell therapeutic
strategies will be successfully developed or commercialized
NOTE 8 - RELATED PARTIES
On May 4, 2005, the Company's Board of Directors (the "Board") voted to
approve an amendmentNeoStem.
Pursuant to Mr. Weinreb's letter agreement, subject to approval
of the stockholders which was obtained on July 20, 2005, pursuant to which
Mr. Weinreb'sMay's employment agreement, was amended to (a) extend the expiration
date thereof from February 2006 to December 2008; (b) change Mr. Weinreb's
annual base salary of $217,800 (with an increase of 10% per annum) to an
annual base salary of $250,000 (with no increase per annum); (c) grant Mr.
Weinreb 3,000,000 shares of common stock, 1,000,000 shares of which shall
vest on each of the date of grant and the first and second anniversaries of
the date of grant; (d) amend the severance provision of the existing
employment agreement to provide that in the event of termination without
cause (subject to certain exceptions), Mr. Weinreb will be entitled to
receive a lump sum payment equal to his then base salary and automobile
allowance for a period of one year; (e) commencing in August 2006, increase
Mr. Weinreb's annual bonus from $20,000 to $25,000; (f) in August 2005, pay
Mr. Weinreb $15,000 to cover costs incurred by him on behalf of the
Company; and (g) in 2006, provide for the reimbursement of all premiums in
an annual aggregate amount of up to $18,000 payable by Mr. Weinreb for life
and long term care insurance covering each year during the remainder of the
term of his employment.
On September 13, 2004, ("Commencement Date") the Company entered into a
letter agreement (the "Letter Agreement") with Mr. Robert Aholt Jr.
pursuant to which the Company appointed Mr. Aholt as its Chief Operating
Officer. Subject to the terms and conditions of the Letter Agreement, the
term of Mr. Aholt's employment in such capacity will be for a period of
three (3) years from the Commencement Date (the "Term").
In consideration for Mr. Aholt's services under the Letter Agreement, Mr.
Aholt will be entitled to receive a monthly salary of $4,000 during the
first year of the Term, $5,000 during the second year of the Term, and
$6,000 during the third year of the Term. In further consideration for Mr.
Aholt's services under the Letter Agreement, on January 1, 2005 and on the
first day of each calendar quarter thereafter during the Term, Mr. Aholt
will be entitled to receive shares of Common Stock with a "Dollar Value" of
$26,750, $27,625 and $28,888, respectively, during the first, second and
third years of the Term. The per share price (the "Price") of each share
granted to determine the Dollar Value will be the average closing price of
one share of Common Stock on the Bulletin Board (or other similar exchange
or association on which the Common Stock is then listed or quoted) for the
five (5) consecutive trading days immediately preceding the date of grant
of such shares; provided, however, that if the Common Stock is not then
listed or quoted on an exchange or association, the Price will be the fair
market value of one share of Common Stock as of the date of grant as
determined in good faith by the Board of Directors of the Company. The
number of shares of Common Stock for each quarterly grant will be equal to
the quotient of the Dollar Value divided by the Price. The shares granted
will be subject to a one year lockup as of the date of each grant. Mr.
Aholt received 477,679 shares of the Company's Common Stock on January 1,
2005, 800,898 shares on April 1, 2005 and 668,750 shares on July 1, 2005.
In the event Mr. Aholt's employment is terminated prior to the end of the
Term for any reason, earned but unpaid cash compensation and unreimbursed
expenses due as of the date of such termination will be payable in full. In
addition, in the event Mr. Aholt's employment is terminated prior to the
end of the Term for any reason other than by the Company with cause, Mr.
Aholt or his executor of his last will or the duly authorized administrator
of his estate, as applicable, will be entitled (i) to receive severance
payments equal to one year's salary, paid at the same level and timing of
salary as Mr. Aholt is then receiving and (ii) to receive, during the one
(1) year period following the date of such termination, the stock grants
that Mr. Aholt would have been entitled to receive had his employment not
been terminated prior to the end of the Term; provided, however, that in
the event such termination is by the Company without cause or is upon Mr.
Aholt's resignation for good reason, such severance payment and grant shall
be subject to Mr. Aholt's execution and delivery to the Company of a
release of all claims against the Company.
11
On May 4, 2005, the Board voted to approve an amendment to Mr. Aholt's
Letter Agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, to (a) replace the provision of Mr. Aholt's
existing employment agreement pursuant to which he is compensated in shares
of Common Stock with a provision pursuant to which he will be compensated
solely in cash, effectiveserve 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 coursean officer of
the Company conducting
business. For his services, duringreporting to the CEO for a term of three year period ("Term"), Dr.
Marasco shall be entitledyears, subject to
annual cash compensation with increases each
year ofearlier termination as provided in 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.agreement. 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 sharesreturn, Mr. May will
be subject to a one
year lockup as of the date of grant. The exercise period will be ten years,
and the grant will otherwise be in accordance with the Company's 2003
Equity Participation Plan and Non-Qualified Stock Option Grant Agreement.
As of September 30, 2005, Dr. Marasco has accrued $96,692 in salary under
this agreement.
On May 4, 2005, the Board voted to approve an amendment to Dr. Marasco's
Letter Agreement, subject to approval of the stockholders which was
obtained on July 20, 2005, pursuant to which Dr. Marasco's Letter Agreement
with the Company was be amended to (a) extend the term of the Letter
Agreement from August 2007 to August 2008; (b) provide forpaid an annual salary of $110,000, $125,000 and $150,000 for the years ended August 2006, 2007
and 2008,$165,000, payable in each such year during the term; (c) provide for a
minimum annual bonus of $12,000, payable in January of each year during the
term, commencing in January 2006; (d) eliminate Dr. Marasco's right under
his existing Letter Agreement to receive 5% of all collected revenues
derived from the Company's royalty or other revenue sharing agreements
(which right is subject to the limitation that the amount of such
additional cash compensation and Dr. Marasco's annual salary do not exceed,
in the aggregate, $200,000 per year); and (e) permit Dr. Marasco to begin
receiving all accrued but unpaid cash compensation under his Letter
Agreement upon the Company's consummation of any financing, whether equity
or otherwise, pursuant to which the Company raises $1,500,000.
On April 20, 2005 (the "Commencement Date"), the Company entered into a
letter agreement (the "Letter Agreement") with Catherine M. Vaczy pursuant
to which Ms. Vaczy serves as the Company's Executive Vice President and
General Counsel. Subject to the terms and conditions of the Letter
Agreement, the term of Ms. Vaczy's employment in such capacity will be for
a period of three (3) years from the commencement date (the "Term").
In consideration for Ms. Vaczy's services under the Letter Agreement, Ms.
Vaczy is entitled to receive an annual salary of $155,000 during the first
year of the term, a minimum annual salary of $170,500 during the second
year of the term, and a minimum annual salary of $187,550 during the third
year of the term. Ms. Vaczy and the Company have agreed that from the
commencement date until the 90th day thereafter (the "Initial 90 Day
Period"), Ms. Vaczy's salary will be paid to her at a rate of 50% of the
annual rate and accrue as to the remainder. At the end of the initial 90
day period, and at the end of each additional 90 day period thereafter,
whether to continue to accrue salary at this rate and provision for payment
of accrued amounts will be discussed in good faith. Payment of accrued
salary may be made in cash, or, upon mutual agreement, shares of Common
Stock. Any shares of Common Stock issued in payment of accrued salary shall
have a per share price equal to the average closing price of one share of
common stock on the Bulletin Board (or other similar exchange or
association on which the Common Stock is then listed or quoted) for the
five (5) consecutive trading days immediately preceding the date of issue
of such shares; provided, however, that if the common stock is not then
quoted on the Bulletin Board or otherwise listed or quoted on an exchange
or association, the price shall be the fair market value of one share of
common stock as of the date of issue as determined in good faith by the
Board. The number of shares of common stock for any issuance in payment of
accrued salary shall be equal to the quotient of the amount of the accrued
salary divided by the price. The shares issued will be subject to a
one-year lock up as of the date of each grant and shall be registered with
the Securities and Exchange Commission on a Registration Statement on Form
S-8.
12
In the event Ms. Vaczy's employment is terminated prior to the end of the
term for any reason, earned but unpaid cash compensation and unreimbursed
expenses due as of the date of such termination will be payable in full. In
addition, in the event Ms. Vaczy's employment is terminated prior to the
end of the term for any reason other than by the Company with "cause" or
Ms. Vaczy without "good reason", Ms. Vaczy or her executor of her last will
or the duly authorized administrator of her estate, as applicable, will be
entitled in the event the employment termination date is after April 20,
2006, to receive severance payments equal to Ms. Vaczy's then one year's
salary, paid in accordance with the
Company's standard payroll practices, forwill 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 and (ii) in the event the employment
termination date is before April 20, 2006 but after October 20, 2005, to
receive severance paymentsCompany's Common Stock
at a per share purchase price equal to one-sixth of Ms. Vaczy's then one
year's salary, paid in accordance with the Company's standard payroll
practices for executives of the Company. In addition, in the event Ms.
Vaczy's employment is terminated prior to the end of the term by the
Company without "cause" or by Ms. Vaczy for "good reason", the option (as
defined below) shall vest and become immediately exercisable in its
entirety and remain exercisable in accordance with its terms. No other
payments shall be made, nor benefits provided, by the Company in connection
with the termination of employment prior to the end of the term, except as
otherwise required by law.
In August 2005, Ms. Vaczy's Letter Agreement was amended to provide that
(i) as of October 1, 2005 she will cease to accrue salary and will as of
that date begin to receive payment of salary solely in cash in accordance
with the Company's standard payroll practices, and (ii) will be issued in
payment of salary accruing during the period that commenced on April 20,
2005 and ended on September 30, 2005, shares of Common Stock. With respect
to the portion of salary that accrued from April 20, 2005 through August
12, 2005, the price per share will be $.06,$.05, the closing price of the
Common Stock on August 12, 2005. For the portioncommencement date, which vests as to 50,000 shares of salary that accrued from
August 13, 2005 through September 30, 2005, the price per share will be the
closing price of the
Common Stock on September 30, 2005. Pursuantthe 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.
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 now intends to provide 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.
12
Presented below is the proforma information as if the acquisition had
occurred at the beginning of three months ended March 31, 2006 and 2005,
respectively. The weighted average shares outstanding for the three months
ended March 31, 2005 gives effect to the foregoing, on August 12,shares issued in connection with
the acquisition.
Three Months Ended March 31,
2006 2005
Ms. Vaczy was issued 412,339---- ----
Revenue $ 6,262 $ 10,985
Net income $ (1,139,444) $ (982,108)
Net income per share $ (.02) $ (.02)
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
Officer and Denis Rodgerson, Director of Stem Cell Science, received shares
of Common Stock in paymentexcess of $24,740the 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 accrued salary and on October 3,
2005, Ms. Vaczy was issued 260,817settlement 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 paymentsettlement of $10,433 in accrued
salary.a liability assumed by the Company of $20,257. The
Company recorded an additional expense of $13,504.
NOTE 911 - 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'sCompany, with this acquisition, will have operations are currently in onetwo segments
when NeoStem commences operations. One segment namelywill 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. Additionally,As
March 31, 2006, the Company is currently endeavoring to establish new
business operations inhas not realized any revenues from the
medical/bio-tech sector. The Company did not
realize any revenue from its purchasecollecting or banking of the royalty interest.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 of
$1,795 for the three months ended March 31, 2006.
NOTE 1012 - SUBSEQUENT EVENTS
On each of October 1, 2005 and November 1, 2005, 16,666 shares of the
Company's Common Stock were issuedSubsequent to Consulting for Strategic Growth Ltd.,
the Company's investor relations and public relations firm; as compensation
for work to be performed in October and November 2005.
On October 3, 2005,March 31, 2006, the Company issued 260,817has sold 3,115,908 shares of its
Common Stock resulting in proceeds to its Executive Vice President and General Counsel as payment of deferred
compensation as per her employment agreement.
On October 3, 2005, the Company issued 461,206of $137,100.
On April 25, 2006, the Company granted options under the Equity
Participation Plan which all expire in ten years from the date of grant.
o 150,000 options to two employees to purchase shares of Common Stock at
an exercise price of $.07 per share which vest one year from the date
of grant.
o 75,000 options to a consultant to purchase shares of Common Stock at
an exercise price of $.07 per share which vest one year from the date
of grant.
o 15,000 options to a consultant to purchase shares of Common Stock at
an exercise price of $.07 per share which vest immediately.
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 its COOexceed $12,000. Pursuant to the
advisory agreement, Duncan also agrees, subject to certain conditions, to
act as lead investor in partial paymenta proposed private placement (the "Private
Placement") of salary as per his employment agreement.
On October 6, 2005, the Company sold 250,000 shares of its Common Stock and warrants to an accredited investor at a price of $.04 per share resulting in gross
proceeds to the Company of $10,000.
On October 6, 2005, the Company sold 500,000purchase shares of
its Common Stock toin an amount that is not less than $2,000,000 or greater than
$3,000,000. In consideration for such role, should the financing close,
Duncan will receive a memberfee of its Advisory Board, an accredited investor, at a price of $.05
per share resulting$200,000 in gross proceeds to the Company of $25,000.
In October 2005, the Company signed a non-binding letter of intent to
purchase all the assets, propertiescash and rights of NeoStem that relate to
its adult stem cell collection and storage business and assume certain of
its liabilities. The letter of intent provides that the Company will pay
the entire purchase price in2,400,000 shares of
the Company'srestricted Common Stock, $.001
par value. The letter of intent expires on December 31, 2005 unless
extended by the parties.Stock.
On November 10, 2005,May 17, 2006, the Company sold a total8% promissory note in the amount of
833,332 shares$20,000 due on demand to Robin Smith, the Chairman of its
Common Stock to two accredited investors at a price of $.06 per share
resulting in gross proceeds to the Company of $50,000.Advisory Board.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Quarterly Report, statements that are not statements of current or historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "plan", "intend," "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
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 provides capitalnow intends to provide adult stem cell processing,
collection and guidance to companies within the medical
sector, in exchange for revenues, royalties and other contractual rights known
as "royalty interests" that entitle it to receive a portion of revenue from the
sale of pharmaceuticals, medical devices and biotechnology products.
On December 12, 2003, the Company signed a royalty agreement with Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. Through September 30, 2005, the
Company has paid PSI a total of $720,000 under the agreement. The agreement also
calls for the Company to pay on behalf of PSI $280,000 of certain expenses
relating to testing of the bioshielding concept. Through September 30, 2005, the
Company paid $74,060 of such expenses. In August 2005, the Company received from
PSI a letter stating that the proof of concept study under the royalty agreement
has been completed and that despite interesting preliminary in vitro results,
the study did not meet the success standards set forth in the royalty agreement
and that PSI has no definitive plans to move forwardbanking services with the program. Phase III
has requested pursuant to the royalty agreement that additional in vitro studies
be performed with other molecules. PSI is under no obligation to perform any
additional studies. If no additional studies are performed under the royalty
agreement the likelihoodgoal of PSI generating revenues in which the Company would
share is substantially reduced.
On March 31, 2004, the Company signed a Joint Venture Agreement with NeoStem to
introduce NeoStem to potential clients for its services and/or technology. In
exchange for such introductions, Phase III will receive 10% of any revenues or
fees and 2% of any research grants received from or as a result of the
introduced client. As of September 30, 2005, no payments have been received
under this agreement.
On June 16, 2005, the Company signed a revenue sharing agreement with
Healthwave, a medical billing company that utilizes advanced, proprietary
technology and connectivity to improve the efficiency of paper-and
labor-intensive routines of healthcare transaction processing. Under the
agreement, Phase III initially will fund Healthwave $125,000 (with a potential
for an additional $125,000) and will provide guidance to them principally
relating to developing and marketing Healthwave's healthcare transaction
processing services. In return, Healthwave will pay Phase III on a monthly basis
a portion of its gross revenues, with certain stated minimums based on the stage
of the agreement. Healthwave has the right to terminate the agreement by paying
to Phase III a buy-out fee. The agreement is contingent on Phase III receiving
certain minimum financing and satisfactorily completing its due diligence.
On September 9, 2005, the Company signed a revenue sharing agreement with
NeoStem. The Company has agreed to fund NeoStem up to $20,000 initially to pay
certain expenses which the Company has the right to approve or not to approve
prior to funding. The Company has agreed to provide additional funding to
NeoStem based on a formula relating to the Company's ability to raise capital.
On October 19, 2005, the Company signed a non-binding letter of intent to
purchase all the assets, properties and rights of NeoStem that relate to its
adultmaking stem cell collection and
storage business and assume certain of its
liabilities. The letter of intent provideswidely 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 will payattempt to utilize the entire
purchase price in sharescombined 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's Common Stock.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 letterCompany is still engaged in the
"run off" of intent
expires on December 31, 2005 unlesssuch extended by the parties.
14
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 Months Ended September 30, 2005March 31, 2006 Compared To Three Months Ended September
30, 2004.March 31, 2005
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $8,218$6,262 for the three months ended September 30,
2005March 31, 2006
as compared to $2,968$10,535 for the three months ended September 30, 2004.March 31, 2005. The revenues
generated in the quarter were derived entirely from revenues deferred over the
life of contracts sold in prior periods. As of March 31, 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 were $5,750$4,467 and
$1,964$7,417 for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively. In addition, the Company paid $6,540 of expenses
relating to its revenue sharing agreement with NeoStem for the three months
ended September 30, 2005 as compared to $234,060 paid for the three months ended
September 30, 2004 to PSI. Due to the uncertainty of the future revenues, these
amounts paid have been charged to current operations.
General and administration expenses increased approximately $354,000$724,000 to $538,070$939,234
for the three months ended September 30, 2005March 31, 2006 as compared to $184,342$215,501 for the three
months ended September 30, 2004.March 31, 2005. The increase in general and administrative expenses
is primarily due to increases in payroll and related expenses of $219,000, professional$130,000, the
settlement with Robert Aholt of $192,000, investment banking commissions and
other consultants of $158,000, insurance primarily related to NeoStem of
$82,000, legal expense of $47,000, marketing relating to NeoStem of $20,000,
laboratory related expenses of $34,000, printing of $14,000, stock transfer fees
of $70,000, investment banking$9,000, travel and entertainment of $13,000 and other general corporate
expenses of $25,000, printing costs relating to a private placement that has yet to close
of $27,000 and expenses relating to the amending of certain employment
agreements of $13,000.$25,000.
Interest expense decreasedincreased by approximately $50,000$165,000 for the three months ended
September 30, 2005March 31, 2006 from the three months ended September 30, 2004.March 31, 2005. Such decreaseincrease was
primarily as a result of reduced interest rates on certainthe amortization of debt no shares
being issued as additional interestdiscount associated with the
convertible debentures of $66,000 and the eliminationvalue charged to interest expense for
the warrants associated with the convertible debentures of default options on$110,000 offset by
reductions related to debt that has been repaid.
14
For the reasons cited above the net loss for the three months ended September
30, 2005March 31,
2006 increased to $575,351$1,139,444 from $500,495$249,670 for the three months ended September 30, 2004.
Nine Months Ended September 30, 2005 Compared To Nine Months Ended September 30,
2004.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $28,201 for the nine months ended September 30,
2005 as compared to $37,383 for the nine months ended September 30, 2004. The
revenues generated in the nine months were derived entirely from revenues
deferred over the life of contracts sold in prior periods. Similarly, direct
costs incurred were $19,770 and $26,108 for the nine months ended September 30,
2005 and 2004, respectively. In addition, the Company paid $6,540 of expenses
relating to its revenue sharing agreement with NeoStem for the nine months ended
September 30, 2005 as compared to $714,060 paid for the nine months ended
September 30, 2004 to PSI. Due to the uncertainty of the future revenues, these
amounts paid have been charged to current operations.
General and administration expenses increased approximately $603,000 to
$1,112,331 for the nine months ended September 30, 2005 as compared to $508,953
for the nine months ended September 30, 2004. The increase in general and
administrative expenses is primarily due to increases in payroll and related
expenses of $379,000, increases in professional fees of $156,000, increases in
investment banking fees and investor relations of $30,000, increases in printing
costs related to a private placement yet to close of $27,000 and increases in
stock transfer fees of $8,000.
Interest expense decreased by approximately $130,000 for the nine months ended
September 30, 2005 from the nine months ended September 30, 2004. Such decrease
was primarily as a result of reduced interest rates on certain debt, no shares
being issued as additional interest and the elimination of default options on
debt that has been repaid
For the reasons cited above, the net loss for the nine months ended September
30, 2005 decreased to $1,218,087 from $1,448,881 for the nine months ended
September 30, 2004.
15
March 31,
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:
NineThree Months Ended
-----------------
September 30,------------------
March 31, 2006 March 31, 2005 September 30, 2004
------------------ ------------------
Cash used in
Operating Activities $ (477,491)(827,722) $ (1,120,064)
Cash used by
Investing Activities - $ (3,934)(94,489)
Cash provided by
Financing Activities $ 460,000367,917 $ 1,374,48772,000
The Company incurred a net loss of $1,218,087$1,139,444 for the ninethree months ended September 30, 2005.March
31, 2006. Such loss adjusted for non-cash items such as deferred revenues (net
of deferred acquisition costs) ($8,431)1,795) and other non-cashnon cash credits totaling
$282,431$302,189 consisting of common stock, options and warrants issued for services
and interest of $220,766, amortization and depreciation of $71,489 and interest
related to the Series A Preferred of $9,934 resulted in cash used in operations
totaling $477,491$827,722 for the ninethree months ended September 30, 2005 including working capital movementsMarch 31, 2006. This use of $466,596 which is comprised of accounts payable, accruedcash
included additions to prepaid expenses and other liabilitiescurrent assets of $469,581$144,852
offset by increases in accounts payable and prepaidaccrued expenses of $(2,985).$156,180.
To meet its cash requirementsrequirement for the ninethree months ended September 30, 2005,March 31, 2006, the
Company relied on the$223,880 of net proceeds from the issuancesale of Promissory Notes$250,000 of
convertible debentures and the sale of shares of Common Stock resulting in
proceeds of $26,500.
Subsequent to March 31, 2006, the Company has sold 3,115,908 shares of its
Common Stock resulting in proceeds to the Company of $137,100.
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, to act as lead investor in a proposed private placement
(the "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, should the amount of $490,000. In order to address the cash
requirements for the Company through the end of the year, the Company, on June
28, 2005, commenced a private placement of a minimum of $500,000 and a maximum
of $2,000,000, without accounting for any over-subscription allowances, of
Senior Secured Convertible Notes and Common Stock Warrants. The Convertible
Notes bear interest at 10% per annum paid semiannually in arrears and are
convertible at any time into shares of the Company's Common Stock at a
conversion price of $.08 per share. In addition, for each $1,000 face amount of
Convertible Note purchased, the investorfinancing close,
Duncan will receive a Warrant to purchase
12,500fee of $200,000 in cash and 2,400,000 shares of restricted
Common Stock. Each WarrantThe Company is exercisable at a price of $.10
per share. This offering expiredrelying on August 31, 2005. The placement agent hasthis investment to fund current and
future operations. In the event this transaction is not closed, nor remitted any funds to the Company.
The Company has a contractual commitment to pay PSI up to an additional $205,940
through the end of its agreement. In addition, the Company has the obligationwill
have to
pay NeoStem up to any additional $13,460 of approved expenses. As of September
30, 2005, the Company had cash balances totaling approximately $10,000. The
Company will rely on its current cash and proceeds from additional financing
through the issuance of promissory notes andother sales of common stocksecurities to fund its new business operations until they become cash generative, if at all. All
interest payments are current.current and future
operations. There can be no assurance that sufficient
proceedsthe Company will be raisedable to raise
sufficient funds to meet current obligations when due.its obligations.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company currently has no operations and limited
financial resources to pay its current expenses and liabilities. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In order to provide the funding to Healthwave and NeoStem pursuant to the
revenue sharing agreements between each of them and the Company, the Company
will need to raise sufficient funds. Each of these agreements provides that the
Company's funding obligations are subject to the Company raising $1,500,000 in
equity financing. The Company will also need to raise sufficient funds to pay
its debts and other obligations.
In the event the Company consummates the acquisition of all of NeoStem's assets
relating to its adult stem cell collection and storage business, the business of
NeoStem will become the Company's primary business and it will utilize the
combined management team and advisors to grow and expand the Company. NeoStem
operates the first autologous adult stem cell bank in the world and is
pioneering the pre-disease collection, processing and storage of adult stem
cells for future medical treatments. In order to grow the business as planned,
the Company will need to raise substantial funds and is currently seeking to do
so.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the ninethree months ended September 30, 2005,March 31, 2006, a situation which is
expected to continue for the foreseeable future.
1615
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Our principalchief executive officer hasand chief financial officer have concluded,
based on histheir 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) that such disclosure controls and
procedures 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,executives, 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, orare reasonably likely to materially affect our
internal controls over financial reporting.
1716
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following securities were sold during the first 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 January 6, January 13, and January 31, 2006 the Company issued $250,000
of convertible debentures which bear 9% simple interest with 416,666 detachable
warrants for each $25,000 of debt, which entitle the holder to purchase shares
of the Company's Common Stock at a price of $.12 per share; (ii) on January 6,
January 13, and January 31, 2006, the Company issued a total of 250,000 shares
of its Common Stock as compensation to Westpark Capital and its agents for the
sale of the convertible debentures; and (iii) on January 10 and 11, 2006, the
Company issued 765,000 shares of its Common Stock in exchange for the conversion
of promissory notes (such issuances were exempt under Section 3(a)(9) of the
Securities Act); and (iv) on January 19, 2006 the Company issued 6,012,225
shares of its Common Stock in connection with the NeoStem transaction; and (v)
on March 27, 29 and 30, 2006, the Company sold 602,270 shares of its Common
Stock to five accredited investors at a per share purchase price equal to $.044.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Notes issued fromNone
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders was held on March through August 2003,17, 2006.
(b) Not applicable.
(c) At the special meeting, the stockholders of the Company voted to approve an
amendment to the Certificate of Incorporation which permits the Company to issue
in the amountexchange for all 681,171 shares of $170,000, of which
$15,000 is from a related party, are in default and bear interest at 20% per
annum. Notes issued in August through December 2004, for $280,000, of which
$275,000 is still outstanding, are in default and bear interest at rates from 8%
to 20% per annum. Notes issued in January through September 2005, for $52,000,
are in default and bear interest at rates from 8% to 20% per annum.
Cumulative dividends payable on Series A Convertible Redeemable Preferred Stock totaled $516,643 at September 30, 2005,outstanding and
its obligation to pay $538,498 (or $.79 per share) in accrued dividends thereon,
a total of which $35,763 represents dividends
for the nine months then ended.5,449,368 shares of Common Stock (eight (8) shares of Common Stock
per share of Series A Preferred Stock). Pursuant thereto, all outstanding shares
of Series A Preferred Stock will be cancelled and converted into Common Stock.
The Common Stockholders voted (i) 40,916,160 shares in favor, (ii) 139,956
shares against and (iii) 70,571 shares abstained from voting. The Series A
Preferred Stockholders voted (i) 360,730 shares in favor, (ii) 2,354 shares
against, and (iii) 1,610 shares abstained from voting. Broker non-votes were not
applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
10(ee) Advisory Agreement dated May 2006 with Duncan Capital Group LLC
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.
17
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
10.8 Restricted Stock Agreement with Mark Weinreb32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE III MEDICAL, INC. (Registrant)
By: /s/ Mark Weinreb
----------------
Mark Weinreb, President and Chief
Executive Officer
Date: November 14, 2005May 22, 2006
19