**U.S.Securities and Exchange Commission**

**Washington,D.C. 20549**

 

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**Form 10-QSB**

 

**AmendmentNo. 2**

 

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| **(Mark One)**             |       |                                                                                                                                                                                                                                                                                                               |
|----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |       |                                                                                                                                                                                                                                                                                                               |
| **ý****  ** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                       |
|                       |       |                                                                                                                                                                                                                                                                                                               |
| ** **                 | ** ** | **For the  quarterly period ended September 30, 2004**                                                                                                                                                                                                                                                             |
|                       |       |                                                                                                                                                                                                                                                                                                               |
| **o****  **      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                            |
|                       |       |                                                                                                                                                                                                                                                                                                               |
| ** **                 | ** ** | **For the  transition period from                          to                       ** |
|                       |       |                                                                                                                                                                                                                                                                                                               |
| ** **                 | ** ** | **Commission  file no. 0-24921**                                                                                                                                                                                                                                                                                   |

 

**Power3Medical Products, Inc.**

(Exact name of small business issuer as specified in its charter)

 
| **New York**                                                    | ** ** | **65-0565144**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**3400 Research Forest Drive, Suite B2-3Woodlands, Texas  77381**

(Address of principal executive offices)

 

**(281) 466-1600**

(Issuer’s telephone number)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  o  No  **ý**

 

Indicate by check mark whetherthe registrant is a shell company (as amended in Rule 12b-2 of the ExchangeAct.)  Yes o  No ý

 

As of August 15, 2005, therewere 65,345,121 shares of votingcommon stock of the registrant issued and outstanding.

 

Transitional Small BusinessDisclosure Format (check one): Yes o  No ý

 

 

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**INDEX**

 
| EXPLANATORY NOTE                                                                     |   |
|--------------------------------------------------------------------------------------|--------|
|                                                                                 |   |
| PART I.  FINANCIAL INFORMATION                                                       |   |
|                                                                                 |   |
| Item 1.  Financial Statements                                                        |   |
|                                                                                 |   |
| Condensed Balance Sheet (unaudited)                                                  |   |
|                                                                                 |   |
| Condensed Statement of Operations (unaudited)                                        |   |
|                                                                                 |   |
| Condensed Statement of Cash Flows (unaudited)                                        |   |
|                                                                                 |   |
| Notes to Condensed Financial Statements (unaudited)                                  |   |
|                                                                                 |   |
| Item  2. Management’s Discussion and Analysis or Plan of Operation (As Amended) |   |
|                                                                                 |   |
| SIGNATURES                                                                           |   |

 

2

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**EXPLANATORYNOTE**

 

This Form10-QSB/A is being filed to amend the Power3 Medical Products, Inc. (the “Company”or “Power3”) Quarterly Report on Form 10-QSB for the quarter ended September30, 2004.  The amendment arises out ofmanagement’s review and redetermination of the proper accounting treatment ofits May 18, 2004 acquisition of a certain set of assets and the assumption ofcertain liabilities from Advanced BioChem in an Asset Purchase Agreement ofthat same date.  Previously theacquisition was reported in the financial statements of the Company, as arecapitalization, in a reverse acquisition. After a thorough review of the facts of the transaction, management hasdetermined that the purchase transaction is properly accounted for usingpurchase accounting between related parties.

 

Aftercompleting an interim revue in preparation for the issuance of the Form 10-QSBfor the six month period ending June 30, 2005, the management and Board ofDirectors of Power3 concluded, on August 5th, 2005, that the Company’sconsolidated financial statements contained within the Company’s quarterlyreports filed on Form 10-QSB and 10-QSB/A for the quarterly periods ended June30, 2004, September 30, 2004 and March 31, 2005, should be restated, and thatsuch previously filed financial statements should no longer be relied upon, aspreviously presented.

 

Therestatement of the financial statements for the three month period ending March31, 2004, as described in the 8-K/A filed for May 18, 2004, results in thepresentation of Power3’s financial condition as of March 31, 2004, rather thanthe presentation of Advanced BioChem, as was required under the previousaccounting treatment.  This restatementresults in different beginning balances in the balance sheet for March 31,2004.  Other than this difference, therestatement results in a recognition of the previously existing RetainedEarnings deficit which had previously been eliminated under recapitalization ina reverse acquisition.  Similarly, withregard to the asset purchase transaction, the stock based compensation expensesare restated to reflect the stock granted at the time of the transaction.

 

Therestatement requires recognition, in the restated Statement of Operations forthe period ended June 30, 2004, of the difference in the historical cost of theassets acquired in the asset purchase transaction minus the liabilities assumedin the transaction.  In addition, therestatement results in a reclassification of the values reported within theStockholder’s Deficit section of the Company’s balance sheet.  However, the restatement does not materiallychange the Total Assets or Total Liabilities reported for the Company, or be amaterial change to the total Stockholder’s Deficit reported for September 30,2004, other than a reclassification of amounts within the Stockholder’s Deficitsection.

 

The managementof Power3 has determined that the facts of the asset purchase transaction weremisinterpreted resulting in a misapplication of GAAP.  As a result of these corrections, managementhas recommended, and the Board of Directors has approved, the restatement ofthe asset purchase transaction which occurred on May 18, 2004 and for thefinancial statements for the three month period ending September 30, 2004.

 

Generally, no attempt hasbeen made in this Form 10-QSB/A to modify or update other disclosures presentedin the original report on Form 10-QSB except as required to restate thefinancial statements for the three month period ended September 30, 2004.  This Form 10-QSB/A does not reflect eventsoccurring after the filing of the original Form 10-QSB or modify or updatethose disclosures.  Information notaffected by the amendment is unchanged and reflects the disclosure made at thetime of the original filing of the Form 10-QSB with the Securities and ExchangeCommission on November 15, 2004.  Otherthan specific additions to amend the Management Discussion & Analysissection related to the restated financial statements, only the financialstatements and the accompanying notes to the financial statements have beenamended as a result of this restatement.                      .

 

3

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**POWER3 MEDICAL PRODUCTS, INC. **

**(ADevelopment Stage Enterprise)**

**CONDENSEDBALANCE SHEET AS OF SEPTEMBER 30, 2004**

**(unaudited)**

 
| ASSETS                                                                                                                                                         |   |        |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
|                                                                                                                                                           |   |        |   |
| CURRENT ASSETS:                                                                                                                                                |   |        |   |
| Cash and cash equivalents                                                                                                                                      |   | 13,042      |   |
| Prepaid expenses and other current assets                                                                                                                      |   | 23,061      |   |
| Total current assets                                                                                                                                           |   | 36,103      |   |
|                                                                                                                                                           |   |        |   |
| LAB EQUIPMENT (net of accumulated  depreciation of $30,240)                                                                                                    |   | 85,025      |   |
| Intellectual  property                                                                                                                                         |   | 142,377     |   |
| Deposits                                                                                                                                                       |   | 350         |   |
|                                                                                                                                                           |   |        |   |
| TOTAL ASSETS                                                                                                                                                   |   | 263,855     |   |
|                                                                                                                                                           |   |        |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                     |   |        |   |
|                                                                                                                                                           |   |        |   |
| CURRENT LIABILITIES:                                                                                                                                           |   |        |   |
| Accounts payable and accrued and other  liabilities                                                                                                            |   | 352,688     |   |
| Notes payable                                                                                                                                                  |   | 30,360      |   |
| Other Liabilities                                                                                                                                              |   | 16,620      |   |
| Total current liabilities                                                                                                                                      |   | 399,668     |   |
|                                                                                                                                                           |   |        |   |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                    |   |        |   |
| Series A Class Preferred Stock, $0.001 par  value, 50,000,000 shares authorized; 3,870,000 shares issued and outstanding  with a liquidation value of $387,000 |   | 3,870       |   |
| Common stock - $0.001 par value:  150,000,000 shares authorized; 62,252,630 shares issued and outstanding                                                      |   | 62,252      |   |
| Capital Stock Additional paid-in capital                                                                                                                       |   | 58,597,729  |   |
| Deferred Compensation                                                                                                                                          |   | (23,261,570 | )      |
| Deficit  accumulated before entering development stage                                                                                                         |   | (11,681,500 | )      |
| Deficit accumulated during the development  stage                                                                                                              |   | (23,856,594 | )      |
|                                                                                                                                                           |   |        |   |
| Total stockholders’ deficit                                                                                                                               |   | (135,813    | )      |
|                                                                                                                                                           |   |        |   |
| TOTAL LIABILITIES & STOCKHOLDERS  DEFICIT                                                                                                                  |   | 263,855     |   |

 

SEE NOTES TO THE CONDENSEDFINANCIAL STATEMENTS.

 

4

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**POWER 3 MEDICAL PRODUCTS, INC. **

**(ADevelopment Stage Enterprise )**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                       | ** ** | **For the  Three  Months Ended  September 30, 2004** | ** ** | **For the  Three  Months Ended  September 30, 2003** | ** ** | **For the  Nine  Months Ended  September 30, 2004** | ** ** | **For the  Nine  Months Ended  September 30, 2003** | ** ** | **Development  StageResults  May 18, 2004 to  September 30, 2004** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| REVENUES                                         | ** ** | **—**                                           |       | 366,414                                              |       | 25,091                                              |       | 374,039                                             |       | 13,600                                                             |       |
| Cost of Goods  Sold                              | ** ** | **—**                                           | ** ** | **—**                                           |       | 10,423                                              |       | 15,710                                              |       | (5,250                                                             | )          |
| Gross Profit                                     | ** ** | **—**                                           |       | 366,414                                              |       | 14,667                                              |       | 358,329                                             |       | 8,350                                                              |       |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| OPERATING  EXPENSES:                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| Stock based  compensation                        |       | 1,717,600                                            |       |                                                 |       | 9,052,649                                           |       |                                                |       | 3,302,465                                                          |       |
| Consulting  Expenses                             |       | (455,633                                             | )          | 30,000                                               |       | 3,302,465                                           |       | 30,000                                              |       | 6,912,649                                                          |       |
| Other operating  expenses                        |       | 362,397                                              |       | 91,167                                               |       | 376,742                                             |       | 255,025                                             |       | 278,054                                                            |       |
| Total operating  expenses                        |       | 1,624,364                                            |       | 121,167                                              |       | 12,731,856                                          |       | 285,025                                             |       | 10,493,168                                                         |       |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| PROFIT (LOSS)                                    |       | (1,624,364                                           | )          | 245,247                                              |       | (12,717,189                                         | )          | 73,304                                              |       | (10,484,818                                                        | )          |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| INTEREST AND  FINANCING EXPENSE                  | ** ** | **—**                                           |       | 3,197                                                |       | 2,752                                               |       | 11,181                                              |       | —                                                             |       |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| NET PROFIT (LOSS)                                |       | (1,624,364                                           | )          | 242,050                                              |       | (12,719,941                                         | )          | 62,123                                              |       | (10,484,818                                                        | )          |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| NET PROFIT (LOSS)  PER SHARE - Basic and diluted |       | (0.05                                                | )          | 0.03                                                 |       | (0.37                                               | )          | 0.01                                                |       | (0.17                                                              | )          |
|                                             |       |                                                 |       |                                                 |       |                                                |       |                                                |       |                                                               |       |
| Weighted average  number of shares Outstanding   |       | 34,761,018                                           |       | 8,442,830                                            |       | 34,761,018                                          |       | 8,442,830                                           |       | 62,082,074                                                         |       |

 

SEE NOTES TO THE CONDENSEDFINANCIAL STATEMENTS.

 

5

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**POWER 3 MEDICAL PRODUCTS, INC**

**(A Development Stage Enterprise)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                               | ** **        | **For the Nine  Months Ended  September 30, 2004** | ** ** | **For the Nine  Months Ended  September 30, 2003** | ** ** | **Cumulative During  Development Stage  May 18, 2004 to  September 30, 2004** | ** ** |
|--------------------------------------------------------------------------|-------------------|----------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Operating activities:                                                    |              |                                               |       |                                               |       |                                                                          |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Net Loss                                                                 |              | (12,719,941                                        | )          | 62,123                                             |       | (10,484,818                                                                   | )          |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Stock based compensation - issued                                        |              | 12,355,114                                         |       | —                                             |       | 10,215,114                                                                    |       |
| common stock                                                             |              | —                                             |       | —                                             |       | —                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Adjustments to reconcile net cash used in  operations:                   |              |                                               |       |                                               |       |                                                                          |       |
| Depreciation                                                             |              | 212,677                                            |       | —                                             |       | 212,677                                                                       |       |
| Expenses incurred in exchange for common  stock                          |              | —                                             |       | —                                             |       | —                                                                        |       |
| Increase in receivables                                                  |              | (2,244                                             | )          | —                                             |       | (13,600                                                                       | )          |
| Increase in accounts payable                                             |              | 189,679                                            |       | (96,111                                            | )          | 80,853                                                                        |       |
| Increase in accrued liabilities                                          |              | (920,740                                           | )          | (99,599                                            | )          | 19,801                                                                        |       |
| Other adjustments                                                        |              | 313,824                                            |       | (50,000                                            | )          | (156,486                                                                      | )          |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Net cash used in operations                                              |              | (571,631                                           | )          | (183,587                                           | )          | (126,459                                                                      | )          |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Investing activities:                                                    |              |                                               |       |                                               |       |                                                                          |       |
| Purchase of equipment                                                    |              | 100,404                                            |       | —                                             |       | 100,404                                                                       |       |
| Advances to subsidiary                                                   |              | —                                             |       | (123,913                                           | )          | —                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Net cash used in investing activities                                    |              | 100,404                                            |       | (123,913                                           | )          | 100,404                                                                       |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Financing activities:                                                    |              |                                               |       |                                               |       |                                                                          |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Sale of common stock                                                     |              | 349,000                                            |       | 300,000                                            |       | —                                                                        |       |
| Other                                                                    |              | 134,722                                            |       | 7,500                                              |       | 36,500                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Net cash from financing activities                                       |              | 483,722                                            |       | 307,500                                            |       | 36,500                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Net Increase(Decrease) during period                                     |              | 12,495                                             |       | —                                             |       | 10,445                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Cash at beginning of period                                              |              | 547                                                |       | —                                             |       | 2,597                                                                         |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| Cash at end of period                                                    |              | 13,041                                             |       | —                                             |       | 13,042                                                                        |       |
|                                                                     |              |                                               |       |                                               |       |                                                                          |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES: |              |                                               |       |                                               |       |                                                                          |       |
| Interest Paid                                                            |              | —                                             |       | $                                                  | 11,181     |                                                                          | —     |   |
| For shares issued (at market price, date of  effective agreement)        |              |                                               |       |                                               |       |                                                                          |       |
| For  consulting contracts                                                | 15,981,466 shares |                                               | $          | 10,277,102                                         |       | —                                                                        |       | $ | 4,842,000 |   |
| For  compensation                                                        | 27,495,000 shares |                                               | $          | 25,451,500                                         |       | —                                                                        |       | $ | 25,451,500 |   |
| For  acquisition                                                         | 15,000,000 shares |                                               | $          | 13,500,000                                         |       | —                                                                        |       | $ | 13,500,000 |   |
|                                                                          |                   |                                                    |            |                                                    |            |                                                                               |            |  |  |  |  |

 

SEE NOTES TO THE CONDENSED FINANCIALSTATEMENTS.

 

6

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**POWER3 MEDICAL PRODUCTS, INC**

**(A Development Stage Enterprise)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

1.ORGANIZATION, PRINCIPAL ACTIVITIES ANDBASIS OF PRESENTATION

 

Prior to January 1, 2004, Power3 MedicalProducts, Inc. and its subsidiaries (collectively “Power3” or “the Company”),formerly known as Surgical Safety Products, was an operating company, primarilyengaged in product development, sales, distribution and services for thehealthcare industry.  The Company’sprincipal business activity was marketing devices to aid surgicalprocedures.  Prior to May 18, 2004, theproduct had received only limited market acceptance and sales had slowed to thepoint that Power3 was searching for other products and markets to increase itspresence in the healthcare industry.

 

In early 2004, Power3 was introduced toAdvanced BioChem, doing business as ProteEx, that provided contract-for-fee labservices. At the conclusion of negotiations with Advanced BioChem, Power3entered into an Asset Purchase Agreement dated May 18, 2004, whereby itpurchased substantially all the assets and intellectual properties of AdvancedBioChem, and assumed certain liabilities, as scheduled in the agreement, fromAdvanced BioChem.  As consideration inthe Asset Purchase Agreement, Power3 issued 15,000,000 shares of common stockto Advanced BioChem.

 

Subsequent to the May 18, 2004 asset purchasetransaction with Advanced BioChem, Power3 Medical Products, Inc. changed itsbusiness model and entered into development stage.  At this point, the Company began to commercializethe intellectual property acquired in the transaction, with its focus being inthe early detection, monitoring and targeting of diseases through the analysisof proteins.  Power3’s currentdevelopmental stage business objective, and activity, is to develop itsintellectual properties by focusing on disease diagnosis, protein and biomarkeridentification and early detection indicators in the areas of cancers,neurodegenerative and neuromuscular diseases, as well as other scientific areasof interest associated with protein biomarkers.

 

Prior to the May 18, 2004, transaction withAdvanced BioChem, Power3 had the following significant transactions:

 

• During April, 2004, Power3 Medical Products, Inc. issued 1,023,334restricted common shares to Southbank Capital, Focus Partners and UTEKCorporation

 

• On May 7, 2004, Power3 Medical Products,Inc. authorized payment of $21,600 and issuance of 50,000 restricted commonshares to Dr. Gray Bowen Swor in settlement of outstanding debts of$25,000.  These restricted shares wereissued on May 10, 2004

 

•  OnMay 7, 2004, Power3 Medical Products, Inc. authorized payment of $25,533 andissuance of 250,000 restricted common shares to Dr. G. Michael Swor insettlement of outstanding notes, shareholder advances and  unpaid salary totaling $210,633.  These restricted shares were issued on May10, 2004.

 

•  OnMay 15, 2004, Core Concepts, Inc. converted shareholder advances of $105,775 toPower3 Medical Products, Inc. restricted common shares at a rate of $0.75 per commonshare for a total of 141,033 common shares. These restricted shares were issued on May 17, 2004.

 

7

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•  OnMay 17, 2004, Power3 Medical Products, Inc. authorized issuance of 1,000,000shares of common stock to Emeritus Group LP for consulting servicesrendered.  These shares were issued onMay 27, 2004

 

•  OnMay 17, 2004, Power3 Medical Products, Inc. authorized issuance of 1,500,000common shares to South Shore Harbor Group LP LLP for consulting servicesrendered.  These shares were issued onMay 27, 2004.

 

•  OnMay 17, 2004, Power3 Medical Products, Inc. authorized issuance  of 2,000,000 common shares to ArborerestAssets LP LLP for consulting services rendered. These shares were issued on June 3, 2004.

 

• Certain liabilities to IBM and Sarasota Memorial Hospital were settledfor $20,000 and $50,000 respectively when an affiliate of a Series A preferredstockholder infused $70,000.

 

After the asset purchase transaction in May,2004, the previous management of Power3 resigned and left the Company.   Subsequent to these resignations, twoemployees of Advanced BioChem were granted employment agreements andjoined  Power3.  These two employees were Steven B. Rash asPresident and CEO and Dr. Ira Goldknopf as Chief Scientific Officer.

 

At December 31, 2004, theCompany had one direct subsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevadacorporation formerly known as Power 3 Medical, Inc.  Tenthgate is not active in Power3’s currentline of business activity.  Prior to theacquisition of substantially all the assets and certain liabilities fromAdvanced BioChem, it was contemplated that Power3 would distribute shares ofits subsidiary to its shareholders of record, however the shares of Tenthgatewere transferred to a trustee for distribution to the shareholders of Power3 onMay 17, 2004, before the Advanced BioChem transaction.  Previous management of Power3 and Tenthgatehave been independently operating Tenthgate since the Advanced BioChemtransaction.  As a result, Power3 doesnot now control the operations or activities of Tenthgate.  As a result, Tenthgate’s activities are nolonger controlled by, nor are their activities associated with Power3 in anymanner whatsoever.  Power3 intends todivest itself of its subsidiary due to the differences in business activitybetween Tenthgate and Power3 operating under its current business model.  Some of the principal reasons for thedivestiture of Tenthgate and its subsidiary are that the disposition ofTenthgate will allow the Company’s management to focus exclusively on itsbusiness objectives and permit management of Tenthgate more flexibility in itsoperations and the disposition will allow the market to separately identify andevaluate each business.  The Company iscontinuing its efforts to complete the disposition of Tenthgate; howevercurrent management of Tenthgate has advised the Company that Tenthgate hasissued a significant number of shares of its common stock purportedly reducingthe Company’s ownership interest to less than 1%.  The Company believes this stock issuance tobe invalid, however the Company does not have access to the records ofTenthgate and is considering its alternatives with respect to these actions.  The Company still desires to complete adivestiture of Tenthgate, but believes the operations are inconsistent with andnot material to the current activities of the Company.  As a result, the operations and assets ofTenthgate are not consolidated or otherwise presented herein.

 

The company has been in the development stagesince the asset purchase transaction with Advanced BioChem referenced above, onMay 18, 2004.   It is primarily engagedin commercializing its intellectual properties in the area of diagnosis andtreatment of breast cancer, ALS, Alzheimer’s disease and Parkinson’s disease.Shares of common stock issued for other than cash have been assigned amountsequivalent to the fair value of the service or assets received in the exchange,with an effective date as the date of the agreement, per SEC requirement.  .

 

8

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The consolidated balance sheets, statementsof operations and statements of cash flow included herein are unaudited, butinclude, in the opinion of management, all the adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of thefinancial position, results of operations and cash flows for the periodspresented.  Results for interim periodsare not necessarily indicative of results that may be expected for any futureinterim period or for a full year.

 

2.RESTATEMENT

 

On May 18, 2004, Power3 executed the AssetPurchase Agreement referred to above, to purchase substantially all the assetsof Advanced BioChem and assume certain liabilities in exchange for  15,000,000 shares of common stock ofPower3.  For financial statementpurposes, the transaction was treated as a recapitalization of the equitystructure of Power3 and therefore, the accumulated deficit of Power3 waseliminated and no stock-based expenses were recorded as a result of thistransaction.   As a result of thisaccounting treatment, the activities of Advanced BioChem and Power3 werecombined in the financial statements previously shown for the period January 1,2004 through May 17, 2004.   For theperiod May 18, 2004 through June 30, 2004, Power3’s financial statements,issued in its Form 10-QSB for the six month period ended June 30, 2004 andAmendment No. 1 for the same period, show Advanced BioChem as the predecessorunder the accounting treatment of recapitalization, in a reverse acquisition,as discussed herein.  Further the Companysubsequently issued financial statements showing Advanced BioChem as thepredecessor in its Form 10-QSB’s filed for the nine months ended September 30,2004.

 

Subsequent to the filing of Form 10-QSB forthe quarter ended March 31, 2005, and during its interim revue and preparationfor filing its 10-QSB for the six months ended June 30, 2005, managementreviewed the transaction referenced above and determined that the May 18, 2004transaction for the purchase of assets and the assumption of a certain set ofliabilities, is properly accounted for as a purchase transaction betweenrelated parties.  Advanced BioChem hascontinued to operate as a separate company with the only relationship to Power3being that it is a significant shareholder in the Company.  The initial impact of the restatement is toreplace the results of Advanced BioChem’s balance sheet, statement ofoperations and cash flows with Power3’s results for the three month periodended March 31, 2004.  This restatementresults in a restated beginning balance for the Power3 accounts, as of March31, 2004.   This difference in beginningbalance flows through the remaining statements, including its effects on therestated financial statements in this amended 10-QSB for the three month periodending September 30, 2004.

 

Other than the difference in beginningbalance described above, this restatement of Power3’s balance sheet results inthe Company’s retained earnings deficit, which had previously been eliminatedunder recapitalization, being restored, as well as recognition of thedifference between the consideration given versus the consideration received inthe asset purchase transaction, being restated with an offset to additionalpaid in capital.  Similarly, with regardto the asset purchase transaction, the stock based compensation expenses arerestated to reflect the stock granted at the time of the transaction to variousshareholders.  Finally, the restatementof the purchase transaction required a reclassification of certain items in thepreviously presented balance sheet for Power3. Power3 will be issuing its audited financial statements for the yearended December 31, 2004, contemporaneously with this amended 10-QSB.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying financial statements includeonly the accounts of Power3.  Asdescribed above, Power3’s subsidiary, Tenthgate, Inc.’s  statement of condition and operating resultshave been excluded from consolidation and the assets have been expensed asabandoned, discontinued operations.

 

9

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Basis of Presentation

 

The accompanying unaudited financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“GAAP”) for interim financial information andwith the instruction to Form 10-QSB and Item 310(b) of Regulation S-B.  They do not include all of the informationand footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included.

 

The results of operations for the periodspresented are not necessarily indicative of the results to be expected for afull year.  For further information,refer to the financial statements of the Company for the years ended December31, 2003 and 2002, including notes thereto included in the Company’s Form10-KSB for the respective periods.

 

Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makecertain estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements. The reported amounts of revenues and expensesduring the reporting period may be affected by the estimates and assumptionsmanagement is required to make. Estimates that are critical to the accompanying financial statementsinclude assessing the impact of contingencies (see above and Note 8) and theamortization periods for the debt issuance costs and debt discount on theconvertible debentures (see Note 8) as well as estimating depreciation andamortization periods of tangible and intangible assets, and long-livedimpairments, among others.  The marketsfor the Company’s products are characterized by intense competition, evolvingstandards and price competition, all of which could impact the futurerealizability of the Company’s assets. Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the financial statements in the period they aredetermined to be necessary.

 

Financial Instruments and Concentrations of Credit Risk 

 

Management believes the book value of theCompany’s cash and cash equivalents, accounts payable and accrued liabilitiesapproximates their fair values due to their short-term nature.   Management has used certain valuationtechniques to estimate the fair value of the convertible debentures, loansnotes and stockholder receivables because of the lack of similar typearrangements in the marketplace and because of uncertainty surrounding the datethe receivables will be recovered.

 

Financialinstruments, which potentially subject the Company to significantconcentrations of credit risk, consist primarily of cash and cashequivalents.  We occasionally maintaincash and cash equivalents balances in excess of federally insured limits.  We have not experienced any losses in suchaccounts.

 

Furniture, Fixtures and Lab Equipment

 

Furniture, fixtures and labequipment are stated at cost.  Majoradditions are capitalized, while minor additions and maintenance and repairs,which do not extend the useful life of an asset, are expensed as incurred.Depreciation and amortization are provided using the straight-line method overthe assets’ estimated useful lives.  AtSeptember 30, 2004, certain lab equipment having a net book value ofapproximately $39,500 serves as security for certain liabilities.

 

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Debt Acquisition Costs 

 

Debt acquisition costs are beingamortized over the maximum term of the convertible debentures of three yearsusing the straight line method.

 

Unamortized Discount

 

Unamortized discount resultingfrom the allocation of value to warrants and the beneficial conversion featureembedded in the convertible debentures (see Note 8) is being amortized tointerest expense over the contractual lives of the debentures using theinterest method.

 

OtherIntangibles 

 

Otherintangibles consist primarily of patents which are recorded at cost and arisefrom legal and filing fees.  Patents andother intangibles are being amortized over ten years on a straight-line basis.

 

Long-LivedAssets 

 

Statementof Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” requires that long-lived assets, includingcertain identifiable intangibles, be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying value of the assets inquestion may not be recoverable. The Company evaluated its long-lived assets atDecember 31, 2004 and determined that certain impairment losses were necessary.As a result, operations were charged for $45,024 during the period May 18, 2004(date of acquisition) to December 31, 2004. Management believes that the remaining balances of the Company’slong-lived assets are recoverable.

 

NetLoss Per Share 

 

Netloss per share is computed in accordance with SFAS No. 128 “Earnings per Share”(“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  Under the provisions of SFAS No. 128 and SAB98, basic net loss per share is computed by dividing the net loss available tocommon stockholders for the period by the weighted average number of commonshares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for theperiod by the number of common and common equivalent shares outstanding duringthe period.  In periods in which theywould be anti-dilutive, common equivalent shares are ignored in the loss pershare calculations.  As a result, basicand diluted net loss per share is identical for each of the periods in theaccompanying financial statements.

 

Stock– Based Compensation 

 

The Companyaccounts for equity instruments issued to employees for services based on theintrinsic value of the equity instruments issued and accounts for equityinstruments issued to those other than employees based on the fair value of theconsideration received or the fair value of the equity instruments, whicheveris more reliably measurable.  The Companyhas valued stock based compensation based on market prices of the stock as ofthe effective date of the agreement per SEC requirement.  Because there have been extreme fluctuationsin the quoted market prices of the stock, this method has resulted insignificant amounts, relative to the assets and liabilities, being recorded ascompensation and paid in capital.

 

The Companyhas adopted Statement of Financial Accounting Standards No. 148 “Accounting forStock-Based Compensation - Transition and Disclosure” (SFAS No. 148). Thisstatement amends FASB Statement No. 123, “Accounting for Stock BasedCompensation”. It provides alternative methods of transition for an entity thatvoluntarily changes to the fair value based method of accounting for employeestock based compensation. It also amends the disclosure provision of FASBstatement No. 123 to require prominent disclosure about the effects on reportednet income of an entity’s accounting policy decisions with respect tostock-based employee compensation. The Company continues to apply the market value method under Accounting Principles

 

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Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for itsstock-based employee compensation arrangements.

 

IncomeTaxes 

 

The Companycomputes income taxes in accordance with Financial Accounting StandardsStatement No. 109 “Accounting for Income Taxes” (“SFAS 109”). The Company alsoprepares its income taxes in accordance with this standard. Under SFAS 109,deferred taxes are recognized for the tax consequences of temporary differencesby applying enacted statutory rates applicable to future years to differencesbetween the financial statement carrying amounts and the tax basis of existingassets and liabilities. Also, the effect on deferred taxes of a change in taxrates is recognized in income in the period that included the enactment date.There were no significant temporary differences at September 30, 2004.

 

Researchand Development 

 

Researchand development costs are expensed as incurred.

 

CashEquivalents

 

For purposes of thestatements of cash flows, the Company considers all highly liquid debtinstruments purchased with a maturity of three months or less to be cashequivalents.

 

Investments

 

The Company accounts for itsinterest in Power 3 Medical, Inc., a Nevada corporation, now known asTenthgate, Inc., using the cost method.

 

Basis of Presentation 

 

The accompanying unauditedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and with the instructions to Form 10-QSB and Item310(b) of Regulation S-B.  As such, theymay not include all of the information and footnotes required by GAAP forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included.  Theresults of operations for the three month period September 30, 2004 are notnecessarily indicative of the results to be expected for the full year endedDecember 31, 2004.

 

(2)  Going Concern

 

The Company’sfinancial statements are presented on a going concern basis, which contemplatesthe realization of assets and satisfaction of liabilities in the normal courseof business. The Company is in the development stage and has primarily beeninvolved in research and development and capital raising activities; as suchthe Company has incurred significant losses from operations and has asignificant stockholders’ deficit at September 30, 2004.   As a result, the Company has an immediateneed for capital to continue its operations, and it will need to raisesignificant additional funds to implement its business plan.  This cash will have to come from equity salesand/or borrowings as management has projected that the Company will needsignificant additional capital for development and other ongoing operationalactivities before it will have any anticipated revenue generating products. Theactual amount of funds that the Company will need will be determined by manyfactors, some of which are beyond the Company’s control.  These factors include:

 

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•                  The extent towhich the Company enters into licensing arrangements, collaborations  or joint ventures;

•                  The progress andresults of research and product development;

•                  The costs andtiming of obtaining new patent rights;

•                  The extent towhich the Company requires or licenses other technologies; and

•                  Regulatorychanges and competition and technological developments in the market.

 

(3)  Loss Per Share

 

The following common equivalent shares havebeen excluded from the fully diluted loss per share calculations because theeffects would be anti-dilutive;

 

•                  580,000shares of warrants which were issued to members of the Company’s ScientificAdvisory Board and various other consultants in 2004 (including 100,000 to theagent that placed the convertible debentures discussed above).  The warrants, which expire three to fiveyears from the dates of the respective grants and were issued at no cost tosuch personnel, may be converted to a like number of shares of the Company’scommon stock at any time prior to their expiration(s).  As a result, during the period May 18, 2004(date of acquisition) to December 31, 2004, the Company recorded $626,100 ofstock based compensation as a result of the issuance of these warrants, whichamounts represent the fair value of the warrants on the dates they weregranted.

 

(4)  Income Taxes

 

The Company recognized lossesfor both financial and tax reporting purposes during each of the periods in theaccompanying statements of operations. Accordingly, no provisions for income taxes and/or deferred income taxespayable have been provided for in the accompanying financial statements.

 

At September 30, 2004 theCompany had net operating loss carryforwards for income tax purposes ofapproximately $9,551,000 arises primarily from stock based expenses that areconsidered to be permanent differences. These net operating loss carryforwards expire at various times throughthe period ended September 30, 2004 however because the Company has experiencedchanges in control and has incurred significant operating losses, utilizationof the income tax loss carryforwards are not assured. As a result, thenon-current deferred income tax asset arising from these net operating losscarryforwards is not recorded in the accompanying balance sheet because theCompany established a valuation allowance to fully reserve such assets as theirrealization did not meet the required asset recognition standard established bySFAS 109.

 

(5) Related Party Transactions

 

(6) Notes Payable

 

(7)Other Commitments and Contingencies

 

OperatingLease

 

In August 2004, the Companyentered into a new lease which expires on August 31, 2009, has an initial termof sixty-three months, and requires base monthly minimum lease payments rangingfrom approximately $6,000 to $9,600 (plus utilities and operating expenses)over the lease term.  The lease containsa provision which allows the Company to extend the lease for two additionalterms of sixty months.

 

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EmploymentAgreements 

 

The Company is obligated underamended and restated employment agreements with its Chief Executive Officer,Chief Scientific Officer and Chief Financial Officer.   The significant terms of the agreements areas follows:

 

Chief Executive Officer – Theamended and restated employment agreement is effective as of May 18, 2004and has an initial term of five years, subject to each party’s terminationrights.  The agreement provides for abase salary of $250,000 per year and the opportunity to receive cash bonusesbased on performance upon the discretion of the board of directors.  The agreement also includes participation inemployee benefit plans offered  toemployees, as well as a grant of 13,250,000 shares of restricted common stockand 1,500,000 shares of restricted Series B preferred stock (the Series Bpreferred shares have not yet been issued). Either party may terminate the Chief Executive Officer’s employmentunder the contract, either with or without cause upon giving the other party atleast thirty days notice.  If the Companyterminates the chief executive officer’s employment at any time during theinitial term without cause, he will be entitled to receive compensationprovided under the agreement for the remaining initial term of employment.  In addition, in the event of a change incontrol as defined in the agreement, the Company may waive, in whole or inpart, any and all remaining restrictions on the restricted shares of commonstock and Series B preferred stock granted to him.

 

Chief Scientific Officer – Theamended and restated employment agreement is effective as of May 18, 2004and has an initial term of five years, subject to each party’s terminationrights.  The agreement provides for acurrent base salary of $125,000 through December 18, 2004 and $100,000thereafter and the opportunity to receive cash bonuses based on performanceupon the discretion of the board of directors.  The agreement also includes participation in employee benefit plansoffered  to employees, as well as a grantof 13,250,000 shares of restricted common stock and 1,500,000 shares ofrestricted Series B preferred stock (the Series B preferred shares have not yetbeen issued).  Either party may terminatethe chief scientific officer’s employment under the contract, either with orwithout cause upon giving the other party at least thirty days notice.  If the Company terminates the ChiefScientific Officer’s employment at any time during the initial term withoutcause, he will be entitled to receive compensation provided under the agreementfor the remaining initial term of employment. In addition, in the event of a change in control as defined in theagreement, the Company may waive, in whole or in part, any and all remainingrestrictions on the restricted shares of common stock and Series Bpreferred stock granted to him.

 

Chief Financial Officer**–** The amended and restated employmentagreement is effective as of July 2, 2004 and has an initial term of threeyears, subject to each party’s termination rights.  The agreement provides for a base salary of$120,000 per year and the opportunity to receive cash bonuses based onperformance upon the discretion of our board of directors.  The agreement also includes participation inemployee benefit plans offered by us to our employees, as well as a grant of140,000 shares of restricted common stock. Either party may terminate the Chief Financial Officer’s employmentunder the contract, either with or without cause upon giving the other party atleast thirty days notice.  If the Companyterminates the chief financial officer’s employment at any time during theinitial term without cause, he will be entitled to receive compensationprovided under the agreement for the remaining initial term of employment.  In addition, in the event of a change incontrol as defined in the agreement, the Company may waive, in whole or inpart, any and all remaining restrictions on the restricted shares of commonstock granted to him.

 

On June 3, 2005, Mr. Michael Rosinski, Chief FinancialOfficer of Power3, resigned and terminated his employment at the Company as ofthat date.   In accordance with hisresignation, the employment agreement with Mr. Rosinski has terminated on June 5,2005, and the stock grant of 140,000 shares of

 

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Restricted Stock to Mr. Rosinski is terminated.  The stock shares covered in this agreementhave been returned to the Company.

 

Other CommonStock Grants

 

In addition to the above commonstock grants, the Company granted 1,305,000 shares of its common stock tovarious other employees.  Because all ofthe shares were granted at no cost to the employees, and because the sharesgenerally vest over a period of two years, the Company recorded $25,024,500 ofdeferred compensation upon the date of the grant (which amount was determinedbased on the total number of shares granted times the trading values of theshares on the dates the stock grants were made).  This amount is being amortized to stock basedcompensation expense over the vesting period.

 

As mentioned above, the Companyhas agreed to issue a total of 3,000,000 shares of Series B Preferred Stock totwo of its officers.  However, forvarious reasons, including certain restrictions required by the indebtedness(which preclude the shares from being issued for at least 90 days after theeffective date of the registration statement that has been filed to cover theresale of the shares of common stock that will be issued upon the conversion orexercise of the securities issued by the Company for such indebtedness), theshares have not yet been issued.  TheCompany intends to issue such shares of the Series B Preferred Stock at suchtime as it is permitted. The shares will be convertible into a like number ofcommon shares as vesting occurs over a period which is expected to be twoyears.

 

Future required payments forbase compensation under all of the employment agreements discussed above areapproximately as follows:

 

| **Periods Ending  December 31,** | ** ** | **Amounts** | ** ** |
|----------------------------------|------------|-------------|------------|
| 2004 (three months)              |       | $           | 123,750    |   |
| 2005                             |       | 470,000     |       |
| 2006                             |       | 412,500     |       |
| 2007                             |       | 350,000     |       |
| 2008                             |       | 350,000     |       |
| 2009                             |       | 175,000     |       |
| Total                            |       | $           | 1,881,250  |   |

 

Contingencies

 

An equipment vendor filed acomplaint against Advanced BioChem (which related to equipment acquired byPower3 in the May 18, 2004 transaction) in April of 2002 in a California courtalleging breach of contract and seeking damages. Advanced BioChem reached asettlement agreement in April of 2003 under which Advanced BioChem agreed topay the vendor $40,000 in installments through August of 2003.  At December 31, 2003, Advanced BioChem had abalance remaining of $20,000. In April 2005 the equipment vendor filed alawsuit against Advanced BioChem and certain former officers of AdvancedBioChem, and against Power3, in order to enforce its claim for the remainingbalance which is past due and may be assumed by the Company as part of thesettlement of the dispute with Advanced BioChem as to liabilities assumed inthe May 18, 2004 transaction.

 

(8)Securities Purchase Agreement

 

(9) Other Significant Equity Transactions

 

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(10) StockOption Plans

 

TheCompany has various stock option and warrant plans outstanding.   Options granted under the 1998 stock optionplans are exercisable only after the respective vesting period, which isdetermined by the Company’s stock option committee. Options expire seven yearsfrom the date of grant. Under the 1999 stock option plan, options granted toemployees vest ratably over three years; vesting is determined by the Company’sstock option committee for options granted to officers, directors, andconsultants. Options expire ten years from the date of grant.

 

OnMarch 31, 2003, the Company approved the 2003 Stock Compensation Plan, whichprovides for the granting of common stock, options and/or warrants to officers,directors and employees of the Company, as well as consultants and attorneyswho provide services to the Company. Under this plan the Company is authorized to issue up to 8,000,000shares of common stock, options or warrants. The options and warrants shallexpire according to terms as determined by a committee on the date of grant,which will not exceed ten years from the date of grant, or five years in casesof a grantee who owns more than 10% of the total combined voting power of allclasses of stock (10% Stockholder). The exercise period of any options orwarrants granted will also be determined by this committee at the date ofgrant. The exercise price shall be determined by the committee at the time ofgrant except that in the case of incentive stock options, the exercise priceshall not be less than 100% of the fair market value of the shares on the dateof grant, and in cases of a 10% Stockholder, for which the exercise price shallnot be less than 110% of fair market value on the date of grant.

 

Inaddition to the above, in January 2004, the Company’s Board of Directorsapproved the 2004 Directors, Officers and Consultants Stock Option, StockWarrant, and Stock Award Plan (the 2004 Plan). Pursuant to the 2004 Plan, initially 10,000,000 shares of common stock,warrants, options, preferred stock or any combination thereof may beoptioned.  After the grant of any option,warrant or share of preferred stock, the number of shares that may be optionedunder the 2004 Plan will be increased. The number of shares of such increase shall be an amount such thatimmediately following such increase, the total number of shares issuable underthis plan and reserved for issuance upon exercise of options, warrants, orconversion of shares of preferred stock will equal 15% of the total number ofissued and outstanding shares of the Company’s common stock.   At September 30, 2004 no warrants or optionsare outstanding under this plan.

 

(11) Recent Pronouncements

 

*FIN 46 – Consolidation ofVariable Interest Entities*

 

In January2003, the FASB issued FIN 46, (revised in December 2003 as FIN46R) “Consolidationof Variable Interest Entities,” which clarifies the application of AccountingResearch Bulletin (“ARB”) 51, Consolidated Financial Statements, to certainentities (called variable interest entities) in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. The disclosurerequirements of this Interpretation are effective for all financial statementsissued after January 31, 2003. The consolidation requirements apply to allvariable interest entities created after January 31, 2003. In addition, publiccompanies must apply the consolidation requirements to variable interestentities that existed prior to February 1, 2003 and remain in existence as ofthe beginning of annual or interim periods beginning after June 15, 2003. Theadoption of FIN 46R had no impact on the financial statements of the Company asthe Company has no variable interests in variable interest entities.

 

*SFAS 150 - Accounting for Certain‘Financial Instruments with Characteristics of Both Liabilities and Equity*

 

In May 2003, SFAS No. 150 “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity,” was issued to establishnew standards for how an entity classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  It requires that an entity

 

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classify a financial instrument that is within its scope as a liability(or an asset in some circumstances). Many of these instruments were previously classified as equity.  This statement was effective when issued forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective for calendar year public companies for the third quarterof 2003.  The adoption of SFAS 150 had noimpact on the financial statements of the Company.

 

*SFAS 132 - Employers’ Disclosuresabout Pensions and Other Postretirement Benefits*

 

In December 2003, FASB Statement No. 132 (revised) was issued whichprescribes the required employers’ disclosures about pension plans and otherpostretirement benefit plans; but it does not change the measurement orrecognition of those plans.  TheStatement retains and revises the disclosure requirements contained in theoriginal Statement 132.  It also requiresadditional disclosures about the assets, obligations, cash flows, and netperiodic benefit cost of defined benefit pension plans and other postretirementbenefit plans.  The Statement generallyis effective for fiscal years ending after December 15, 2003.  Since the Company does not have any types ofpension plans or other postretirement benefits, the adoption of this Statementdid not have an effect on the Company’s financial statements.

 

*SFAS 123(R) ‘Share-Based Payments’*

 

In December 2004, the Financial Accounting Standards Board issuedStatement Number 123 (“FAS 123 (R)”), Share-Based Payments. FAS 123 (R)requires all entities to recognize compensation expense in an amount equal tothe fair value of shared-based payments such as stock options granted toemployees. The Company will be required to apply FAS 123 (R) on a modifiedprospective method. Under this method, the Company is required to recordcompensation expense (as previous awards continue to vest) for the unvestedportion of previously granted awards that remain outstanding at the date ofadoption. In addition, the Company may elect to adopt FAS 123 (R) by restatingpreviously issued financial statements, basing the amounts on the expensepreviously calculated and reported in the pro forma disclosures that had beenrequired by FAS 123. FAS 123 (R) is effective for the first reporting periodbeginning after June 15, 2005. The Company does not believe the impact ofadopting this Statement will be material as there are no unvested options andwarrants at December 31, 2004.

 

*SFAS 153 - Exchanges of Non-monetary Assets an Amendment of APB OpinionNo. 29*

 

In December 2004, FASB Statement No. 153 was issued amending APBOpinion No. 29 to eliminate the exception allowing non-monetary exchanges ofsimilar productive assets to be measured based on the carrying value of theassets exchanged as opposed to at their fair values.  This exception was replaced with a general exceptionfor exchanges of non-monetary assets that do not have commercialsubstance.  A non-monetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange.  The provisions of this statement areeffective for non-monetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005.  Theadoption of this statement did not have a material impact on the Company’sfinancial statements.

 

*FIN- 45Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others*

 

In November 2002, the FASBissued FASB Interpretation (“FIN”) 45 “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued. It also clarifies that a guarantor is requiredto recognize, at the inception of the guarantee, a liability for the fair valueof the obligation undertaken in issuing the guarantee. The initial recognitionand initial measurement provisions of this Interpretation are appliedprospectively to guarantees issued or modified after December 31, 2002. Theadoption of these recognition provisions will result in recording liabilitiesassociated with certain guarantees provided by us. The disclosure requirementsof this Interpretation are effective for financial

 

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statements of interim or annualperiods ending after December 15, 2002. FIN 45 has no impact on the Company’sfinancial statements

 

(12) Subsequent Events

 

**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION (AS AMENDED)**

 

Delay in Filing AnnualReport on Form 10-KSB

 

As previously reported, the Company wasunable to file its 2004 10-KSB within the extended filing deadline ending April15, 2005 and has remained unable to make its filing of that report up tonow.  Under the previous accountingtreatment of recapitalization, as in a reverse acquisition, the Company wasrequired to display the financial statements of Advanced BioChem for theinterim period of January 1, 2004 to May 17, 2004 and for the year endedDecember 31, 2003, as a predecessor entity. The predecessor auditors refused to give their consent to the use ofAdvanced BioChem’s audited financial statements and Power3 was not able to fileits 2004 10-KSB within the filing deadline. The Company previously requested Advanced BioChem to engage new auditorsto obtain a separate audit of their 2003 financial statements.  In addition, the Company elected to pursueguidance from the SEC in an alternative effort to resolve the accountingmatters as expeditiously as possible.  However, due to other reasons, Power3 was not able to convince AdvancedBioChem to secure a separate audit, nor was it able to obtain a resolution ofits accounting matters from the SEC and its Form 10-KSB for 2004 remainedunfiled.

 

After completing an interim review inpreparation for the issuance of the Form 10-QSB for the six month period endedJune 30, 2005, the management and Board of Directors of Power3 concluded, onAugust 5, 2005 that the Company’s consolidated financial statements containedwithin the Company’s Quarterly Reports filed on Form 10-QSB and 10-QSB/A forthe quarterly periods ended June 30, 2004, September 30, 2004 and March 31,2005, should be restated, and that such previously filed financial statementsshould no longer be relied upon, as previously presented.  The Company intends to file amendedconsolidated financial statements for the aforementioned periods prior to, andcontemporaneously with, the filing of its Form 10-KSB for year ended December31, 2004.

 

While the impact of replacing the AdvancedBioChem predecessor financials with Power3’s financials significantly affectsthe beginning balances, the restatement does not materially change the Company’sbalance sheet,  The effect of therestatement on Power3’s Statement of Operations is to recognize the acquisitioncosts incurred in the May 18, 2004 transaction. The restatement also requires a recognition, in the restated Statement of Operations for the period, ofthe difference in the historical cost of the assets acquired in the assetpurchase transaction minus the liabilities assumed in the transaction, of thestock based costs of the stock issued as consideration in the transaction andto employees and consultants at the time of the asset purchasetransaction.  In addition, therestatement results in a restatement of the values reported within theStockholder’s Equity section of the Company’s balance sheet.   However, the restatement of the financialstatements for 2004 is not expected to materially change the Total Assets orTotal Liabilities reported for the Company, other than as to the beginningbalance restatement reported above.

 

The management of Power3, after considerablereview, has determined that the facts of the asset purchase transaction weremisinterpreted resulting in a misapplication of GAAP.   As a result of these corrections, managementhas recommended, and the Board of Directors has approved, the restatement ofthe asset acquisition transaction which occurred on May 18, 2004 for thefinancial statements included in the Form 10-QSB’s as filed for the quarterlyperiods ended June 30, 2004, September 30, 2004 and March 31, 2005.

 

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Dispute with AdvancedBioChem

 

Advanced BioChem recentlyadvised the Company, and publicly announced that it was reviewing the terms ofthe Company’s acquisition of the assets and assumption of certain liabilitiesof Advanced BioChem pursuant to the Asset Purchase Agreement.  Advanced BioChem has asserted that theCompany, together with Messrs. Rash and Goldknopf, are responsible for AdvancedBioChem’s liabilities, with the exception of those specifically excluded.  Even though Advanced BioChem has reporteddiffering amounts in its public reports filed concerning these liabilities,Power3 currently understands the amount of such disputed liabilities to beapproximately $2,700,000.  The terms ofthe Asset Purchase Agreement are not clear and are subject to differentinterpretations.  The Company hadconfidential and non-binding discussions and negotiations with Advanced BioChemin an effort to resolve this disagreement. At this time, Advanced BioChem has ceased discussions with the Companyindicating that it will take action to enforce any rights and remedies it mayhave with respect to the Power3 sale and the liabilities.  Notwithstanding this, because the Company hadoffered to assume certain liabilities in the amount of approximately $425,000in an effort to resolve this disagreement and in accordance with FinancialAccounting Standards Board Statement Number 5, “Accounting for Contingencies”,the Company had previously increased the purchase price by $ 425,000 (whichamount represents the minimum amount of the range of additional liabilities thatmay ultimately be assumed upon resolution of the matter.)

 

Under interim review,subsequent to the filing of its Form 10-QSB for the six month period ended June30, 2005, management determined that it is no longer agreeable to assume theaforementioned $ 425,000 in Advanced BioChem’s liabilities and has restated thepurchase price of the transaction back to its original amount and has removedthe $425,000 in contingent liabilities from its balance sheet for March 31,2005.  On August 2, 2005, Advanced BioChemfiled suit against Power3 claiming damages of at least $3,000,000 including thecosts of litigation and of addressing the claims of the creditors of AdvancedBioChem that remain unpaid. The Company remains contingently liable for theremaining liabilities of approximately $ 2,700,000.  However, the purchase price and relatedfinancial statements have not been adjusted for these liabilities as the fairvalue of this contingency cannot be reasonably estimated at this time.

 

Results of Operation

 

*Three Months Ended September 30,2004 as Compared to Three Months Ended September 30, 2003*

 

There were no revenuesfor the quarter ended September 30, 2004 compared to $366,414 in revenues forthe quarter ended September 30, 2003. Due to the lack of revenue, there were no Gross Profits for the quarterended September 30, 2004 compared to $366,414 for the quarter ended September30, 2003.  The lack of revenues duringthe period ended September 30, 2004 is due to the Company’s status as adevelopmental stage company with no revenues being generated from products orservices yet.

 

Operating expenses were$1,624,364 for the quarter ended September 30, 2004, as compared to $121,167for the quarter ended September 30, 2003, representing an increase partly dueto higher payrolls and administrative costs associated with commercializing theCompany’s intellectual properties.  Also Duringthe quarter, the Company issued non-cash stock based compensation to employeesand consultants in the amount of $1,717,600, valued at market price, on theeffective date of the agreement per SEC requirement.

 

Interest expense in thequarter ended September 30, 2004 was $-0- as compared to $3,197 for the sameperiod in 2003.

 

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Liquidity and CapitalResources

 

The Company’s liquidityand capital needs relate primarily to working capital, research and developmentcosts and other general corporate requirements. The Company has not received any cash from operations and therefore isdependent upon debt and equity capital raised to operate the company duringthis developmental stage.

 

Net cash used inoperating activities approximated ($571,631) for the nine months endedSeptember 30, 2004.  A significantportion of this is represented in the negative Net Income reported for theperiod.

 

Net cash used ininvesting activities was ($100,404), primarily consisting of payments, tovendors, on equipment obtained in the Advanced BioChem transaction.

 

Net cash provided byfinancing activities amounted to $483,722, primarily consisting of the sale ofcommon stock.  During the nine monthperiod, the Company experienced a net cash increase for the period of($12,495.)

 

Plan ofOperations and Cash Requirements

 

The Company currently does nothave operating revenues from product sales or the performance of services andit continues to experience net operating losses.  The Company is actively pursuing third partylicensing agreements, collaboration agreements and similar businessarrangements in order to establish a revenue base utilizing its capabilities indisease diagnosis based on protein and biomarker identification, and drugresistance in the areas of cancers, neurodegenerative and neuromusculardiseases.  The Company has undertakenclinical validation studies to demonstrate the diagnostic capabilities of itstechnologies. However, there can be no assurances that revenue-generatingagreements will be in place in the next twelve months.

 

Absent a source of revenues,the Company will require funding in order to carry out its business plan untilsuch time as it is able to generate sustained revenues.  The Company’s current cash requirements areapproximately $250,000 per month and the Company anticipates that it willrequire approximately $3,500,000 for the twelve months ended March 31,2006 to continue its development activities, undertake and perform clinicalvalidation studies, continue its marketing efforts and maintain itsadministrative infrastructure, broken down as follows:

 

Estimated Expenditures RequiredDuring Next Twelve Months

 

| General and Administrative               |   | $      | 2,550,000 |   |
|------------------------------------------|--------|--------|-----------|--------|
| Capital Expenditures                     |   | $      | 400,000   |   |
| Patent filings and intellectual property |   | $      | 200,000   |   |
| NAF clinical validation studies          |   | $      | 350,000   |   |
|                                     |   |   |      |   |
| Total                                    |   | $      | 3,500,000 |   |

 

The foregoingis based upon the Company’s current estimated cash requirements.  The resolution of the Company’s currentdispute with Advanced BioChem regarding the liabilities assumed by the Companyin the parties’ transaction may result in an increase in the Company’sliabilities and cash requirements. The Company has no significant capitalexpenditure requirements and does not plan to increase its monthly expenditurerate absent an increase in revenues or additional funding.

 

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Off-BalanceSheet Arrangements

 

At September 30, 2004, with theexception of the lease for its operating facility, and employment agreementsentered with its three principal officers, the Company did not have anysignificant off balance sheet commitments.

 

CriticalAccounting Policies

 

In accordance with the EmergingIssues Task Force (EITF) Issue 98-5, the Company allocates the proceedsreceived from convertible instruments to the instrument, and to the intrinsicvalue, if any, of the imbedded conversion option.  Under this approach, the proceeds received inthe financing transaction are allocated to the convertible instrument and anydetachable instruments on a fair value basis. The Issue 98-5 model is thenapplied to the amount allocated to convertible instrument and the intrinsicvalue of the embedded conversion option is then measured.

 

The Company accounts for equityinstruments issued to employees for services based on the intrinsic value ofthe equity instruments issued.  Equityinstruments issued to non-employees that are fully vested and non-forfeitableare measured at fair value at the issuance date and expensed in the period overwhich the benefit is expected to be received.

 

The Company has adoptedStatement of Financial Accounting Standards No. 148 “Accounting for Stock-BasedCompensation - Transition and Disclosure” (SFAS No. 148). This statement amendsFASB statement No. 123, “Accounting for Stock Based Compensation”. It providesalternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for employee stock based compensation. Italso amends the disclosure provision of FASB statement No. 123 to requireprominent disclosure about the effects on reported net income of an entity’saccounting policy decisions with respect to stock-based employee compensation.As permitted by SFAS No. 123 and amended by SFAS No. 148, the Company continuesto apply the intrinsic value method under Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for itsstock-based employee compensation arrangements.

 

In December 2004, the FinancialAccounting Standards Board issued Statement Number 123 (“FAS 123 (R)”),Share-Based Payments. FAS 123 (R) requires all entities to recognize compensationexpense in an amount equal to the fair value of share-based payments such asstock options granted to employees.  TheCompany will be required to apply FAS 123 (R) on a modifiedprospective method.  Under this method,the Company will be required to record compensation expense (as previous awardscontinue to vest) for the unvested portion of previously granted awards thatremain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) byrestating previously issued financial statements, basing the amounts on theexpense previously calculated and reported in the pro forma disclosures thathad been required by FAS 123, FAS 123 (R) is effective for thefirst reporting period beginning after June 15, 2005.  The Company has not yet determined the impactthat FAS 123 (R) will have on its financial statements; however, itdoes not believe the impact of adopting this Statement will be material asthere are no unvested options and warrants at December 31, 2004.

 

Item 3. Controls and Procedures

 

Under the supervision and withthe participation of the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, the Company conducted an evaluation of itsdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)of the Exchange Act).  Based on thisevaluation and for the reasons set forth below, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were ineffective as of September 30, 2004, the end of the periodcovered by this report.

 

Management has identifiedcertain deficiencies which have caused it to conclude that the Company’sdisclosure controls are ineffective. Many of these deficiencies were previously reported in the

 

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Company’s Quarterly Report onForm 10-QSB for the quarterly period ended June 30, 2004. The Company hasundertaken steps and implemented actions as disclosed in its previousForm 10-QSB in an effort to resolve these deficiencies.  While the actions identified in thepreviously filed Form 10-QSB and the actions identified below haveaddressed many of these deficiencies, the Company continued to havedeficiencies with respect to its disclosure controls and procedures atSeptember 30, 2004 including the following:

 

•                  As the Company has previously reported, theCompany has been unable to file its 2004 Annual Report on Form 10-KSB.  The Company’s inability to timely file its 2004Form 10-KSB was caused by its inability to include the audit report ofAdvanced BioChem’s previous auditor in the Company’s 2004 Form 10-KSB.  The Company has also encountered deficienciesarising from a lack of supporting documentation and records relating to periodsprior to the Advanced BioChem transaction and a lack of communication betweenthe Company, its auditors and the previous auditors of Advanced BioChem.  The lack of this supporting documentation andfailure either to obtain the prior auditor’s consent or make alternativearrangements for the 2003 Advanced BioChem audit report have resulted in theCompany’s inability to file its Annual Report on Form 10-KSB. Although theCompany has hired accounting personnel as reported in its previous Form 10-QSB,the Company’s limited financing and available capital have restricted theCompany’s ability to fully implement its procedures for the improvement of itsinternal control over financial reporting and to engage outside professionalsand advisors to the extent the Company has desired to support the Company’saccounting personnel in the preparation and/or audit of financial statementsand reports to be filed with the SEC.

 

•                  TheCompany continues to face unexpected issues relating to the integration of theAdvanced BioChem transaction such as the dispute described in this quarterlyreport and such issues have caused the Company’s accounting personnel to devotesignificant and unanticipated time and attention to these matters.

 

The Company continues to believe that the deficienciesare attributable to many factors including issues relating to the quality ofthe Company’s disclosure controls and procedures at the time of the AdvancedBioChem transaction and the transition following the transaction.  Management is committed to a sound disclosurecontrol and internal control environment and is continuing its efforts toimprove the Company’s infrastructure, personnel, processes and controls to helpensure that the Company is able to produce accurate financial statements on atimely basis.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

An equipment vendor filed acomplaint against the Advanced BioChem in April of 2002 in a California courtalleging breach of contract and seeking damages. The Predecessor reached asettlement agreement in April of 2003 under which Advanced BioChem would paythe vendor $40,000 in installments through August of 2003.  Advanced BioChem recorded a settlement cost of $40,000 in 2002general and administrative expenses. At December 31, 2003, Advanced BioChem hada balance remaining of $20,000. In April 2005 the equipment vendor filed alawsuit against Advanced BioChem, certain former officers of Advanced BioChemand the Company  in order to enforce itsclaim for the remaining balance which is past due and may be assumed by theCompany as part of the settlement of the dispute with Advanced BioChem.

 

Item 2. Unregistered Sale ofEquity Securities and use of Proceeds

 

(a)                Notapplicable.

 

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(b)               Notapplicable

 

(c)                Notapplicable.

 

(d)               Notapplicable.

 

Item 3. Defaults Upon SeniorSecurities

 

None

 

Item 4. Submission of Mattersto a Vote of Security Holders

 

No matters were submitted tothe security holders for a vote during the quarter ended March 31, 2004.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 
| 31.1*  |   | Certification                          |
|--------|--------|----------------------------------------|
| 31.2*  |   | Certification                          |
| 32.1** |   | Certification  Pursuant to Section 906 |
| 32.2** |   | Certification  Pursuant to Section 906 |

 

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*Filed withthis report.

**Furnished with this report.

 

SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Power3 Medical Products, Inc. (Registrant) |
|--------------------------------------------|
|                                       |   |
|                                       |   |
| Date:  September 9, 2005                   |  By: |   /s/ Steven B. Rash |   |
|                                       | Steven B.  Rash |
|                                       | Chairman and  Chief Executive Officer |

 

Pursuant tothe requirements of the Exchange Act, this report has been signed by thefollowing persons in the capacities and on the dates indicated.

 
| **Signature**       | ** ** | **Title** | ** **                            | **Date** |
|---------------------|------------|-----------|---------------------------------------|----------|
|                |       |      |                                  |     |
| /s/ Steven  B. Rash |       |      | Chairman and  Chief Executive Officer |     | September 9  2005 |
| Steven B.  Rash     |       |      |                                  |     |
|                |       |      |                                  |     |
| /s/ John P.  Burton |       |      | Chief  Accounting Officer             |     | September 9,  2005 |
| John P.  Burton     |       |      |                                  |     |

 

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