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

**Washington, D.C. 20549**

** **

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** **

**Form 10-QSB**

** **

**Amendment No. 2**

** **

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** **

**(Mark One)**

**ý****                                        ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended June 30,2004**

 

**o****                                        ****TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                           to                           **

 

**Commission file no.  0-24921**

** **

**Power3 Medical Products, Inc.**

(Exact name of smallbusiness 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 ForestDrive, Suite B2-3**

**Woodlands, Texas  77381**

(Address of principalexecutive offices)

 

**(281) 466-1600**

(Issuer’s telephonenumber)

 

Check whetherthe issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  o  No  ý

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.)   Yes  o   No ý

 

As of August 15,2005, there were 65,345,121shares of voting common stock of the registrant issued and outstanding.

 

TransitionalSmall Business Disclosure 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 Form 10-QSB/Ais being filed to amend the Power3 Medical Products, Inc. (the “Company”or “Power3”) Quarterly Report on Form 10-QSB for the quarter ended June 30,2004.  The amendment arises out ofmanagement’s review and redetermination of the accounting treatment of its May 18,2004 acquisition of a certain set of assets and the assumption of certainliabilities from Advanced BioChem in an Asset Purchase Agreement of that samedate.  Previously, the acquisition wasreported in the financial statements of the Company, as a recapitalization, ina reverse acquisition.  After a thoroughreview of the facts of the transaction, management has determined that thepurchase transaction is properly accounted for using purchase accountingbetween 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 theCompany’s consolidated financial statements contained within the Company’squarterly reports filed on Form 10-QSB and 10-QSB/A for the quarterlyperiods 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.

 

Therestatement of the financial statements for the three month period ending March 31,2004, 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, ratherthan the 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 the difference in thebeginning balance resulting from the restatement of the financial statementsfor the three month period ending March 31, 2004, the restatement of theCompany’s balance sheet for June 30, 2004 results in a recognition of thepreviously existing Retained Earnings deficit which had previously beeneliminated under recapitalization, in a reverse acquisition.  Similarly, with regard to the asset purchasetransaction, the stock based compensation expenses are restated to reflect thestock granted at the time of the transaction to various shareholders.  The restatement requires recognition, in therestated Statement of Operations for the period, of the difference in thehistorical cost of the assets acquired in the asset purchase transaction minusthe liabilities assumed in the transaction. In addition, the restatement results in a reclassification of the valuesreported within the Stockholder’s Deficit section of the Company’s balancesheet.

 

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 June 30, 2004.

 

Generally, noattempt has been made in this Form 10-QSB/A to modify or update otherdisclosures presented in the original report on Form 10-QSB except asrequired to restate the financial statements for the three month period ended June 30,2004.  This Form 10-QSB/A does notreflect events occurring after the filing of the original Form 10-QSB ormodify or update those disclosures. Information not affected by the amendment is unchanged and reflects thedisclosure made at the time of the original filing of the Form 10-QSB/Awith the Securities and Exchange Commission on November 15, 2004  Other than specific additions to amend theManagement Discussion & Analysis section related to the restatedfinancial statements, only the financial statements and the accompanying notesto the financial statements have been amended as a result of the restatement.

 

3

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**POWER3 MEDICAL PRODUCTS,INC. **

**(A Development Stage Enterprise)**

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

**(unaudited)**

 
| **ASSETS**                                                                                                                                                               |   |        |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
| CURRENT  ASSETS:                                                                                                                                                         |   |        |   |
| Cash and  cash equivalents                                                                                                                                               |   | 83,877      |   |
| Prepaid  expenses and other current assets                                                                                                                               |   | 21,453      |   |
| Total  current assets                                                                                                                                                    |   | 105,330     |   |
|                                                                                                                                                                     |   |        |   |
| LAB  EQUIPMENT (net of accumulated depreciation of $9,880)                                                                                                               |   | 85,025      |   |
| INTELLECTUAL  PROPERTY                                                                                                                                                   |   | 66,530      |   |
|                                                                                                                                                                     |   |        |   |
| **TOTAL  ASSETS**                                                                                                                                                        |   | 256,885     |   |
|                                                                                                                                                                     |   |        |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                          |   |        |   |
| CURRENT  LIABILITIES:                                                                                                                                                    |   |        |   |
| Accounts  payable and accrued and other liabilities                                                                                                                      |   | 399,671     |   |
| Notes  payable                                                                                                                                                           |   | 30,360      |   |
| Other  Liabilities                                                                                                                                                       |   | 91,745      |   |
| Total  current liabilities                                                                                                                                               |   | 521,776     |   |
|                                                                                                                                                                     |   |        |   |
| 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; 61,987,630 shares issued  and outstanding                                                               |   | 61,987      |   |
| Capital  Stock Additional paid-in capital                                                                                                                                |   | 57,885,994  |   |
| Deferred  Compensation                                                                                                                                                   |   | (24,303,012 | )      |
| Deficit accumulated before entering  development stage                                                                                                                   |   | (11,681,500 | )      |
| Deficit  accumulated during the development stage                                                                                                                        |   | (22,232,230 | )      |
|                                                                                                                                                                     |   |        |   |
| Total  stockholders’ deficit                                                                                                                                        |   | (264,891    | )      |
|                                                                                                                                                                     |   |        |   |
| **LIABILITIES &  STOCKHOLDERS DEFICIT**                                                                                                                         |   | 256,885     |   |

 

SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.

 

4

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**POWER 3 MEDICAL PRODUCTS,INC. **

**(A Development Stage Enterprise )**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                       | ** ** | **For the Three  Months Ended  June 30, 2004** | ** ** | **For the Three  Months Ended  June 30, 2003** | ** ** | **For the Six  Months Ended  June 30, 2004** | ** ** | **For the Six  Months Ended  June 30, 2003** | ** ** | **Development  Stage Results  May 18, 2004 to  June 30, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| REVENUES                                         |       | 13,600                                              |       | 4,826                                               |       | 25,091                                            |       | 7,625                                             |       | 13,600                                                                   |       |
| Cost of  Goods Sold                              |       | 5,250                                               |       | 10,960                                              |       | 10,423                                            |       | 15,710                                            |       | 5,250                                                                    |       |
| Gross Profit                                     |       | 8,350                                               |       | (6,134                                              | )          | 14,667                                            |       | (8,085                                            | )          | 8,350                                                                    |       |
|                                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| OPERATING  EXPENSES:                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| Stock based  compensation                        |       | 1,584,865                                           |       |                                                |       | 1,584,865                                         |       |                                              |       | 1,584,865                                                                |       |
| Consulting  Fees                                 |       | 7,378,281                                           |       |                                                |       | 9,508,282                                         |       |                                              |       | 7,368,281                                                                |       |
| Other  operating expenses                        |       | 299,645                                             |       | 80,031                                              |       | 656,200                                           |       | 163,858                                           |       | (84,342                                                                  | )          |
| Total  operating expenses                        |       | 9,262,791                                           |       | 80,031                                              |       | 11,749,347                                        |       | 163,858                                           |       | 8,868,804                                                                |       |
|                                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| PROFIT  (LOSS)                                   |       | (9,254,441                                          | )          | (86,165                                             | )          | (11,734,680                                       | )          | (171,943                                          | )          | (8,860,454                                                               | )          |
| Other Income                                     |       | 641,856                                             |       |                                                |       | 641,855                                           |       |                                              |       |                                                                     |       |
| INTEREST AND  FINANCING EXPENSE                  |       | (1,238                                              | )          | (6,945                                              | )          | (2,752                                            | )          | (7,984                                            | )          |                                                                     |       |
|                                             |       |                                                |       |                                                |       |                                              |       |                                              | ** ** | ** **                                                               | ** ** |
| NET PROFIT  (LOSS)                               |       | (8,613,823                                          | )          | (93,110                                             | )          | (11,095,577                                       | )          | (179,927                                          | )          | (8,860,454                                                               | )          |
|                                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| NET PROFIT  (LOSS) PER SHARE - Basic and diluted |       | (0.41                                               | )          | (0.00                                               | )          | (0.53                                             | )          | (0.00                                             | )          | (0.14                                                                    | )          |
|                                             |       |                                                |       |                                                |       |                                              |       |                                              |       |                                                                     |       |
| Weighted  average number of shares Outstanding   |       | 20,804,038                                          |       | 50,641,501                                          |       | 20,804,038                                        |       | 50,641,501                                        |       | 61,895,928                                                               |       |

 

SEENOTES TO THE CONDENSED FINANCIAL STATEMENTS.

 

5

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**POWER 3 MEDICAL PRODUCTS, INC**

**(ADevelopment Stage Enterprise)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                               | ** **        | **For the Six  Months Ended  June 30, 2004** | ** ** | **For the Six  Months Ended  June 30, 2003** | ** ** | **Cumulative  During  Development  Stage May 18,  2004-June 30,  2004** | ** ** |
|--------------------------------------------------------------------------|-------------------|---------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Operating  activities:                                                   |              | (11,095,577                                       | )          | (179,927                                          | )          | (8,860,454                                                                        | )          |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Net Loss                                                                 |              | 11,093,147                                        |       | —                                            |       | 8,953,146                                                                         |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Stock based  compensation - issued common stock                          |              |                                              |       |                                              |       |                                                                              |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Adjustments  to reconcile net cash used in operations:                   |              |                                              |       |                                              |       |                                                                              |       |
| Depreciation                                                             |              | 197,893                                           |       | —                                            |       | 197,893                                                                           |       |
| Expenses  incurred in exchange for common stock                          |              | —                                            |       | —                                            |       | —                                                                            |       |
| Increase in  receivables                                                 |              | (2,244                                            | )     | (23,146                                           | )          | (13,600                                                                           | )          |
| Increase in  accounts payable                                            |              | (293,654                                          | )          | (6,751                                            | )          | 94,273                                                                            |       |
| Increase in  accrued liabilities                                         |              | (314,013                                          | )          | 44,500                                            |       | (18,821                                                                           | )          |
| Other  adjustments                                                       |              | (69,804                                           | )          | (42,710                                           | )          | (263,335                                                                          | )          |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Net cash  used in operations                                             |              | (484,252                                          | )          | (208,034                                          | )          | 89,102                                                                            |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Investing  activities:                                                   |              |                                              |       |                                              |       |                                                                              |       |
| Purchase of  equipment                                                   |              | 118,978                                           |       | 26,221                                            |       | 118,997                                                                           |       |
| Advances to  subsidiary                                                  |              | —                                            |       | (125,687                                          | )          | —                                                                            |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Net cash  used in investing activities                                   |              | 118,978                                           |       | (99,466                                           | )          | 118,997                                                                           |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Financing  activities:                                                   |              |                                              |       |                                              |       |                                                                              |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Sale of  common stock                                                    |              | 349,000                                           |       | —                                            |       | —                                                                            |       |
| Other                                                                    |              | 99,604                                            |       | 307,500                                           |       | (126,819                                                                          | )          |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Net cash  from financing activities                                      |              | 448,604                                           |       | 307,500                                           |       | (126,819                                                                          | )          |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Net  Increase(Decrease) during period                                    |              | 83,330                                            |       | —                                            |       | 81,280                                                                            |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Cash at  beginning of period                                             |              | 547                                               |       | —                                            |       | 2,597                                                                             |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| Cash at end  of period                                                   |              | 83,877                                            |       | —                                            |       | 83,877                                                                            |       |
|                                                                     |              |                                              |       |                                              |       |                                                                              |       |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |              |                                              |       |                                              |       |                                                                              |       |
| Interest  Paid                                                           |              | 1,238                                             |       | 7,984                                             |       | —                                                                            |       |
| Shares  issued (at market, date of effective agreement):                 |              |                                              |       |                                              |       |                                                                              |       |
| For consulting  contracts                                                | 11,086,466 shares |                                              | 9,992,102  |                                              | —     |                                                                              | 4,557,000  |   |
| For  acquisition                                                         | 15,000,000 shares |                                              | 13,500,000 |                                              | —     |                                                                              | 13,500,000 |   |
| For  compensation                                                        | 27,805,000 shares |                                              | 25,024,500 |                                              | —     |                                                                              | 25,024,500 |   |
| For  settlement of debt                                                  | 300,000 shares    |                                              | 195,000    |                                              | —     | ** **                                                                        | **—** | ** ** |

 

SEE NOTES TO THE CONDENSED FINANCIAL STATEMENTS.

 

6

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**POWER3 MEDICAL PRODUCTS, INC**

**(ADevelopment Stage Enterprise)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

1.ORGANIZATION,PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION

 

Priorto January 1, 2004, Power3 Medical Products, Inc. and itssubsidiaries (collectively “Power3” or “the Company”), formerly known asSurgical Safety Products, was primarily engaged in product development, sales,distribution and services for the healthcare industry.  The Company was an operating company,marketing devices to aid surgical procedures. Prior to May 18, 2004, the product had received only limited marketacceptance and sales had slowed to the point that Power3 was searching forother products and markets to increase its presence in the healthcare industry.

 

Inearly 2004, Power3 was introduced to Advanced BioChem, doing business asProteEx, that provided contract-for-fee lab services. At the conclusion ofnegotiations with Advanced BioChem, Power3 entered into an Asset PurchaseAgreement dated May 18, 2004, whereby it purchased substantially all theassets and intellectual properties of Advanced BioChem, and assumed certainliabilities, as scheduled in the agreement, from Advanced BioChem.  As consideration in the Asset PurchaseAgreement, Power3 issued 15,000,000 shares of common stock to Advanced BioChem.

 

Subsequentto the May 18, 2004 asset purchase transaction with Advanced BioChem,Power3 Medical Products, Inc. changed its business model and entered intothe development stage as it began to commercialize the intellectual propertyacquired in the transaction, with its focus being in the early detection,monitoring and targeting of diseases through the analysis of proteins.  Power3’s current developmental stage businessobjective, and activity, is to develop its intellectual properties by focusingon disease diagnosis, protein and biomarker identification and early detectionindicators in the areas of cancers, neurodegenerative and neuromusculardiseases, as well as other scientific areas of interest associated with proteinbiomarkers.

 

Priorto the May 18, 2004, transaction with Advanced BioChem, Power3 had thefollowing significant transactions:

 

•  During April, 2004, Power3 Medical Products, Inc.issued 1,023,334 restricted common shares to Southbank Capital, Focus Partnersand UTEK Corporation

 

•  On May 7, 2004, Power3 MedicalProducts, Inc. authorized payment of $21,600 and issuance of 50,000restricted common shares to Dr. Gray Bowen Swor in settlement ofoutstanding debts of $25,000.  Theserestricted shares were issued on May 10, 2004

 

•  On May 7, 2004, Power3 Medical Products, Inc.authorized payment of $25,533 and issuance of 250,000 restricted common sharesto Dr. G. Michael Swor in settlement of outstanding notes, shareholderadvances and unpaid salary totaling $210,633. These restricted shares were issued on May 10, 2004.

 

•  On May 15, 2004, Core Concepts, Inc.converted shareholder advances of $105,775 to Power3 Medical Products, Inc.restricted common shares at a rate of $0.75 per common share for a total of141,033 common shares.  These restrictedshares were issued on May 17, 2004.

 

•  On May 17, 2004, Power3 Medical Products, Inc.authorized issuance of 1,000,000 shares of common stock to Emeritus Group LPfor consulting services rendered.  Theseshares were issued on May 27, 2004

 

7

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•  On May 17, 2004, Power3 Medical Products, Inc.authorized issuance of 1,500,000 common shares to South Shore Harbor Group LPLLP for consulting services rendered. These shares were issued on May 27, 2004.

 

•  On May 17, 2004, Power3 Medical Products, Inc.authorized issuance of 2,000,000 common shares to Arborerest Assets LP LLP forconsulting services rendered.  Theseshares were issued on June 3, 2004.

 

•  Certain liabilities to IBM and SarasotaMemorial Hospital were settled for $20,000 and $50,000 respectively when anaffiliate of a Series A preferred stockholder infused $70,000.

 

Afterthe asset purchase transaction in May, 2004, the previous management of Power3resigned and left the Company.  Subsequentto these resignations, two employees of Advanced BioChem were grantedemployment agreements and joined Power3.  These two employees were Steven B. Rash asPresident and CEO and Dr. Ira Goldknopf as Chief Scientific Officer.

 

At December 31,2004, the Company had one direct subsidiary, Tenthgate, Inc. (“Tenthgate”),a Nevada corporation 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 the divestitureof Tenthgate and its subsidiary are that the disposition of Tenthgate willallow the Company’s management to focus exclusively on its business objectivesand permit management of Tenthgate more flexibility in its operations and thedisposition will allow the market to separately identify and evaluate eachbusiness.  The Company is continuing itsefforts to complete the disposition of Tenthgate; however current management ofTenthgate has advised the Company that Tenthgate has issued a significant numberof shares of its common stock purportedly reducing the Company’s ownershipinterest to less than 1%.  The Companybelieves this stock issuance to be invalid, however the Company does not haveaccess to the records of Tenthgate and is considering its alternatives withrespect to these actions.  The Companystill desires to complete a divestiture of Tenthgate, but believes theoperations are inconsistent with and not material to the current activities ofthe Company.  As a result, the operationsand assets of Tenthgate are not consolidated or otherwise presented herein.

 

Theconsolidated balance sheets, statements of operations and statements of cashflow included herein are unaudited, but include, in the opinion of management,all the adjustments, consisting only of normal recurring adjustments, necessaryfor a fair presentation of the financial position, results of operations andcash flows for the periods presented. Results for interim periods are not necessarily indicative of resultsthat may be expected for any future interim period or for a full year.

 

Thecompany has been in the development stage since the asset purchase transactionwith Advanced BioChem referenced above, on May 18, 2004.  It is primarily engaged in commercializingits intellectual properties in the area of diagnosis and treatment of breastcancer, ALS, Alzheimer’s disease and Parkinson’s disease. Shares of commonstock issued for other than cash have been assigned amounts equivalent to thefair value of the service or assets received in the exchange, with an effectivedate as the date of the agreement to issue, per SEC requirements..

 

8

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2.RESTATEMENT

 

OnMay 18, 2004, Power3 executed the Asset Purchase Agreement referred toabove, to purchase substantially all the assets of Advanced BioChem and assumecertain 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 financialstatements, issued in its Form 10-QSB for the six month period ended June 30,2004 and Amendment No. 1 for the same period, show Advanced BioChem as thepredecessor under the accounting treatment of recapitalization, in a reverseacquisition, as discussed herein. Further the Company subsequently issued financial statements showingAdvanced BioChem as the predecessor in its Form 10-QSB filed for the sixmonths ended June 30, 2004.

 

Subsequentto the filing of Form 10-QSB for the quarter ended March 31, 2005,and during its interim revue and preparation for filing its 10-QSB for the sixmonths ended June 30, 2005, management reviewed the transaction referencedabove and determined that the May 18, 2004 transaction for the purchase ofassets and the assumption of a certain set of liabilities, is properlyaccounted for as a purchase transaction between related parties.  Advanced BioChem has continued to operate asa separate company with the only relationship to Power3 being that it is asignificant shareholder in the Company. The initial impact of the restatement is to replace the results of AdvancedBioChem’s balance sheet, statement of operations and cash flows with Power3’sresults for the three month period ended March 31, 2004.  This restatement results in a restatedbeginning balance for the Power3 accounts, as of March 31, 2004.  This difference in beginning balance flowsthrough the remaining statements, including its effects on the restatedfinancial statements in this amended 10-QSB for the three month period ending June 30,2004.

 

Otherthan the difference in beginning balance described above, this restatement ofPower3’s balance sheet results in the Company’s retained earnings deficit,which had previously been eliminated under recapitalization, being restored, aswell as recognition of the difference between the consideration given versusthe consideration received in the asset purchase transaction, being restatedwith an offset to additional paid in capital. Similarly, with regard to the asset purchase transaction, the stockbased compensation expenses are restated to reflect the stock granted at thetime of the transaction as consideration for the acquisition, as compensationto employees and as compensation to various consultants.  Finally, the restatement of the purchasetransaction required a reclassification of certain items in the previouslypresented balance sheet for Power3. Power3 will be issuing its audited financial statements for the yearended December 31, 2004, contemporaneously with this amended 10-QSB.

 

Asa result of the restated accounting treatment and the recognition of thestock-based compensation expenses issued for consulting fees and ascompensation to employees, the Statement of Operations, for Power3, during thethree months ended June 30, 2004, is different from that previouslypresented in the 10-QSB for the same three month period.  The stock-based compensation expense andconsulting fees which produce the difference between this restated statement ofoperations and the previously presented statement of operations are primarilyassociated with the May 18, 2004 transaction and the restated purchaseaccounting treatment of this acquisition.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

Theaccompanying financial statements include only the accounts of Power3.  As discussed, Power3’s subsidiary, Tenthgate, Inc.’s statement ofcondition and operating results have been excluded from consolidation and theassets have been expensed as abandoned, discontinued operations.

 

9

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Basis of Presentation

 

Theaccompanying unaudited financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”)for interim financial information and with the instruction to Form 10-QSBand Item 310(b) of Regulation S-B. They do not include all of the information and footnotes required byGAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.

 

Theresults of operations for the periods presented are not necessarily indicativeof the results to be expected for a full year. For further information, refer to the financial statements of theCompany for the years ended December 31, 2003 and 2002, including notesthereto included in the Company’s Form 10-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 ofCredit Risk 

 

Management believes the book value of the Company’s cash and cashequivalents, accounts payable and accrued liabilities approximates their fairvalues due to their short-term nature.  Managementhas used certain valuation techniques to estimate the fair value of theconvertible debentures, loans notes and stockholder receivables because of thelack of similar type arrangements in the marketplace and because of uncertaintysurrounding the date the 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 lab equipment are stated at cost.  Major additions are capitalized, while minoradditions and maintenance and repairs, which do not extend the useful life ofan asset, are expensed as incurred. Depreciation and amortization are providedusing the straight-line method over the assets’ estimated useful lives.  At June 30, 2004, certain lab equipmenthaving a net book value of approximately $39,500 serves as security for certainliabilities.

 

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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 werenecessary. 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 remainingbalances of the Company’s long-lived assets are recoverable.

 

NetLoss Per Share 

 

Netloss per share is computed in accordance with SFAS No. 128 “Earnings perShare” (“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB98”).  Under the provisions of SFAS No. 128and SAB 98, basic net loss per share is computed by dividing the net lossavailable to common stockholders for the period by the weighted average numberof common shares 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 Company accounts for equity instruments issued to employees forservices based on the intrinsic value of the equity instruments issued andaccounts for equity instruments issued to those other than employees based onthe fair value of the consideration received or the fair value of the equityinstruments, whichever is more reliably measurable.  The Company has valued stock basedcompensation based on market prices of the stock as of the time the agreementswere made, per SEC requirements.  Becausethere have been extreme fluctuations in the quoted market prices of the stock,this method has resulted in significant amounts, relative to the assets andliabilities, being recorded as compensation and paid in capital.

 

The Company has adopted Statement of Financial Accounting Standards No. 148“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148).This statement 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 onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation.  TheCompany continues to apply the market value method under Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”to account for its stock-based employee compensation arrangements.

 

IncomeTaxes 

 

The Company computes income taxes in accordance with FinancialAccounting Standards Statement No. 109 “Accounting for Income Taxes” (“SFAS109”). The Company also prepares its income taxes in accordance with thisstandard. Under SFAS 109, deferred taxes are recognized for the taxconsequences of temporary differences by applying enacted statutory ratesapplicable to future years to differences

 

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between the financial statement carrying amounts and the tax basis ofexisting assets and liabilities. Also, the effect on deferred taxes of a changein tax rates is recognized in income in the period that included the enactmentdate. There were no significant temporary differences at June 30, 2004.

 

Researchand Development 

 

Researchand development costs are expensed as incurred.

 

CashEquivalents

 

For purposes of the statements of cash flows, the Companyconsiders all highly liquid debt instruments purchased with a maturity of threemonths or less to be cash equivalents.

 

Investments

 

The Company accounts for its interest in Power 3Medical, Inc., a Nevada corporation, now known as Tenthgate, Inc., usingthe cost method.

 

Basis of Presentation 

 

The accompanying unaudited financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”) for interim financial information andwith the instructions to Form 10-QSB and Item 310(b) of RegulationS-B.  As such, they may not include allof the information and footnotes required by GAAP for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.  The results of operations forthe three month period ended June 30, 2004 are not necessarily indicativeof the results to be expected for the full year ended December 31, 2004.

 

(2) Going Concern

 

The Company’s financial statements are presented on a going concernbasis, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company is in the developmentstage and has primarily been involved in research and development and capitalraising activities; as such the Company has incurred significant losses fromoperations and has a significant stockholders’ deficit at June 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:

 

•                  Theextent to which the Company enters into licensing arrangements, collaborationsor joint ventures;

•                  Theprogress and results of research and product development;

•                  Thecosts and timing of obtaining new patent rights;

•                  Theextent to which the Company requires or licenses other technologies; and

•                  Regulatorychanges and competition and technological developments in the market.

 

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(3) Loss Per Share

 

The following common equivalent shares have been excluded from thefully diluted loss per share calculations because the effects would beanti-dilutive;

 

•                  580,000shares of warrants which were issued to members of the Company’s Scientific AdvisoryBoard and various other consultants in 2004 (including 100,000 to the agentthat 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 of stock based compensation as a result of the issuance of thesewarrants, which amounts represent the fair value of the warrants on the datesthey were granted.

 

(4)  Income Taxes

 

The Company recognized losses for both financial and tax reportingpurposes during each of the periods in the accompanying statements ofoperations.  Accordingly, no provisionsfor income taxes and/or deferred income taxes payable have been provided for inthe accompanying financial statements.

 

At June 30, 2004 the Company had net operating loss carryforwardsfor income tax purposes of approximately $9,551,000 arises primarily from stockbased expenses that are considered to be permanent differences.  These net operating loss carryforwards expireat various times through the period ended June 30, 2004 however becausethe Company has experienced changes in control and has incurred significantoperating losses, utilization of the income tax loss carryforwards are notassured. As a result, the non-current deferred income tax asset arising fromthese net operating loss carryforwards is not recorded in the accompanyingbalance sheet because the Company established a valuation allowance to fullyreserve such assets as their realization did not meet the required assetrecognition standard established by SFAS 109.

 

(5) Related Party Transactions

 

(6) Notes Payable

 

(7) OtherCommitments and Contingencies

 

Employment Agreements 

 

The Company is obligated under amended and restated employmentagreements with its Chief Executive Officer, Chief Scientific Officer and ChiefFinancial Officer.  The significant termsof the agreements are as follows:

 

Chief Executive Officer – The amended and restated employment agreementis effective as of May 18, 2004 and has an initial term of five years,subject to each party’s termination rights. The agreement provides for a base salary of $250,000 per year and theopportunity to receive cash bonuses based on performance upon the discretion ofthe board of directors.  The agreementalso includes participation in employee benefit plans offered to employees, aswell as a grant of 13,250,000 shares of restricted common stock and 1,500,000shares of restricted Series B preferred stock (the Series B preferredshares have not yet been issued).  Eitherparty may terminate the Chief Executive Officer’s employment under thecontract, either with or without cause upon giving the other party at leastthirty 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

 

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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 Scientific Officer – The amended and restated employmentagreement is effective as of May 18, 2004 and has an initial term of fiveyears, subject to each party’s termination rights.  The agreement provides for a current basesalary of $125,000 through December 18, 2004 and $100,000 thereafter andthe opportunity to receive cash bonuses based on performance upon thediscretion of the board of directors.  Theagreement also includes participation in employee 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 scientific officer’s employmentunder the contract, either with or without cause upon giving the other party atleast thirty days notice.  If the Companyterminates the Chief Scientific 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.

 

Other Common Stock Grants

 

In addition to the above common stock grants, the Company granted1,305,000 shares of its common stock to various other employees.  Because all of the shares were granted at nocost to the employees, and because the shares generally vest over a period oftwo years, the Company recorded $25,024,500 of deferred compensation upon thedate of the grant (which amount was determined based on the total number ofshares granted times the trading values of the shares on the dates the stockgrants were made).  This amount is beingamortized to stock based compensation expense over the vesting period.

 

As mentioned above, the Company has agreed to issue a total of3,000,000 shares of Series B Preferred Stock to two of its officers.  However, for various reasons, includingcertain restrictions required by the indebtedness (which preclude the sharesfrom being issued for at least 90 days after the effective date of theregistration statement that has been filed to cover the resale of the shares ofcommon stock that will be issued upon the conversion or exercise of thesecurities issued by the Company for such indebtedness), the shares have notyet been issued.  The Company intends toissue such shares of the Series B Preferred Stock at such time as it ispermitted. The shares will be convertible into a like number of common sharesas vesting occurs over a period which is expected to be two years.

 

Future required payments for base compensation under all of theemployment agreements discussed above are approximately as follows:

 
| **Periods Ending  December 31,** | ** ** | **Amounts** | ** ** |
|---------------------------------------|------------|-------------|------------|
| 2004 (six  months)                    |       | $           | 247,500    |   |
| 2005                                  |       | 470,000     |       |
| 2006                                  |       | 412,500     |       |
| 2007                                  |       | 350,000     |       |
| 2008                                  |       | 350,000     |       |
| 2009                                  |       | 175,000     |       |
| Total                                 |       | $           | 2,005,000  |   |

 

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Contingencies

 

An equipment vendor filed a complaint against Advanced BioChem (whichrelated to equipment acquired by Power3 in the May 18, 2004 transaction)in April of 2002 in a California court alleging breach of contract andseeking damages. Advanced BioChem reached a settlement agreement in April of2003 under which Advanced BioChem agreed to pay the vendor $40,000 ininstallments through August of 2003. At December 31, 2003, Advanced BioChem had a balance remaining of$20,000. In April 2005 the equipment vendor filed a lawsuit againstAdvanced BioChem and certain former officers of Advanced BioChem, and againstPower3, in order to enforce its claim for the remaining balance which is pastdue and may be assumed by the Company as part of the settlement of the disputewith Advanced BioChem as to liabilities assumed in the May 18, 2004transaction.

 

(8) SecuritiesPurchase Agreement

 

(9) Other Significant Equity Transactions

 

(10) StockOption Plans

 

The Company has various stock option andwarrant plans outstanding.  Optionsgranted under the 1998 stock option plans are exercisable only after therespective vesting period, which is determined by the Company’s stock optioncommittee. Options expire seven years from the date of grant. Under the 1999stock option plan, options granted to employees vest ratably over three years;vesting is determined by the Company’s stock option committee for optionsgranted to officers, directors, and consultants. Options expire ten years fromthe date of grant.

 

On March 31, 2003, the Companyapproved the 2003 Stock Compensation Plan, which provides for the granting ofcommon stock, options and/or warrants to officers, directors and employees ofthe Company, as well as consultants and attorneys who provide services to theCompany.  Under this plan the Company isauthorized to issue up to 8,000,000 shares of common stock, options orwarrants. The options and warrants shall expire according to terms asdetermined by a committee on the date of grant, which will not exceed ten yearsfrom the date of grant, or five years in cases of a grantee who owns more than10% of the total combined voting power of all classes of stock (10%Stockholder). The exercise period of any options or warrants granted will alsobe determined by this committee at the date of grant. The exercise price shallbe determined by the committee at the time of grant except that in the case ofincentive stock options, the exercise price shall not be less than 100% of thefair market value of the shares on the date of grant, and in cases of a 10%Stockholder, for which the exercise price shall not be less than 110% of fairmarket value on the date of grant.

 

In addition to the above, in January 2004,the Company’s Board of Directors approved the 2004 Directors, Officers and ConsultantsStock Option, Stock Warrant, and Stock Award Plan (the 2004 Plan).  Pursuant to the 2004 Plan, initially10,000,000 shares of common stock, warrants, options, preferred stock or anycombination thereof may be optioned. After the grant of any option, warrant or share of preferred stock, thenumber of shares that may be optioned under the 2004 Plan will beincreased.  The number of shares of suchincrease shall be an amount such that immediately following such increase, thetotal number of shares issuable under this plan and reserved for issuance uponexercise of options, warrants, or conversion of shares of preferred stock willequal 15% of the total number of issued and outstanding shares of the Company’scommon stock.  At June 30, 2004 nowarrants are outstanding under this plan.

 

 (11) Recent Pronouncements

 

*FIN 46 – Consolidation of Variable InterestEntities*

 

In January 2003, the FASB issued FIN 46, (revised in December 2003as FIN46R) “Consolidation of Variable Interest Entities,” which clarifies theapplication of Accounting Research Bulletin (“ARB”) 51,

 

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Consolidated Financial Statements, to certain entities (called variableinterest entities) in which equity investors do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties. The disclosure requirements of this Interpretationare effective for all financial statements issued after January 31, 2003.The consolidation requirements apply to all variable interest entities createdafter January 31, 2003. In addition, public companies must apply theconsolidation requirements to variable interest entities that existed prior to February 1,2003 and remain in existence as of the beginning of annual or interim periodsbeginning after June 15, 2003. The adoption of FIN 46R had no impact onthe financial statements of the Company as the Company has no variableinterests in variable interest entities.

 

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

 

In May 2003,SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristicsof Both Liabilities and Equity,” was issued to establish new standards for howan entity classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an entity classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances).  Many of these instruments were previouslyclassified as equity.  This statement waseffective when issued for financial instruments entered into or modified after May 31,2003, and otherwise is effective for calendar year public companies for thethird quarter of 2003.  The adoption ofSFAS 150 had no impact on the financial statements of the Company.

 

*SFAS 132 - Employers’ Disclosures about Pensionsand Other Postretirement Benefits*

 

In December 2003,FASB Statement No. 132 (revised) was issued which prescribes the requiredemployers’ disclosures about pension plans and other postretirement benefitplans; but it does not change the measurement or recognition of those plans.  The Statement retains and revises thedisclosure requirements contained in the original Statement 132.  It also requires additional disclosures aboutthe assets, obligations, cash flows, and net periodic benefit cost of definedbenefit pension plans and other postretirement benefit plans.  The Statement generally is effective forfiscal 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 issued Statement Number 123 (“FAS 123(R)”), Share-Based Payments. FAS 123 (R) requires all entities to recognizecompensation expense in an amount equal to the fair value of shared-basedpayments such as stock options granted to employees. The Company will berequired to apply FAS 123 (R) on a modified prospective method. Under thismethod, the Company is required to record compensation expense (as previousawards continue to vest) for the unvested portion of previously granted awardsthat remain outstanding at the date of adoption. In addition, the Company mayelect to adopt FAS 123 (R) by restating previously issued financial statements,basing the amounts on the expense previously calculated and reported in the proforma disclosures that had been required by FAS 123. FAS 123 (R) is effectivefor the first reporting period beginning after June 15, 2005. The Companydoes not believe the impact of adopting this Statement will be material asthere are no unvested options and warrants at December 31, 2004.

 

*SFAS 153 - Exchanges ofNon-monetary Assets an Amendment of APB Opinion No. 29*

 

In December 2004, FASB Statement No. 153was issued amending APB Opinion No. 29 to eliminate the exception allowingnon-monetary exchanges of similar productive assets to be measured based on thecarrying value of the assets exchanged as opposed to at their fair values.  This exception was replaced with a generalexception for 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 to 

 

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change significantly as a result of theexchange.  The provisions of thisstatement are effective for non-monetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The adoption of this statement did not have a material impact on theCompany’s financial statements.

 

*FIN- 45 Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*

 

In November 2002, the FASB issued FASB Interpretation (“FIN”) 45 “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also clarifies thata guarantor is required to recognize, at the inception of the guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and initial measurement provisions of thisInterpretation are applied prospectively to guarantees issued or modified afterDecember 31, 2002. The adoption of these recognition provisions willresult in recording liabilities associated with certain guarantees provided byus. The disclosure requirements of this Interpretation are effective forfinancial statements of interim or annual periods ending after December 15,2002. FIN 45 has no impact on the Company’s financial statements (12)Subsequent Events.

 

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

**(AS AMENDED)**

 

Delay in Filing Annual Report on Form 10-KSB

 

Aspreviously reported, the Company was unable to file its 2004 10-KSB within theextended filing deadline ending April 15, 2005 and has remained unable tomake its filing of that report up to now. Under the previous accounting treatment of recapitalization, as in areverse acquisition, the Company was required to display the financialstatements of Advanced BioChem for the interim period of January 1, 2004to May 17, 2004 and for the year ended December 31, 2003, as apredecessor entity.  The predecessorauditors refused to give their consent to the use of Advanced BioChem’s auditedfinancial statements and Power3 was not able to file its 2004 10-KSB within thefiling deadline.  The Company previouslyrequested Advanced BioChem to engage new auditors to obtain a separate audit oftheir 2003 financial statements.  Inaddition, the Company elected to pursue guidance from the SEC in an alternativeeffort to resolve the accounting matters as expeditiously as possible.  However, due to other reasons, Power3 was notable to convince Advanced BioChem to secure a separate audit, nor was it ableto obtain a resolution of its accounting matters from the SEC and its Form 10-KSBfor 2004 remained unfiled.

 

Aftercompleting an interim review in preparation for the issuance of the Form 10-QSBfor the six month period ended June 30, 2005, the management and Board ofDirectors of Power3 concluded, on August 5, 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 June 30,2004, September 30, 2004 and March 31, 2005, should be restated, andthat such previously filed financial statements should no longer be reliedupon, as previously presented.  TheCompany intends to file amended consolidated financial statements for theaforementioned periods prior to, and contemporaneously with, the filing of its Form 10-KSBfor year ended December 31, 2004.

 

Whilethe impact of replacing the Advanced BioChem predecessor financials with Power3’sfinancials significantly affects the beginning balances, the restatement alsorequires a recognition of the acquisition costs incurred in the May 18,2004 transaction.  The restatementrequires a recognition, in the restated Statement of Operations for the period,of the difference in the historical cost of the assets acquired in the assetpurchase transaction minus the liabilities assumed in the transaction and ofthe costs associated with the stock issued as consideration in thetransaction.  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

 

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orTotal Liabilities reported for the Company, other than as to the beginningbalance restatement reported above.

 

Themanagement of Power3, after considerable review, has determined that the factsof the asset purchase transaction were misinterpreted resulting in amisapplication of GAAP.  As a result ofthese corrections, management has recommended, and the Board of Directors hasapproved, the restatement of the asset acquisition transaction which occurredon May 18, 2004 for the financial statements included in the Form 10-QSB’sas filed for the quarterly periods ended June 30, 2004, September 30,2004 and March 31, 2005.

 

Dispute with Advanced BioChem

 

Advanced BioChem recently advised the Company, and publicly announcedthat it was reviewing the terms of the Company’s acquisition of the assets andassumption of certain liabilities of Advanced BioChem pursuant to the AssetPurchase Agreement.  Advanced BioChem hasasserted that the Company, together with Messrs. Rash and Goldknopf, areresponsible for Advanced BioChem’s liabilities, with the exception of thosespecifically excluded.  Even thoughAdvanced BioChem has reported differing amounts in its public reports filedconcerning these liabilities, Power3 currently understands the amount of suchdisputed liabilities to be approximately $2,700,000.  The terms of the Asset Purchase Agreement arenot clear and are subject to different interpretations.  The Company had confidential and non-bindingdiscussions and negotiations with Advanced BioChem in an effort to resolve thisdisagreement.  At this time, AdvancedBioChem has ceased discussions with the Company indicating that it will takeaction to enforce any rights and remedies it may have with respect to thePower3 sale and the liabilities. Notwithstanding this, because the Company had offered to assume certainliabilities in the amount of approximately $425,000 in an effort to resolvethis disagreement and in accordance with Financial Accounting Standards BoardStatement Number 5, “Accounting for Contingencies”, the Company had increasedthe purchase price by $425,000 (which amount represents the minimum amount ofthe range of additional liabilities that may ultimately be assumed uponresolution of the matter.)

 

Under interim review, subsequent to the filing of its Form 10-QSBfor the six month period ended June 30, 2005, management has determinedthat it is no longer agreeable to assume the aforementioned $425,000 inAdvanced BioChem’s liabilities and has restated the purchase price of thetransaction back to its original amount and has removed the $425,000 incontingent liabilities from its balance sheet for March 31, 2005.  On August 2, 2005, Advanced BioChem filedsuit against Power3 claiming damages of at least $3,000,000 including the costsof litigation and of adressing the claims of the creditors of Advanced BioChem thatremain unpaid.The Company remains contingently liable for the remaining liabilities ofapproximately $2,700,000.  However, thepurchase price and related financial statements have not been adjusted forthese liabilities as the fair value of this contingency cannot be reasonablyestimated at this time.

 

Results of Operation

 

Three Months Ended June 30, 2004 as Compared to Three Months EndedJune 30, 2003

 

Revenues for the quarter ended June 30, 2004 were $13,600 comparedto $4,826 for the 1st quarter of 2003.  Gross profits were $8,350 for the quarterended June 30, 2004 compared to ($6,134) for the quarter ended June 30,2003.

 

Operating expenses were $9,262,791 for the quarter ended June 30,2004, as compared to $80,031 for the quarter ended June 30, 2003,representing a very significant increase in non-cash stock-based compensationexpense and consulting fees during the three months ending June 30, 2004of approximately $8,963,146.  Thesestock-based compensation expenses have been valued at market price of the stockon the effective date of the agreement, per SEC requirements.

 

Interest expense in the quarter ended June 30, 2004 was $1,238 ascompared to $6,945 for the same period in 2003. The decrease in interest expense is primarily attributable to the lowerlevel of outstanding debt securities as of June 30, 2004.

 

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Liquidity and Capital Resources

 

The Company’s liquidity and capital needs relate primarily to workingcapital, research and development costs and other general corporaterequirements.  The Company has notreceived any cash from operations and therefore is dependent upon debt andequity capital raised to operate the company during this developmental stage.

 

Net cash used in operating activities approximated ($484,252)) for thesix months ended June 30, 2004.  Asignificant portion of this is represented in the adjustment for accountspayable and accrued liabilities for the period.

 

Net cash used in investing activities was $118,978, primarilyconsisting of payments, to vendors, on equipment obtained in the AdvancedBioChem transaction.

 

Net cash provided by financing activities amounted to $448,604,primarily consisting of cash received for the sale of common stock during thesix month period.  During the six monthperiod, the Company experienced a net cash increase for the period of $83,330.

 

Plan of Operations and Cash Requirements

 

The Company currently does not have operating revenues from productsales or the performance of services and it continues to experience netoperating losses.  The Company isactively pursuing third party licensing agreements, collaboration agreementsand similar business arrangements in order to establish a revenue baseutilizing its capabilities in disease diagnosis based on protein and biomarkeridentification, and drug resistance in the areas of cancers, neurodegenerativeand neuromuscular diseases.  The Companyhas undertaken clinical validation studies to demonstrate the diagnosticcapabilities of its technologies. However, there can be no assurances thatrevenue-generating agreements will be in place in the next twelve months.

 

Absent a source of revenues, the Company will require funding in orderto carry out its business plan until such time as it is able to generatesustained revenues.  The Company’scurrent cash requirements are approximately $250,000 per month and the Companyanticipates that it will require approximately $3,500,000 for the twelve monthsended March 31, 2006 to continue its development activities, undertake andperform clinical validation studies, continue its marketing efforts andmaintain its administrative infrastructure, broken down as follows:

 

EstimatedExpenditures 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

 

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Company has nosignificant capital expenditure requirements and does not plan to increase itsmonthly expenditure rate absent an increase in revenues or additional funding.

 

Off-Balance Sheet Arrangements

 

At June 30, 2004, with the exception of the employment agreementsentered into with its two principal officers, the Company did not have anysignificant off balance sheet commitments.

 

Critical Accounting Policies

 

In accordance with the Emerging Issues Task Force (EITF) Issue 98-5,the Company allocates the proceeds received from convertible instruments to theinstrument, and to the intrinsic value, if any, of the imbedded conversionoption.  Under this approach, theproceeds received in the financing transaction are allocated to the convertibleinstrument and any detachable instruments on a fair value basis. The Issue 98-5model is then applied to the amount allocated to convertible instrument and theintrinsic value of the embedded conversion option is then measured.

 

The Company accounts for equity instruments issued to employees forservices based on the intrinsic value of the equity instruments issued.  Equity instruments issued to non-employeesthat are fully vested and non-forfeitable are measured at fair value at theissuance date and expensed in the period over which the benefit is expected tobe received.

 

The Company has adopted Statement of Financial Accounting Standards No. 148“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148).This statement 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 onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation. As permitted by SFAS No. 123 andamended by SFAS No. 148, the Company continues to apply the intrinsicvalue method under Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” to account for its stock-based employeecompensation arrangements.

 

In December 2004, the Financial Accounting Standards Board issuedStatement Number 123 (“FAS 123 (R)”), Share-Based Payments.  FAS 123 (R) requires all entitiesto recognize compensation expense in an amount equal to the fair value of share-basedpayments such as stock options granted to employees.  The Company will be required to applyFAS 123 (R) on a modified prospective method.  Under this method, the Company will berequired to record compensation expense (as previous awards continue to vest)for the unvested portion of previously granted awards that remain outstandingat the date of adoption.  In addition,the Company may elect to adopt FAS 123 (R) by restating previouslyissued financial statements, basing the amounts on the expense previouslycalculated and reported in the pro forma disclosures that had been required byFAS 123, FAS 123 (R) is effective for the first reporting periodbeginning after June 15, 2005.  TheCompany has not yet determined the impact that FAS 123 (R) will haveon its financial statements; however, it does not believe the impact ofadopting this Statement will be material as there are no unvested options andwarrants at December 31, 2004.

 

Item 3. Controls and Procedures

 

Under the supervision and with the participation of the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,the Company conducted an evaluation of its disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) of the ExchangeAct).  Based on this evaluation and forthe reasons set forth below, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereineffective as of March 31, 2005, the end of the period covered by thisreport.

 

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Management has identified certain deficiencies which have caused it toconclude that the Company’s disclosure controls are ineffective.  Many of these deficiencies were previouslyreported in the Company’s Quarterly Report on Form 10-QSB for thequarterly period ended June 30, 2004. The Company has undertaken steps andimplemented actions as disclosed in its previous Form 10-QSB in an effortto resolve these deficiencies.  While theactions identified in the previously filed Form 10-QSB and the actionsidentified below have addressed many of these deficiencies, the Companycontinued to have deficiencies with respect to its disclosure controls andprocedures at June 30, 2004 including the following:

 

•                  Asthe Company has previously reported, the Company has been unable to file its2004 Annual Report on Form 10-KSB. As previously reported by the Company, the Company’s inability to timelyfile its 2004 Form 10-KSB was caused by its inability to include the auditreport of Advanced 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, the Company’s limited financing andavailable capital have restricted the Company’s ability to fully implement itsprocedures for the improvement of its internal control over financial reportingand to engage outside professionals and advisors to the extent the Company hasdesired to support the Company’s accounting personnel in the preparation and/oraudit of financial statements and reports to be filed with the SEC.

 

•                  The Company continues to faceunexpected issues relating to the integration of the Advanced BioChemtransaction and such issues have caused the Company’s accounting personnel todevote significant 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 a complaint against the Advanced BioChem in April of2002 in a California court alleging breach of contract and seeking damages. ThePredecessor reached a settlement agreement in April of 2003 under whichAdvanced BioChem would pay the vendor $40,000 in installments through August of2003.  Advanced BioChem recorded a settlementcost of $40,000 in 2002 general and administrative expenses. At December 31,2003, Advanced BioChem had a balance remaining of $20,000. In April 2005the equipment vendor filed a lawsuit against Advanced BioChem, certain formerofficers of Advanced BioChem and the Company in order to enforce its claim forthe remaining balance which is past due and may be assumed by the Company aspart of the settlement of the dispute with Advanced BioChem.

 

Item 2. Unregistered Sale of Equity Securities and use of Proceeds

 

(a)                Not applicable.

 

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(b)               Not applicable

 

(c)                Not applicable.

 

(d)               Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to the security holders for a vote during thequarter ended June 30, 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 to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

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

 

Pursuant to the requirements of the ExchangeAct, this report has been signed by the following persons in the capacities andon the dates indicated.

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

 

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