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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from --------------- to ------------------
Commission file number 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2343568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH SERVICE ROAD, SUITE 120, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 631-574-4955
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act of 1934). Yes No X
--- ---
23,501,460 SHARES, $.001 PAR VALUE, AS OF OCTOBER 24, 2003
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
1
I N D E X
Page No.
Part I - Financial Information: -------
Item 1. Financial Statements (Unaudited):
Balance Sheets
At September 30, 2003 and December 31, 2002 3
Statements of Operations
For the three and nine months
ended September 30, 2003 and 2002 4
Statement of Stockholders' Deficit
For the nine months ended September 30, 5
2003
Statements of Cash Flows
for the nine months ended
September 30, 2003 and 2002 6
Notes to Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 12-14
Operations
Item 3. Quantitative and Qualitative Disclosures 14
About
Market Risk
Item 4. Controls and Procedures 14
Part II - Other
Information:
Item 1. Legal Proceedings 15
Item 4. Submission of matters to a vote of 15
Security Holders
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures 17
2
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
2003 2002
----------- ------------
Current assets:
Cash and equivalents $32,560 $19,255
Notes receivable, net of allowance of $250,000 325,000 1,000,000
Prepaid expenses and other current assets 16,624 40,094
-------- ---------
Total current assets 374,184 1,059,349
Property and equipment, net 2,150 -
Deferred Acquisition Costs 87,909 123,835
Other assets 3,000 -
-------- ---------
$467,243 $1,183,184
======== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Dividends payable - preferred stock $421,275 $385,512
Accounts payable 95,385 344,279
Accrued liabilities 41,904 157,806
Stockholder advances 25,000 106,000
Notes payable 420,000 125,000
Current portion of long-term debt 15,348 22,595
----------- ---------
Total current liabilities 1,018,912 1,141,192
Unearned revenues 124,897 175,200
Long-term debt - 9,513
Series A Convertible Redeemable Preferred
Stock:
$0.07 cumulative convertible preferred stock;
liquidation value - $1.00 per share;
authorized, 1,000,000 shares; outstanding,
681,174 shares 681,174 681,174
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,
23,501,460 shares at September 30, 2003 and
22,398,710 shares at December 31, 2002 23,502 22,399
Additional paid-in capital 8,942,916 8,847,573
Accumulated deficit (10,324,258)(9,693,967)
-----------------------
Total stockholders' deficit (1,357,740) (823,895)
-----------------------
$467,243 $1,183,184
=======================
See accompany notes to financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earned revenues $15,294 $19,986 $50,303 $62,825
Direct costs (10,826) (14,177) (35,926) (47,241)
------- ------- ------- -------
Gross profit 4,468 5,809 14,377 15,584
Selling, general and administrative expenses (201,253) (230,770) (539,321) (807,731)
------- ------- ------- -------
Operating loss (196,785) (224,961) (524,944) (792,147)
Other income (expense):
Realized loss on marketable securities - - - (3,490)
Interest income 51,116 7,534 51,123 70,672
Interest expense (58,293) (1,614) (120,707) (3,742)
Property and equipment impairment charge - - - (54,732)
------- ------- ------- -------
(7,177) 5,920 (69,584) 8,708
------- ------- ------- -------
Net loss (203,962) (219,041) (594,528) (783,439)
Preferred dividend (11,921) (11,921) (35,763) (35,763)
------- ------- ------- -------
Net loss attributable to common stockholders $(215,883) $(230,962) $(630,291) $(819,202)
========= ========= ========= =========
Net loss per common share $(0.01) $(0.01) $(0.03) $(0.04)
========= ========= ========= =========
Weighted average common shares outstanding 23,190,047 22,395,960 22,890,937 22,327,055
========== ========== ========== ==========
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Series B
Convertible
Preferred Stock Common Stock
--------------- -------------------- Additional
Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------- ------ ---------- ------- ---------- ------------ ---------
Balance - January 1, 2003 10,000 $100 22,398,710 $22,399 $8,847,573 $(9,693,967) $(823,895)
Issuance of common stock
upon exercise of options -- -- 1,000,000 1,000 4,000 -- 5,000
Issuance of common stock
for services -- -- 100,000 100 2,900 -- 3,000
Issuance of common stock
to directors -- -- 2,750 3 300 -- 303
Stock options granted
with debt -- -- -- -- 88,143 -- 88,143
Series A Convertible
stock dividends -- -- -- -- -- (35,763) (35,763)
Net loss -- -- -- -- -- (594,528) (594,528)
------ ---- ---------- ------- ---------- ------------- -------------
Balance - September 30, 2003 10,000 $100 23,501,460 $23,502 $8,942,916 $(10,324,258) $(1,357,740)
====== ==== ========== ======= ========== ============= =============
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
---------------------
2003 2002
--------- ----------
Cash flows from operating activities:
Net loss $(594,528) $(783,439)
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 91,446 1,067
Depreciation and amortization 431 16,766
Property and equipment impairment charge - 54,732
Unearned revenues (50,303) (66,056)
Deferred acquisition costs 35,926 46,479
Changes in operating asset and
liability account balances:
Prepaid expenses and other current assets 20,470 (34,103)
Accounts payable (248,894) 219,351
Accrued liabilities (115,902) 72,647
--------- --------
Net cash used in operating activities (861,354) (472,556)
Cash flows from investing activities:
(Increase) decrease in marketable securities - 1,503,374
Notes receivable collections (advances) 675,000 (1,250,000)
Proceeds of sale of property and equipment - 3,795
Acquisition of property and equipment (2,581) (1,134)
--------- --------
Net cash provided by investing activities 672,419 256,035
--------- --------
Cash flows from financing activities:
Issuance of common stock 5,000 -
Advances on notes payable 295,000 125,000
Stockholder advances (repayments) (81,000) 106,000
Repayment of long-term debt (16,760) (15,704)
--------- --------
Net cash provided by financing activities 202,240 215,296
--------- --------
Net increase (decrease) in cash and cash
equivalents 13,305 (1,225)
Cash and cash equivalents at beginning of period 19,255 51,268
--------- --------
Cash and cash equivalents at end of period $32,560 $50,043
========= =========
Supplemental Disclosure of Cash Flow
Information:
Interest paid $9,949 $3,023
========= =========
Supplemental Schedule of Non-cash Financing
Activities:
Series A Preferred Stock dividends $35,763 $35,763
========= =========
Issuance of common stock for services rendered $3,303 $ 1,067
========= =========
Stock options issued with debt $88,143 $ -
========= =========
See accompanying notes to financial statements.
6
PHASE III MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY.
Phase III Medical, Inc. (the "Company") was known as Corniche Group
Incorporated until it changed its name on July 24, 2003. The Company was a
provider of extended warranties and service contracts via the Internet at
warrantysuperstore.com through June 30, 2002. In June 2002, management
determined, in light of continuing operating losses, to discontinue its warranty
and service contract business and to seek new business opportunities for the
Company. On February 6, 2003, the Company appointed Mark Weinreb as a member of
the Board of Directors and as its President and Chief Executive Officer. The
Company and Mr. Weinreb have been exploring business plans for the Company that
involve entering the medical sector by acquiring or participating in one or more
biotech and/or medical companies or technologies, owning one or more drugs or
medical devices that may or may not yet be available to the public, or acquiring
rights to one or more of such drugs or medical devices or the royalty streams
therefrom. Mr. Weinreb was appointed to finalize and execute the Company's new
business plan. The Company will need to recruit management, business development
and technical personnel, and develop its business model. Accordingly, it will be
necessary for the Company to raise new capital. There can be no assurance that
any such business plan developed by the Company will be successful, that the
Company will be able to acquire such new business or rights or raise new
capital, or that the terms of any transaction will be favorable to the Company.
The business of the Company today comprises the "run off" of its sale of
extended warranties and service contracts via the Internet and the new business
opportunity it is pursuing in the medical/bio-tech sector.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company discontinued sales of its extended
warranty service contracts through its web site in June 2002. Accordingly, the
Company has no operations nor available means to finance its current expenses
and with which to pay its current liabilities. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 2 - BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, the statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2003, the results of operations for the three and
nine months ended September 30, 2003 and 2002 and the cash flows for the nine
months ended September 30, 2003 and 2002. The results of operations for the
three and nine months ended September 30, 2003 are not necessarily indicative of
the results to be expected for the full year.
The December 31, 2002 balance sheet has been derived from the audited
financial statements at that date included in the Company's Annual Report on
Form 10-K. These unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K.
NOTE 3 - ACCOUNTING POLICIES.
There were no changes in the Company's accounting policies during the nine
months ended September 30, 2003.
NOTE 4 - NOTES RECEIVABLE.
As previously reported, on January 7, 2002, the Company entered into a
Stock Contribution Exchange Agreement (the "Agreement") with StrandTek
International, Inc., a Delaware corporation ("StrandTek"), certain of
StrandTek's principal shareholders and certain non-shareholder loan holders of
StrandTek (the "StrandTek Transaction"). Consummation of the StrandTek
Transaction was conditioned upon a number of closing conditions which ultimately
could not be met. As a result, the Agreements were formally terminated by the
Company and StrandTek in June 2002.
7
NOTE 4 - NOTES RECEIVABLE (continued)
In January 2002, the Company advanced to StrandTek a loan of $1 million on
an unsecured basis, which was personally guaranteed by certain of the principal
shareholders of StrandTek and a further loan of $250,000 on February 19, 2002 on
an unsecured basis. Such loans bore interest at 7% per annum and were due on
July 31, 2002 following termination of the Agreements in June 2002.
StrandTek defaulted on the payment of $1,250,000 plus accrued interest due
to the Company on July 31, 2002. As a result, on August 6, 2002, the Company
filed a complaint in the Superior Court of New Jersey entitled Corniche Group
Incorporated v StrandTek International, Inc., a Delaware corporation, StrandTek
International, Inc., a Florida corporation, David M. Veltman, William G. Buckles
Jr., Jerome Bauman and Jan Arnett. The complaint sought recovery of the
$1,250,000 loans, plus interest, costs and fees, and sought recovery against the
individual defendants pursuant to their partial guarantees. On May 9, 2003, the
Company was granted a final judgment in the amount of $1,415,622.02 from each
corporate defendant, in the amount of $291,405.50 against each individual
defendant and dismissing defendants' counterclaims.
Since the February 2002 $250,000 loan was unsecured and not guaranteed, the
Company established an allowance of $250,000 at December 31, 2002. No assurances
can be given that the Company will be able to collect fully on the balance of
the loans, even after the reserve. The Company was informed that on April 16,
2003, StrandTek made an assignment for the benefit of its creditors, so that any
collection on its judgment other than on the personal guarantees is highly
unlikely.
On July 24, 2003 the Company entered into a Forbearance Agreement with
personal guarantors Veltman and Buckles pursuant to which they made an on
account payment of $50,000 each with a further on account payment of $75,000
each due on or before August 20, 2003 and additional payments of $50,000 each
due by the 20th of each subsequent month with the final balance due being paid
in December 2003. Additionally, each of Veltman and Buckles were to provide
collateral to secure payment of their respective judgments. A similar
forbearance agreement was reached with guarantor Arnett as of July 28, 2003,
also against an on account payment of $50,000. The Company has agreed to forbear
from taking further steps to exercise on the judgments entered against each of
them in May 2003, subject to their adhering to the terms of the Forbearance
Agreements. In August 2003 personal guarantors Veltman and Buckles paid the
judgment amounts against them in full including post judgment interest. As of
the date hereof guarantor Arnett has made payments totaling $225,000 in
accordance with the terms of the forbearance agreement executed between him and
the Company. The Company is continuing collection efforts with respect to
guarantor Bauman.
NOTE 5 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
September 30, December 31,
2003 2002
--------------- -------------
Computer equipment $ 2,581 $ -
Computer software 602,014 602,014
604,595 602,014
Less: Accumulated depreciation (602,445) (602,014)
$ 2,150 $ -
Depreciation and amortization charged to operations was $215 and $0 for the
three months ended September 30, 2003 and 2002, respectively and $431 and
$16,766 for the nine months ended September 30, 2003 and 2002, respectively. An
impairment charge of $54,732 was recorded in June 2002 to record property and
equipment at its net realizable value.
NOTE 6 - NOTES PAYABLE.
In September 2002, the Company sold to accredited investors five 60-day
promissory notes in the principal sum of $25,000 each, resulting in net proceeds
to the Company of $117,500, net of offering costs. The notes bear interest at
15% per annum payable at maturity. The notes include a default penalty pursuant
to which if the notes are not paid on the due date the holder shall have the
option to purchase twenty five thousand shares of the Company's common stock for
an aggregate purchase price of $125. If the non payment continues for 30 days,
then on the 30th day, and at the end of each successive 30-day period until the
note is paid in full, the holder shall have the option to purchase an additional
twenty five thousand shares of the Company's common stock for an aggregate
purchase price of $125. During the nine months ended September 30, 2003, options
for 1,000,000 shares were exercised by the note holders. At September 30, 2003,
the Company had reserved 375,000 shares of the Company's common stock for
issuance against exercise of the options granted pursuant to the default
penalty. NOTE 6 - NOTES PAYABLE (continued)
8
On February 11, 2003, the Company commenced a private placement offering to
raise up to $100,000 in 30-day promissory notes in increments of $5,000 bearing
interest at 20% per annum. Only selected investors which qualify as "accredited
investors" as defined in Rule 501(a) under the Securities Act of 1933, as
amended, were eligible to purchase these promissory notes. The Company raised
$50,000 through the sale of such promissory notes, resulting in net proceeds to
the Company of $45,000, net of offering costs. The Company has since repaid
$5,000 of such promissory notes and the balance of $45,000 remains outstanding
and past due together with accrued interest.
On March 17, 2003, the Company commenced a private placement offering to
raise up to $250,000 in 6-month promissory notes in increments of $5,000 bearing
interest at 15% per annum. Only selected investors which qualify as "accredited
investors" as defined in Rule 501(a) under the Securities Act of 1933, as
amended, are eligible to purchase these promissory notes. As of September 30,
2003 the Company had 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.
NOTE 7 - LONG-TERM DEBT.
Long-term debt consists of the following:
September 30, December 31,
2003 2002
---------------- ----------------
Bank note payable in equal monthly installments of
$2,043 including interest at 8.75% $ 15,348 $ 32,108
Less: current maturities 15,348 22,595
---------------- ----------------
$ - $ 9,513
================ ================
NOTE 8 - SERIES "A" CONVERTIBLE REDEEMABLE PREFERRED STOCK.
The Certificate of Designation for the Company's Series A Preferred Stock
provides that at any time after December 1, 1999 any holder of Series A
Preferred Stock may require the Company to redeem his shares of Series A
Preferred Stock (if there are funds with which the Company may legally do so) at
a price of $1.00 per share. Notwithstanding the foregoing redemption provisions,
if any dividends on the Series A Preferred Stock are past due, no shares of
Series A Preferred Stock may be redeemed by the Company unless all outstanding
shares of Series A Preferred Stock are simultaneously redeemed. The holders of
Series A Preferred Stock may convert their Series A Preferred Stock into shares
of Common Stock of the Company at a price of $5.20 per share. At September 30,
2003 and December 31, 2002, 681,174 shares of Series A Preferred Stock were
outstanding.
NOTE 9 - STOCKHOLDERS' EQUITY.
(a) Common Stock:
During the nine months ended September 30, 2003, the Company issued
2,750 shares of its common stock whose fair value was $303 to its
board members for director's fees.
On February 6, 2003, the Company entered into a deferment agreement
with three major creditors pursuant to which liabilities of
approximately $523,887 in aggregate, were deferred, subject to the
success of the Company's debt and equity financing efforts, until
January 15, 2005, against a pledge of the StrandTek note receivable
(see Note 4). In consideration for the deferral, the Company agreed to
issue 100,000 restricted shares of the Company's common stock whose
fair value was $3,000. Amounts received from the StrandTek guarantors
were used to pay these liabilities in full pursuant to the pledge.
9
NOTE 9 - STOCKHOLDERS' EQUITY. (Continued)
(a) Common Stock (continued):
On September 22, 2003, the Company commenced an equity private
placement offering to sell up to 40 million shares of common stock at
a price of $.10 per share to raise up to $4,000,000. Only selected
investors which qualify as "accredited investors" as defined in Rule
501(a) under the Securities Act of 1933, as amended, are eligible to
purchase these shares of common stock and each subscriber must
purchase a minimum of 50,000 shares. The Company will pay its
placement agent an amount equal to 10% of the proceeds of the offering
as commissions for the placement agent's services and 3% of the
proceeds of the offering as a non-accountable allowance against the
placement agent's expenses. Additionally, the Company has granted the
placement agent indemnification against customary liabilities. The
offering is a best efforts offering with no required minimum amount to
be raised. If the full $4,000,000 is not raised, the Company's startup
activities will be constrained. There can be no assurance that the
offering will be successful.
(b) Warrants:
The Company has issued common stock purchase warrants from time to
time to investors in private placements, certain vendors,
underwriters, and directors and officers of the Company. A total of
44,000 shares of common stock are reserved for issuance upon exercise
of outstanding warrants as of September 30, 2003 at prices ranging
from $3.20 to $8.10 and expiring through October 2004.
(c) Stock Option Plans:
The Company has two stock option plans, the 1998 Employee Incentive
Stock Option Plan and the 2003 Equity Participation Plan. The 1998
Employee Incentive Stock Option Plan provided for the grant of options
to purchase shares of the Company's common stock to employees. The
1998 Employee Incentive Stock Option Plan has been superceded by the
2003 Equity Participation Plan.
Information with respect to options under the 1998 Stock Option Plan
is summarized as follows:
For the Nine Months Ended
September 30, 2002
-------------- --------------
Shares Prices
-------------- --------------
Outstanding at beginning of period 301,500 $0.41 to $1.94
Granted -
Expired (201,500) $0.41 to $1.10
Cancelled -
--------------
Outstanding at end of period 100,000 $1.94
==============
All outstanding options under the 1998 Employee Incentive Stock Option
Plan were either cancelled or expired during 2002.
In February 2003, the Company adopted the 2003 Equity Participation
Plan, which was approved by stockholders at the Company's Annual
Meeting on July 24, 2003. Under this plan, the Company has reserved
15,000,000 shares of common stock for the grant of incentive stock
options and non-statutory stock options to employees and non-employee
directors, consultants and advisors.
Information with respect to options under the 2003 Equity
Participation Plan is summarized as follows:
For the Nine Months Ended
September 30, 2003
-------------- --------------
Shares Prices
-------------- --------------
Outstanding at beginning of period - -
Granted 3,700,000 $.0.03 to $0.18
Expired - -
Cancelled - -
--------------
Outstanding at end of period 3,700,000 $0.03 to $0.18
==============
All options were granted at an exercise price equal to the fair value
of the common stock at the grant date. Therefore, in NOTE 9 -
STOCKHOLDERS' EQUITY. (Continued)
10
(c) Stock Option Plans (continued):
accordance with the provisions of APB Opinion No. 25 related to fixed
stock options, no compensation expense is recognized with respect to
options granted or exercised. Under the alternative fair-value based
method defined in SFAS No. 123, the fair value of all fixed stock
options on the grant date would be recognized as expense over the
vesting period. Assuming the fair value of the stock at the date of
grant to be $.3125 per share in May 1996, $.40625 per share in May
1997, $.6875 in January 1999, $1.00 per share in September 1999, $1.94
in June 2000, $1.097 in September 2000, $.03 in February 2003, $.05 in
June and July 2003 and $0.18 in September 2003, the life of the
options to be from three to ten years, the expected volatility at
200%, expected dividends are none, and the risk-free interest rates of
10%, 3.97%, 2.52%, 2.27%, 2.87 and 3.18%, the Company would have
recorded compensation expense of $4,638 and $14,531 for the three
months ended September 30, 2003 and 2002, respectively, and $9,094 and
$43,593 for the nine months ended September 30, 2003 and 2002,
respectively, as calculated by the Black-Scholes option pricing model.
As such, pro-forma net loss and loss per share would be as follows:
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 2003 Sept. 30, 2002 Sept. 30, 2003 Sept. 30, 2002
-------------- -------------- -------------- --------------
Net loss as reported $ (203,962) $ (219,041) $ (594,528) $ (783,439)
Additional compensation (4,638) (14,531) (9,094) (43,593)
Adjusted net loss $ (208,600) $ (233,572) $ (603,622) $ (827,032)
Loss per share as reported $ (0.01) $ (0.01) $ (0.03) $ (0.04)
Proforma loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.04)
NOTE 10 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION.
The Company's operations are currently in one segment, namely the "run off"
of its sale of extended warranties and service contracts via the Internet.
Additionally, the Company is currently endeavoring to establish new business
operations in the medical/bio-tech sector. The Company's operations are
conducted entirely in the United States.
11
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
In June 2002, in light of on-going operating losses, management determined that
it was in the best interest of the Company to discontinue the Company's sale of
extended warranties and service contracts business and to seek new business
opportunities for the Company. On February 6, 2003, the Company appointed Mark
Weinreb as a member of the Board of Directors and as its President and Chief
Executive Officer. The Company and Mr. Weinreb have been exploring business
plans for the Company that involve entering the medical sector by acquiring or
participating in one or more biotech and/or medical companies or technologies,
owning one or more drugs or medical devices that may or may not yet be available
to the public, or acquiring rights to one or more of such drugs or medical
devices or the royalty streams therefrom. Mr. Weinreb was appointed to finalize
and execute the Company's new business plan. The Company will need to recruit
management, business development and technical personnel, and develop its
business model. Accordingly, it will be necessary for the Company to raise new
capital. There can be no assurance that any such business plan developed by the
Company will be successful, that the Company will be able to acquire such new
business or rights or raise new capital, or that the terms of any transaction
will be favorable to the Company.
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, 2003 Compared To Three Months Ended September
30, 2002.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $15,000 for the three months ended September 30,
2003 (three months ended September 30, 2002: $20,000). The revenues generated in
the quarter were derived entirely from revenues deferred over the life of
contracts sold in prior periods. Similarly, direct costs incurred in the period
relate to costs previously deferred over the life of such contracts ($11,000 and
$14,000 for the three months ended September 30, 2003 and 2002, respectively).
General and administration expenses decreased 12.8% to $201,000 for the three
months ended September 30, 2003 as compared to $231,000 for the three months
ended September 30, 2002. The three months ended September 30, 2003 are not
strictly comparable to the same period in the prior year because in the
corresponding period in fiscal 2002 the Company was closing down its warranty
service contracts business and closing its office in Texas whereas in fiscal
2003 it has been endeavoring to establish new business operations in the medical
sector as described above. Notwithstanding the foregoing, the decrease in
general and administrative expenses of $30,000 is primarily due to an increase
in payroll costs $32,000, legal and professional fees $68,000, D&O insurance
$20,000 and commissions on loan note financing $10,000 being more than off-set
by lower travel and subsistence costs of $17,000 and employment termination and
office closure costs of $143,000 incurred in fiscal 2002.
Interest income increased by $44,000 in the three months ended September 30,
2003 as compared to the corresponding period in 2002. Interest income in fiscal
2003 was received from the StrandTek loan guarantors. Interest expense increased
by $57,000 for the three months ended September 30, 2003 compared to 2002
primarily as a result of short-term loans obtained in September 2002 and in the
nine months ended September 30, 2003.
For the reasons cited above, net loss for the three months ended September 30,
2003 decreased by 6.9% to $204,000 from the comparable loss of $219,000 for the
three months ended September 2002.
12
Nine Months Ended September 30, 2003 Compared To Nine Months Ended September 30,
2002.
The Company recognized revenues from the sale of extended warranties and service
contracts via the Internet of $50,000 for the nine months ended September 30,
2003 (nine months ended September 30, 2002: $63,000). The revenues generated in
the quarter were derived entirely from revenues deferred over the life of
contracts sold in prior periods. Similarly, direct costs incurred in the period
relate to costs previously deferred over the life of such contracts ($36,000 and
$47,000 for the nine months ended September 30, 2003 and 2002, respectively).
General and administration expenses decreased 33.2% to $539,000 for the nine
months ended September 30, 2003 as compared to $808,000 for the nine months
ended September 30, 2002. The nine months ended September 30, 2003 are not
strictly comparable to the same period in the prior year because in the
corresponding period in fiscal 2002 the Company was operating its warranty
service contracts business from its office in Texas through June 2002 whereas in
fiscal 2003 it has been endeavoring to establish new business operations in the
medical sector as described above. Notwithstanding the foregoing, the decrease
in general and administrative expenses of $268,000 is primarily due to decreases
in legal and professional fees $18,000, director's fees $19,000, travel and
subsistence $60,000, property costs $26,000, employee termination and closure
costs $175,000, depreciation charges $16,000 and information technology expenses
$40,000 incurred in connection with the Company's extended warranties and
service contracts business, net of increases in payroll costs $25,000, D&O
insurance costs $45,000, commissions on loan note financing $25,000 and annual
stockholder meeting costs $12,000.
Interest income decreased by $20,000 in the nine months ended September 30, 2003
as compared to the corresponding period in 2002. Interest income was generated
from the StrandTek loans in 2003 versus marketable securities in 2002. Interest
expense increased by $117,000 for the nine months ended September 30, 2003
compared to 2002 primarily as a result of short-term loans obtained in September
2002 and in the nine months ended September 30, 2003.
The Company also recorded a property and equipment impairment charge of $55,000
in the nine months ended September 30, 2002.
For the reasons cited above, net loss for the nine months ended September 30,
2003 decreased by 24.1% to $595,000 from a loss of $783,000 for the nine months
ended September 2002.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Cash used in
Operating Activities $(861,354) $ (472,556)
Cash provided by
Investing Activities 672,419 256,035
Cash provided by
Financing Activities 202,240 215,296
The Company incurred a net loss of $594,528 for the nine months ended September
30, 2003. Such loss adjusted for non-cash items such as deferred revenues (net
of deferred acquisition costs) ($14,377) and other non cash credits totaling
$91,877 resulted in cash used in operations totaling $861,354 for the nine
months ended September 30, 2003, including working capital movements of
$(344,326).
To meet its cash requirement during the nine months ended September 30, 2003,
the Company relied on:
(i) the proceeds of sale of Promissory Notes in the amount of $265,500 net of
issuance costs; and
(ii) recoveries made from the personal guarantors of the StrandTek loan totaling
approximately $766,000, including interest of $91,000. See Note 4 to the
Unaudited Financial Statements.
On February 6, 2003, the Company entered into a deferment agreement with three
major creditors pursuant to which liabilities of approximately $524,000 in
aggregate, were deferred, subject to the success of the Company's debt and
equity financing efforts or its collection efforts against StrandTek, until
January 15, 2005, against a pledge of the loans advanced to StrandTek in the
first quarter of fiscal 2002 in the sum of $1,250,000 plus accrued interest. The
Company discharged these liabilities in full in August 2003 from the recoveries
made against the StrandTek loan personal guarantors.
13
On February 11, 2003, the Company commenced a private placement offering to
selected investors which qualify as "accredited investors" as defined in Rule
501(a) under the Securities Act of 1933, as amended, and raised $50,000 in
30-day promissory notes bearing interest at 20% per annum, resulting in net
proceeds to the Company of $45,000, net of offering costs. The Company has since
repaid $5,000 of such promissory notes and the balance of $45,000 remains
outstanding and past due together with accrued interest.
On March 17, 2003, the Company commenced a further private placement offering to
"accredited investors" and raised $250,000 in promissory notes (the "Notes"),
resulting in net proceeds to the Company of $225,000, net of offering costs.
Each Note bears interest at 15% per annum and each is due 6 months from the date
issued (the "Maturity Date"). Principal is payable at the Maturity Date and
interest is payable monthly in arrears. In the event that the Notes are not paid
at the Maturity Date, the interest rate will increase to a default rate of 20%
per annum. The Company paid its placement agent an amount equal to 10% of the
proceeds of the offering as commissions for the placement agent's services, in
addition to reimbursement of the placement agent's expenses and indemnification
against customary liabilities.
The Company has no contracted capital expenditure commitments in place. As of
September 30, 2003, the Company had cash balances totaling $32,560. The Company
will rely on its cash reserves to fund its new business operations until they
become cash generative. In September 2003 the Company commenced an equity
private placement to raise up to $4 million to meet its cash needs going
forward. See Note 9(a) to the Unaudited Financial Statements. To date, the
Company has raised $222,500. Additionally, the Company may have cash recoveries
from the StrandTek loan guarantors Arnett and Bauman available to it. While the
Company has made full recovery from two of the StrandTek loan guarantors and has
entered into a Forbearance Agreement with a third (Arnett), it continues to seek
recovery under its judgment against the fourth personal guarantor, Bauman.
However, there can be no assurance that the Company will be able to collect
fully on all the judgments obtained. See Note 4 to the Unaudited Financial
Statements.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company discontinued sales of its extended
warranty service contracts through its web site in June 2002. Accordingly, the
Company has no operations nor available means to finance its current expenses
and with which to pay its current liabilities. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation for the three and nine months ended September 30, 2003, a situation
which is expected to continue for the foreseeable future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. As of the end of the Company's
most recently completed fiscal quarter covered by this report, the Company
carried out an evaluation, with the participation of the Company's management,
including the Company's Chief Executive Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-15. Based upon that evaluation, the Company's Chief Executive Officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act is recorded,
processed, summarized, and reported within time periods specified in the SEC's
rules and forms.
(b) Changes in internal controls over financial reporting. There have been
no changes in the Company's internal control over financial reporting that
occurred during the Company's last fiscal quarter to which this report relates
that materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
14
PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Corniche v. Strandtek
On May 9, 2003, the Court granted the Company's motion for final summary
judgment against all parties on all claims, and dismissed the defendants'
counterclaims against the Company as a matter of law.
As a result of this ruling, final judgment was entered against the two corporate
defendants, Strandtek (Delaware) and Strandtek (Florida), for $1,415,622.02,
plus post-judgment interest at 5% and an award of attorneys' fees and collection
costs.
Also, final judgment was subsequently entered against each of the four
guarantors (David Veltman, William Buckles, Jerome Baumann and Jan Arnett) for
$291,405.50 ($250,000 plus 25% of the accrued unpaid interest of $165,622.02)
together with post-judgment interest at 5%. The guarantors are not liable for
any portion of the attorneys' fees and collection costs.
After the Court's decision, the Company was informed that the corporate
defendants had made an assignment to the benefit of creditors on April 16, 2003,
and that its senior secured lender is undersecured. Accordingly, it is highly
unlikely that the Company will recover on the judgment other than against the
personal guarantors.
On July 24, 2003 the Company entered into a Forbearance Agreement with personal
guarantors Veltman and Buckles pursuant to which they made an on account payment
of $50,000 each with a further on account payment of $75,000 each due on or
before August 20, 2003 and additional payments of $50,000 each due by the 20th
of each subsequent month with the final balance due being paid in December 2003.
Additionally, each of Veltman and Buckles are to provide collateral to secure
payment of their respective judgments. A similar forbearance agreement was
reached with guarantor Arnett as of July 28, 2003 against an account payment of
$50,000. The Company has agreed to forbear from taking further steps to exercise
on the judgments entered against each of them in May 2003, subject to their
adhering to the terms of the Forbearance Agreement. In August 2003 personal
guarantors Veltman and Buckles paid the judgment amounts against them in full
including post judgment interest. As of the date hereof guarantor Arnett has
made payments totaling $225,000 in accordance with the terms of the forbearance
agreement executed between him and the Company
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on the September 2002 60-day promissory notes sold to
accredited investors in the amount of $125,000. The notes include a default
penalty pursuant to which if the notes are not paid on the due date the holder
shall have the option to purchase twenty five thousand shares of the Company's
common stock for an aggregate purchase price of $125. If the non payment
continues for 30 days, then on the 30th day, and at the end of each successive
30-day period until the note is paid in full, the holder shall have the option
to purchase an additional twenty five thousand shares of the Company's common
stock for an aggregate purchase price of $125. During the nine months ended
September 30, 2003, options for 1,000,000 shares were exercised by the note
holders. At September 30, 2003, the Company had reserved 375,000 shares of the
Company's common stock for issuance against exercise of the options granted
pursuant to the default penalty.
On February 11, 2003, the Company commenced a private placement offering to
raise up to $100,000 in 30-day promissory notes in increments of $5,000 bearing
interest at 20% per annum. Only selected investors which qualify as "accredited
investors" as defined in Rule 501(a) under the Securities Act of 1933, as
amended, were eligible to purchase these promissory notes. The Company raised
$50,000 through the sale of such promissory notes, resulting in net proceeds to
the Company of $45,000, net of offering costs. The Company has since repaid
$5,000 of such promissory notes and the balance of $45,000 remains outstanding
and past due together with accrued interest. Notes issued in March, April and
May 2003 will also be in default in the fourth quarter and bear interest at 20%
per annum.
Cumulative dividends payable on Series A Convertible Redeemable Preferred Stock
totaled $421,275 at September 30, 2003, of which $35,763 represents dividends
for the nine months then ended.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the Company's stockholders at
its 2003 Annual Meeting held on July 24, 2003 and the votes cast were as set
forth:
(i) The election of Mark Weinreb and Wayne A. Marasco to serve as directors of
the Company until the next meeting of stockholders. The votes cast were as
follows:
For Against Authority
Withheld
Mark Weinreb 19,343,084 0 1,499
Wayne A. Marasco 19,343,202 0 1,381
(ii) A change of the Company's name to "Phase III Medical, Inc." The votes cast
were as follows:
Broker
For Against Abstain Non-voting
19,332,645 11,840 98 -
(iii) An increase in the number of shares of the Company's authorized Common
Stock from 75,000,000 to 250,000,000 shares. The votes cast were as
follows:
Broker
For Against Abstain Non-voting
19,277,341 67,029 213 -
(iv) The Company's 2003 Equity Participation Plan and the options granted
thereunder to the Company's president, Mark Weinreb, and director Marasco.
The votes cast were as follows:
Broker
For Against Abstain Non-voting
9,123,57 161,371 10,194 10,049,448
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K dated July 24, 2003 reporting the change of the Company's name to
Phase III Medical, Inc.
Form 8-K dated July 29, 2003 reporting the change of the Company's common
stock ticker symbol to PHSM and Series A preferred stock symbol to PHSMP.
16
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. (formerly known as CORNICHE
GROUP INCORPORATED) (Registrant)
By: /s/ Mark Weinreb
---------------------------------------------------
Mark Weinreb, President and Chief Executive Officer
Date: November 5, 2003
17