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 JUNE 30, 2004
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
31,981,460 SHARES, $.001 PAR VALUE, AS OF JULY 30, 2004
(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 June 30, 2004 and December 31, 2003 3
Statements of Operations
For the three and six months
ended June 30, 2004 and 2003 4
Statements of Cash Flows
for the six months ended
June 30, 2004 and 2003 5
Notes to Unaudited Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and Procedures 13
Part II - Other Information:
Item 1. Legal Proceedings 14
Item 3. Defaults Upon Senior Securities 14
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
2
PHASE III MEDICAL, INC.
BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2004 2003
------------------------
Current assets:
Cash and equivalents $1,750 $210,947
Prepaid expenses and other current
assets 8,018 18,024
------------------------
Total current assets 9,768 228,971
Property and equipment, net 4,425 1,935
Deferred acquisition costs 53,638 77,782
Other assets 3,000 3,000
------------------------
$70,831 $311,688
========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Interest and dividends payable -
preferred stock $457,037 $433,196
Accounts payable 135,575 87,896
Accrued liabilities 87,594 92,115
Notes payable 540,000 400,000
Current portion of long-term debt - 9,513
-------------------------
Total current liabilities 1,220,206 1,022,720
Unearned revenues 76,153 110,568
Series A mandatorily redeemable
convertible
preferred stock 681,174 681,174
-------------------------
Total Liabilities 1,977,533 1,814,462
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,
31,656,460 shares at June 30,
2004 and
26,326,460 shares at December
31, 2003 31,657 26,327
Additional paid-in capital 9,771,881 9,232,753
Accumulated deficit (11,710,340)(10,761,954)
-------------------------
Total stockholders' deficit (1,906,702) (1,502,774)
-------------------------
$70,831 $311,688
=========================
See accompanying notes to financial statements
3
PHASE III MEDICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Earned revenues $ 7,073 $ 17,005 $ 34,415 $ 35,009
Direct costs (4,871) (12,177) (24,144) (25,100)
--------------------------------------------
Gross profit 2,202 4,828 10,271 9,909
Selling, general and administrative (175,532) (209,490) (324,611) (338,068)
Purchase of medical royalty stream (240,000) - (480,000) -
--------------------------------------------
Operating loss (413,330) (204,662) (794,340) (328,159)
Other income (expense):
Interest income 4 3 159 7
Interest expense (66,933) (42,927) (130,363) (62,414)
Interest expense - Series A mandatorily redeemable convertible preferred
stock (11,921) - (23,842) -
--------------------------------------------
Net loss (492,180) (247,586) (948,386) (390,566)
Preferred dividend - (11,921) - (23,842)
--------------------------------------------
Net loss attributable to common stockholders $(492,180) $(259,507) $(948,386) $(414.408)
============================================
Net loss per common share $(.02) $(.01) $(.03) $(.02)
============================================
Weighted average
common shares outstanding 29,501,515 22,597,777 28,076,075 22,584,172
============================================
See accompanying notes to financial statements.
4
PHASE III MEDICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
2004 2003
---- ----
Cash flows from operating activities:
Net loss $(948,386) $ (390,566)
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 115,708 49,065
Depreciation 798 216
Deferred acquisition costs 24,144 25,100
Changes in operating asset and
liabilities:
Prepaid expenses and other current assets 10,006 (19,164)
Unearned revenues (34,415) (35,009)
Accounts payable, accrued expenses,
and other current liabilities 66,999 194,438
------------ -------------
Net cash used in operating activities (765,146) (175,920)
------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment (3,288) (2,581)
------------ -------------
Net cash used in investing activities (3,288) (2,581)
------------ -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 428,750 2,750
Net proceeds from advances on notes payable 140,000 195,000
Repayment of long-term debt (9,513) (11,052)
------------ -------------
Net cash provided by financing activities 559,237 186,698
------------ -------------
Net (decrease) increase in cash and cash equivalents (209,197) 8,197
Cash and cash equivalents at beginning of period 210,947 19,255
------------ -------------
Cash and cash equivalents at end of period $ 1,750 $ 27,452
============ =============
2004 2003
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 22,254 $ 2,712
========= ========
Supplemental Schedule of Non-cash Financing Activities:
Net accrual of dividends on Series A Preferred Stock $ 23,842 $ 23,842
========= =========
Issuance of common stock for services rendered $ - $ 3,303
========= =========
Compensatory element of stock options $ 96,508 $ 45,762
========= =========
See accompanying notes to financial statements.
5
PHASE III MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Phase III Medical, Inc. ("Phase III" or the "Company") (formerly known as
Corniche Group Incorporated) provides capital and guidance to
companies, within the medical sector, in exchange for revenues,
royalties and other contractual rights known as "royalty interests",
that entitle it to receive a portion of revenue from the sale of
pharmaceuticals, medical devices and biotechnology products.
Previously, the Company was a provider of extended warranties and
service contracts via the Internet at warrantysuperstore.com through
June 30, 2002. 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.
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 June 30, 2004 and December 31, 2003, the results of
operations for the three and six months ended June 30, 2004 and 2003
and the cash flows for the six months ended June 30, 2004 and 2003.
The results of operations for the three and six months ended June 30,
2004 are not necessarily indicative of the results to be expected for
the full year.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. Accordingly, the Company currently
has no operations and limited financial resources to pay its current
expenses and liabilities. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
The December 31, 2003 balance sheet has been derived from the audited
financial statements at that date included in the Company's Annual
Report on Form 10-K. These unaudited financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K.
NOTE 3 -STOCK OPTIONS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure -
an amendment of FASB Statement No. 123 ("SFAS 148"). SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation and does not permit the use of the original SFAS
No. 123 prospective method of transition in fiscal years beginning
after December 15, 2003. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results, regardless of whether, when, or how
an entity adopts preferable fair value based method of accounting.
SFAS No. 148 improves the prominence and clarity of the pro forma
disclosures required by SFAS No. 123 by prescribing a specific tabular
format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent and improves the timeliness of
those disclosures by requiring their inclusion in financial reports
for interim periods. The Company has adopted the disclosure
requirements of SFAS No. 148. The Company will continue to account for
stock-based employee compensation under APB Opinion No. 25 and its
related interpretations.
6
The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation for all periods:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---------------- ---------------- ---------------- -------------------
Net loss as reported $ (492,180) $ (247,586) $ (948,386) $ (390,566)
Additional compensation (10,985) (1,088) (157,785) (3,708)
---------------- ---------------- ---------------- -------------------
Adjusted net loss $ (503,165) $ (248,674) $ (1,106,171) $ (394,274)
================ ================ ================ ===================
Net loss per share as reported $ (.02) $ (.01) $ (.03) $ (.02)
================ ================ ================ ===================
Adjusted net loss per share $ (.02) $ (.01) $ (.04) $ (.02)
================ ================ ================ ===================
NOTE 4 - NOTES PAYABLE
In September 2002, the Company sold to accredited investors five 60-day
romissory notes in the principal sum of $25,000 each, resulting in
et proceeds to the Company of $117,500, net of offering costs. The
otes bear interest at 15% per annum payable at maturity. The notes
nclude a default penalty pursuant to which if the notes are not paid
n the due date the holder shall have the option to purchase twenty
ive thousand shares of the Company's common stock for an aggregate
urchase price of $125. If the non payment continues for 30 days, then
n the 30th day, and at the end of each successive 30-day period until
he note is paid in full, the holder shall have the option to purchase
n additional twenty five thousand shares of the Company's common
tock for an aggregate purchase price of $125. During the six months
nded June 30, 2004, options for 750,000 shares of common stock were
xercised by the note holders. At June 30, 2004, the Company had
eserved 750,000 shares of the Company's common stock for issuance
gainst exercise of the options granted pursuant to the default
enalty. At June 30, 2004, $125,000 of these notes was unpaid along
ith $33,545 of accrued interest.
On March 17, 2003, the Company commenced a private placement offering
which raised $250,000 in 6-month promissory notes in increments of
$5,000 bearing interest at 15% per annum. Only selected investors
which qualify as "accredited investors" as defined in Rule 501(a)
under the Securities Act of 1933, as amended, are eligible to purchase
these promissory notes. As of June 30, 2004, $250,000 remains
outstanding. All of these notes are in default, and accordingly the
interest rate has been increased to 20%. 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. The loan bears interest at 8% and as of June 30, 2004,
$26,452, including accrued interest of $1,452, remains unpaid.
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 is anticipated that these notes will be repaid from the
proceeds of the 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 for each
30 day period or part thereof. As of June 30, 2004, $100,000 of these
notes remains unpaid. All interest payments have been paid timely. 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. As of
June 30, 2004, this note remains unpaid in its entirety. All interest
payments have been paid timely.
NOTE 5 - SERIES "A" MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of Designation for the Company's Series A Preferred Stock
provides that at any time after December 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 June
30, 2004 and December 31, 2003, 681,174 shares of Series A Preferred
Stock were outstanding.
7
NOTE 6 - STOCKHOLDERS' EQUITY
(a) Common Stock:
During the six months ended June 30, 2004, the Company issued 30,000
shares of its common stock whose fair value was $4,200 to two
note holders as additional interest.
The Company amended its equity private placement to raise up to $4
million through the sale of up to 40 million shares of Common
Stock in increments of $5,000 or 50,000 shares. 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. The initial placement closed
on December 31, 2003. During the six months ended June 30, 2004,
the Company sold 4,550,000 common shares resulting in net
proceeds to the Company of $425,000. Such shares have not been
registered under the Securities Act and may not be offered or
sold in the United States absent registration or an applicable
exemption of registration requirements.
As described in Note 4, the Company granted purchasers of the
Company's September 2002 60-day promissory notes, options to
purchase shares of common stock if the Company defaulted on the
payment of principal or interest on such promissory notes. For
each 30 day period, the purchaser is granted the option to
purchase 25,000 shares of common stock for an aggregate price of
$125 on the 30th day. In January 2004, two holders of such
promissory notes exercised their options and purchased 200,000
shares of common stock resulting in net proceeds to the Company
of $1,000. During the three months ended June 30, 2004, three
holders of such promissory notes exercised their options and
purchased 550,000 shares of common stock resulting in net
proceeds to the Company of $2,750.
(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 326,500 shares of common stock are reserved for issuance upon
exercise of outstanding warrants as of June 30, 2004 at prices
ranging from $0.12 to $8.10 and expiring through December 2008.
In connection with the September 2003 equity private placement,
the Company issued a 5 year warrant to purchase 282,500 shares of
its Common Stock at an exercise price of $0.12 per share to its
retained placement agent, Robert M. Cohen & Company. The warrant
contains piggyback registration rights.
(c) Stock Option Plans:
In February 2003, the Company adopted the 2003 Equity Participation
Plan, which was approved by stockholders at the Company's Annual
Meeting on July 24, 2003. 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 Six Months Ended
June 30, 2004
-------------- --------------
Shares Prices
-------------- --------------
Outstanding at beginning of period 3,700,000 $0.03 to $0.18
Granted 1,910,000 $0.10 to $0.15
Expired - -
Cancelled - -
-------------- --------------
Outstanding at end of period 5,610,000 $0.03 to $0.18
============== ==============
Options are granted at an exercise price equal to the fair value of
the common stock at the grant date. However, included above are
300,000 options to purchase the Company's common stock at $ .10
per share granted at an exercise price of $.10 when the fair
value on that date was $.15. Therefore the Company recorded an
expense of $15,000 associated with that transaction. Options to
purchase 1,000,000 of the Company's common stock were granted to
five members of the Company's Board of Advisors pursuant to their
agreements. Each advisor was issued options to purchase 200,000
shares of the Company's common stock at a range of exercise
prices of $.11 to $.15 per share. The balance of the options
granted were issued for services to consultants and directors of
the Company.
8
NOTE 7 - COMMITMENTS AND CONTINGENCIES
On April 22, 2004, the Company entered into an agreement with an
advisor in connection with its amended private placement to
provide assistance in finding qualified investors. The agreement
calls for the payment of 10% of the funds raised by the Company
as a direct result of introductions made by the advisor. In
addition, the Company is obligated to pay a 2% non-accountable
expense allowance on all funds raised that are subject to the 10%
payment. As of June 30, 2004, the Company paid a total of $21,000
under this agreement.
On March 20, 2004, the Company entered into a consulting agreement
which will provide the Company with advice as to business
development possibilities for the services and technology of
NeoStem Inc. (See MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS). The agreement
provides for the issuance of options to purchase 300,000 shares
of the Company's common stock at an exercise price of $.10 per
share. This option is immediately vested and expires ten years
from the date of issue. The agreement also provides for the
payment of $2,500 per month for each month after the Company has
received capital contributions of $1,000,000 from the date of the
agreement. If certain performance levels are met, the Company is
obligated to issue an additional option to purchase 500,000
shares of the Company's common stock for an exercise price of
$.10 per share.
On December 12, 2003, the Company signed a royalty agreement with
Parallel Solutions, Inc. "(PSI") to develop a new bioshielding
platform technology for the delivery of therapeutic proteins and
small molecule drugs in order to extend circulating half-life to
improve bioavailability and dosing regimen, while maintaining or
improving pharmacologic activity. The agreement provides for PSI
to pay the Company a percentage of the revenue received from the
sale of certain specified products or licensing activity. The
Company is providing capital and guidance to PSI to conduct a
proof of concept study to improve an existing therapeutic protein
with the goal of validating the bioshielding technology for
further development and licensing the technology. During the six
months ended June 30, 2004, the Company paid $480,000 as
specified in the agreement which brought the total paid since the
inception of the agreement to $560,000.
NOTE 8 - INDUSTRY AND GEOGRAPHICAL SEGMENTAL INFORMATION
The Company's operations are currently in one segment, namely the
"run off" of its sale of extended warranties and service
contracts via the Internet. Additionally, the Company is
currently endeavoring to establish new business operations in the
medical/bio-tech sector. The Company did not realize any revenue
from its purchase of the royalty interest. The Company's
operations are conducted entirely in the United States.
NOTE 9 - SUBSEQUENT EVENTS
The Company has sold 300,000 shares of its common stock through the
amended private placement since June 30, 2004 with net proceeds
to the Company of $30,000.
As described in Note 4, holders of promissory notes in default
exercised options to purchase 25,000 shares of common stock since
June 30, 2004, with net proceeds to the Company of $125.
The Company sold $30,000 of 30 day 20% notes, $25,000 of 150 day 20%
notes and $80,000 of 180 day 20% notes to accredited investors
since June 30, 2004.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. When used
in this Quarterly Report, statements that are not statements of current or
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "plan", "intend," "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
The Company provides capital and guidance to companies within the medical
sector, in exchange for revenues, royalties and other contractual rights known
as "royalty interests" that entitle it to receive a portion of revenue from the
sale of pharmaceuticals, medical devices and biotechnology products. On December
12, 2003, the Company signed a royalty agreement with Parallel Solutions, Inc.
"(PSI") to develop a new bioshielding platform technology for the delivery of
therapeutic proteins and small molecule drugs in order to extend circulating
half-life to improve bioavailability and dosing regimen, while maintaining or
improving pharmacologic activity. 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. During the six months ended June 30,
2004, the Company provided $480,000 to PSI pursuant to the royalty agreement
which brings the total payments since the inception of the agreement to
$560,000. The Company remains obligated under this agreement to pay an
additional $440,000. Subsequent to June 30, 2004, the Company paid an additional
$80,000 to PSI, in accordance with the terms of the agreement
On January 19, 2004, the Company entered into a letter of intent with
NeoStem, Inc., a California company, whose primary business is to establish an
autologous adult stem cell bank. If a definitive agreement is reached, Phase III
would provide funding and guidance in connection with the adult stem cell
banking enterprise in exchange for a share of the revenues derived from such
enterprise. This letter of intent has expired, however, the Company and NeoStem
continue to discuss and work towards a definitive agreement. As of June 30,
2004, no payments have been made to NeoStem. No assurances can be given that a
definitive revenue sharing agreement will be finalized, 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.
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 June 30, 2004, no payments have been received
under this agreement.
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 June 30, 2004 Compared To Three Months Ended June 30, 2003.
The Company recognized revenues from the sale of extended warranties and
service contracts via the Internet of $7,073 for the three months ended June 30,
2004 as compared to $17,005 for the three months ended June 30, 2003. The
revenues generated in the quarter were derived entirely from revenues deferred
over the life of contracts sold in prior periods. Similarly, direct costs
incurred were $4,871 and $12,177 for the three months ended June 30, 2004 and
2003, respectively. In addition, the Company paid $240,000 for the purchase of
royalty interests as per its agreement with PSI. Due to the uncertainty of the
future revenues, the amounts paid have been charged to current operations.
10
General and administration expenses decreased 16.2% to $175,532 for the
three months ended June 30, 2004 as compared to $209,490 for the three months
ended June 30, 2003. The decrease in general and administrative expenses of
approximately $34,000 is primarily due to a reduction in professional fees.
Interest expense increased by approximately $24,000 for the three months
ended June 30, 2004 from the three months ended June 30, 2003 primarily as a
result of short-term loans obtained in the last nine months of fiscal year ended
December 31, 2003 and the six months ended June 30, 2004.
For the reasons cited above, primarily the purchase of the royalty
interests, the net loss for the three months ended June 30, 2004 increased to
$492,180 from $247,586 for the three months ended June 30, 2003.
Six Months Ended June 30, 2004 Compared To Six Months Ended June 30, 2003.
The Company recognized revenues from the sale of extended warranties and
service contracts via the Internet of $34,415 for the six months ended June 30,
2004 as compared to $35,009 for the six months ended June 30, 2003. The revenues
generated in the six months were derived entirely from revenues deferred over
the life of contracts sold in prior periods. Similarly, direct costs incurred
were $24,144 and $25,100 for the six months ended June 30, 2004 and 2003,
respectively. In addition, the Company paid $480,000 for the purchase of royalty
interests as per its agreement with PSI. Due to the uncertainty of the future
revenues, the amounts paid have been charged to current operations.
General and administration expenses decreased 4% to $324,611 for the six
months ended June 30, 2004 as compared to $338,068 for the six months ended June
30, 2003. The slight decrease in general and administrative expenses of
approximately $14,000 is primarily due to a reduction in professional fees.
Interest expense increased by approximately $68,000 for the six months
ended June 30, 2004 from the six months ended June 30, 2003 primarily as a
result of short-term loans obtained in the last nine months of fiscal year ended
December 31, 2003 and the six months ended June 30, 2004.
For the reasons cited above, primarily the purchase of the royalty
interests, the net loss for the six months ended June 30, 2004 increased to
$948,386 from $390,566 for the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in
operating, financing and investment activities for each period indicated:
Six Months Ended
----------------
June 30, 2004 June 30, 2003
Cash used in
Operating Activities $(765,146) $ (175,920)
Cash used by
Investing Activities $ (3,288) $ (2,581)
Cash provided by
Financing Activities $ 559,237 186,698
The Company incurred a net loss of $948,386 for the six months ended June
30, 2004. Such loss adjusted for non-cash items such as deferred revenues (net
of deferred acquisition costs) ($10,271) and other non cash credits totaling
$101,506 resulted in cash used in operations totaling $765,146 for the six
months ended June 30, 2004, including working capital movements of $77,005.
To meet its cash requirement for the six months ended June 30, 2004, the
Company relied on:
(i) the proceeds from the issuance of Promissory Notes in the amount of
$140,000; and
(ii) the proceeds from the sale of the Company's common stock in the amount of
$428,750
(iii) proceeds from the settlement of the Strandtek litigation
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The Company has a contractual commitment to pay PSI an additional $440,000
through the end of its agreement. As of June 30, 2004, the Company had cash
balances totaling $1,750. The Company will rely on its current cash and proceeds
from the sale of promissory notes and common stock to fund its new business
operations until they become cash generative. The Company amended its equity
private placement to raise up to $4 million through the sale of up to 40 million
shares of Common Stock in increments of $5,000 or 50,000 shares. 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. The initial placement closed on December 31, 2003. As of June 30, 2004,
the Company has sold 4,550,000 common shares resulting in net proceeds to the
Company of $425,000. Such shares have not been registered under the Securities
Act and may not be offered or sold in the United States absent registration or
an applicable exemption of registration requirements. Additionally, the Company
issued $160,000 of 20% 30 day promissory notes to fund the PSI payments and
current operating expenses. The Company repaid $25,000 of these notes as of June
30, 2004. The Company plans to meet its current and future obligations through
the sales of common stock and loans from accredited investors. There can be no
assurance that sufficient proceeds will be raised to meet current obligations
when due.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company currently has no operations and
limited financial resources to pay its current expenses and liabilities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
INFLATION
The Company does not believe that its operations have been materially
influenced by inflation for the six months ended June 30, 2004, a situation
which is expected to continue for the foreseeable future.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Item 4. CONTROLS AND PROCEDURES
(a) Our principal executive officer has concluded, based on his
evaluation of, the effectiveness of our "disclosure controls and
procedures" as of the end of the period covered by this quarterly
report on Form 10-Q (as defined under Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934) were effective
as of such date to ensure that information we are required to
disclose in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and include
controls and procedures designed to ensure that information we
are required to disclose in such reports is accumulated and
communicated to management, including our principal executive, as
appropriate, to allow timely decisions regarding required
disclosure.
(b) During our last fiscal quarter and subsequent to our evaluation,
there were no significant changes in internal controls or other
factors that have materially affected, or reasonably likely to
materially affect our internal controls over financial reporting.
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PHASE III MEDICAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings or
claims against 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
nonpayment 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 six
months ended June 30, 2004, options for 750,000 shares were exercised by the
note holders. At June 30, 2004, the Company had reserved 750,000 shares of the
Company's common stock for issuance against exercise of the options granted
pursuant to the default penalty.
Notes issued from March through August 2003, for $250,000, are in default
and bear interest at 20% per annum. Notes issued in February 2004, for $125,000,
are in default. Two of these notes, for $50,000, require an additional interest
payment of $250 per $25,000 invested for each 30 day period they remain unpaid.
At June 30, 2004, $100,000 of these notes remains unpaid. A note issued in May
2004, for $40,000, is in default.
Cumulative dividends payable on Series A Convertible Redeemable Preferred
Stock totaled $457,037 at June 30, 2004, of which $23,842 represents dividends
for the six months then ended.
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
None
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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: August 13, 2004
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